DC Velocity - July 2018

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Transportation Board (STB), the nation’s rail regulator, concerned about unreliable and inconsistent service, ordered all Class I railroads to submit to the agency their service plans for the rest of 2018. Service complaints in 2017 spiked 144 percent from 2016 levels, the STB said.

Erik Hansen, vice president, intermodal for Kansas City Southern, the Kansas City, Mo.-based railroad that operates north-south routes within the U.S. and in and out of Mexico, said at a June 19 news conference following the report’s release that the company is closely watching developments in linehaul technology. Hansen shared the view held by many that it could be years before such technologies become mainstream and that their impact on all supply chains, including the railroads, is “uncertain.”

STEEP GRADE AHEAD

The exceptional pricing leverage enjoyed by asset-based carriers was the central narrative of this year’s report, titled “A Steep Grade Ahead.” Last year’s report, which analyzed 2016’s performance, described an uncertain future for the industry and posited various scenarios for its direction. By contrast, this year’s report had a single message: Assets are where it’s at.

“Carriers are in control as demand outstrips supply, while shippers try to ‘create capacity’ by improving efficiency whenever possible,” according to the authors. For shippers, the biggest challenge won’t be fighting the upward rate trend, but rather, finding creative ways to secure adequate capacity at prices they can live with.

Shippers are digging deeper into their routing guides than ever before and are increasing their reliance on freight brokers, which continue to show healthy demand increases. Broker volumes rose 40 percent in 2018, a period of ultra-tight capacity that forced many shippers onto the “spot,” or non-contract, market, said the report, citing data from loadboard operator DAT Solutions.

Shippers who avoided putting their
freight out to bid in an effort to wait out
the upward rate trend often found them-
selves facing load rejections that disrupted
their operations, the report found. Those
who re-bid their freight, although they
because rail suppliers have not been
as aggressive as their trucking coun-
terparts have in embedding perfor-
mance-enhancing technology into
their products, the authors said.

Using sophisticated analytics, truckers can assess the profitability of each route and shift assets to higher-margin lanes while rejecting more loads on low-density lanes, the report said. By tracking how much time trucks spend at each stop, carriers can purge “sluggish” shippers that take up too much driver time and generate little profit, according to the authors. In the current cycle, which could last several years, shippers stuck in the transactional rate-driven mindset that paid short shrift to the needs of fleets and drivers will be marginalized.

That’s not to say railroads still
can’t make hay. It’s just that they
have to do it while the sun shines.
Based on the report’s data, it’s shin-
ing right now. Intermodal costs
climbed 10. 5 percent in 2017 over
the prior-year totals, the biggest
gain among across-the-board leaps
in freight rates as a better econ-
omy met up with tighter capaci-
ty, according to the report. Strong
demand gave railroads pricing
power—especially in intermodal—
while productivity improvements
boosted their profit margins and
the newly enacted corporate tax
cuts increased their cash flows, the
report found. Intermodal gained a
powerful tailwind from traffic con-
versions by shippers struggling to
find over-the-road capacity.

How long intermodal’s good times last will not only depend on the traction of truckers’ improvements, but also on the rails’ ability to keep their own operational house in order. Events of the past few months haven’t been encouraging. In March, the Surface