Intermodal shipping

 
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Intermodal shipping is a method of moving cargo that involves more than one kind of transportation, whether truck, rail, ship or plane. It uses special containers so goods can be transferred from ship to rail to truck without having to be repacked. The most common combination used is truck and rail. In a typical example, cargo is picked up at the point of origin by truck, transported to a loading site onto a train and shipped the majority of the distance by rail, and then unloaded and transported by truck to the final destination. A major benefit of this arrangement is lower fuel costs, as trains are around three times more efficient than long-haul trucks[1]. Drawbacks include less flexibility, as firms are limited to places where there are train routes, and slower shipping times. Rail intermodal moves totaled 14,078,952 in 2007[2].

The transportation industry depends on a healthy economy to keep goods moving around the country. When consumer demand falls, fewer goods are shipped and intermodal shipping companies lose revenue. Another factor that will affect transportation firms is fuel costs. In the short term, rising gas prices will increase demand for intermodal services, as they are more efficient than trucking alone.

IANA
IANA[2]

Companies Involved

Many intermodal shipping don't own their own trucks and trains. These companies, known ase non-asset based transportation firms or intermodal marketing companies (IMCs), contract with third-party carriers to ship goods. The firm buys container-hauling space in bulk from carriers, and then sells the space to clients at rates cheaper than what they could negotiate independently. This arrangement is also favorable to carriers because IMCs can offer large, consolidated shipping volumes. The major railroads, who dominate the intermodal market, rely on IMCs for their intermodal business.

  • Hub Group (HUBG): This non-asset based transportation company ships goods such as consumer products and retail merchandise. Intermodal operations constituted for 73% of total revenues in 2007[3]. The remainder of HUBG’s earnings comes from its truck brokerage (19%) and logistics (8%) segments[3]. Operating 21 facilities throughout the U.S. and Canada, Hub Group has become the largest intermodal marketing company in the country and one of the top five truck brokers[4]. Total revenue in 2007 was $1.66B[5].
  • C.H. Robinson Worldwide (CHRW): C.H. Robinson is a non-asset based shipping firm that holds contracts with 48,000 third-party carriers and shipped ~6.5M packages for approximately 29,000 customers in 2007[6]. CHRW has 218 offices throughout North America, Europe, Asia and South America[6]. Gross revenues in 2007 was $7.3B, 88% of which came from the transportation of goods; the balance of revenues came from distributing fresh produce, and its T-Chek Service Unit which provides management services to the trucking industry[7].
  • Pacer International (PACR): This non-asset based shipping company transports goods such as building materials, automotive parts, and electronics. The company’s intermodal operations accounted for ~80% of total revenues in 2007[8]. The remainder of PACR’s revenue comes from its logistics segment, which provides international freight forwarding, supply chain management, and warehousing and distribution services. Total revenue in 2007 amounted to $1.97B[9].
  • J.B. Hunt Transport Services (JBHT): J.B. Hunt is a non-asset based transportation company that ships forest and paper products, building materials, food and beverage, chemicals, and automotive parts. It operates four business segments: intermodal (JBI), dedicated contract services (DCS), truckload freight (JBT) and integrated capacity solutions (ICS). In 2007 revenues were $3.5B, 47% of which came from JBI, 27% from DCS, 24% from JBT and 2% from ICS[10].
  • UTi Worldwide (UTIW): UTi is a shipping company that helps companies move goods between international manufacturers and markets. In 2007, UTi had a global network of ~440 facilities in which it consolidated shipments, and over 200 packaging and distribution centers in 65 countries[11]. The company has operations in an additional 78 countries through relationships with independent, agent-owned offices[12]. Revenues in 2007 totaled $3.6B, 57% of which were generated outside the U.S. [13]
  • Expeditors International of Washington (EXPD): Expeditors International provides global shipping services to manufacturing and retail customers through third-party suppliers. At the end of September 2007, EXPD ran 174 full-service offices and had operations in over 30 countries[14]. Net revenue was $1.5B in 2007[15]. Airfreight services accounted for 36% of company revenues in 2007, while ocean freight operations made up 24% and customs brokerage comprised 40%[16].
  • Burlington Northern Santa Fe (BNI): BNI is the second-largest U.S. railroad company with over 6,300 locomotives and 32,000 route miles[17]. The company ships freight throughout the western two thirds of the United States. BNI’s consumer products’ freight business (which includes the firm’s international and domestic intermodal operations) generated ~37% of the company’s $15.8B revenues in 2007[18]. BNI operates 33 major intermodal hubs located across the U.S. and holds the largest market share in the domestic rail intermodal market at 43.9%[19].
  • Union Pacific (UNP): The Union Pacific railroad stretches from the Mississippi River to the Pacific Ocean and is the only railroad that serves all six major gateways to Mexico[20]. UNP caters to six commodity groups: agricultural, automotive, chemicals, energy, industrial products, and intermodal. The firm generated revenue of $16.3 billion in 2007, 19% of which came from intermodal services[21]. The firm holds 20.5% market share in the domestic rail intermodal market[22].
  • Norfolk Southern (NSC): Norfolk Southern operates ~21,000 miles of railroad track primarily in the eastern United States[23]. NSC handled 3.1 million intermodal units in 2007, the revenues from which accounted for 20% of the company’s railway operating revenues for the year[24]. Total railway operating revenue was $9.7B in 2007[25]. The firm holds 15.6% market share in the domestic rail intermodal market[22].
  • CSX: CSX operate a rail network comprised of more than 21,000 miles of track throughout the U.S. and Canada[26]. Its main divisions are merchandise, coal , intermodal and automotive. Revenues totaled $10.0B in 2007[27]. Intermodal operations accounted for ~14% of revenues and 30% of volume in that year[28]. The firm holds 14.1% market share in the domestic rail intermodal market[22].

Trends and Forces

U.S. Economic Cycles Will Lead To Fluctuating Revenues

By contracting with third-party carriers instead of buying their own transportation fleet, many intermodal firms are able to adjust shipping capacity by controlling the number of third-party contracts that they enter. This shields them in part from fluctuations in consumer demand. However, a slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt earnings. For instance, several of the companies mentioned above ship automotive parts and building materials, two sectors that have been hard hit by the 2007 economic downturn.

Intermodal Operations Offer Hedge Against Increasing Fuel Prices

Companies in the intermodal industry are relatively shielded from changes in fuel prices because railroads are about three times more fuel-efficient than long-haul trucks[1]. In addition, most firms in the transportation industry determine shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. And if diesel prices continue to increase, it may be harder for transportation companies to continue this practice. Since 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 [29].

The Transportation Industry is Subject to Government Regulation

The transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. Although the intermodal segment has essentially been deregulated, the U.S. Department of Transportation (DOT) regulates trucking operations. In 2004, the DOT reduced the amount of time that drivers can spend behind the wheel[30]. In addition, the Environmental Protection Agency has posted guidelines for a progressive decrease in diesel truck emissions through 2010[31]. Both of these regulations increase the operating costs of the third-party trucking companies intermodal firms contract with. Furthermore, in 2006 the DOT issued new regulations that will make intermodal equipment providers subject to the Federal Motor Carrier Safety Regulations for the first time[32]. Compliance with these new guidelines will entail higher operating and maintenance costs for intermodal firms.

Increased Global Outsourcing of Production will Benefit Intermodal Firms

More businesses today are expanding to foreign markets, increasing the volume of international shipments. This will increase demand for intermodal services, especially air and ocean freight carriers. Intermodal firms like [[UTi Worldwide (UTIW) and Expeditors International of Washington (EXPD) who earn most of their revenue outside of the U.S. will stand to benefit from this higher demand.

Transportation Companies Face Labor Supply Risks

Intermodal firms depend on workers in the rail and trucking industries to run their businesses. The driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies[33]. According to the American Trucking Association, the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014[33]. The transportation sector is also no stranger to labor unrest. For instance, in the fall of 2002, all West Cost ports were shut down for two weeks as a result of disputes with longshoremen who offloaded freight[34]. And in 2004, independent trucking providers operating in California refused to transport shipments to and from rail facilities, leading to terminal congestion and a Union Pacific embargo on shipments to Northern California destinations[34].

Market Share

The following chart shows 2006 domestic rail intermodal market share by gross revenue. Total gross revenue in that year was ~$6B for the industry as a whole [22]. As the graph shows, the major railroads dominate the domestic rail intermodal market. However, many of the railroads actually rely on non-asset based transportation firms (IMCs) for their intermodal business because these third-party firms can offer large, consolidated shipping volumes.

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References

  1. 1.0 1.1 Market Watch: Railroad Fuel Efficiency Sets New Record. Retrieved on June 27, 2008.
  2. 2.0 2.1 IANA: Year 2007 Industry Statistics. Retrieved on July 10, 2008.
  3. 3.0 3.1 HUBG 2007 10-K pg. 15  
  4. HUBG 2007 10-K pg. 1  
  5. HUBG 2007 10-K pg. 13  
  6. 6.0 6.1 CHRW 2007 10-K pg. 3  
  7. CHRW 2007 10-K pg. 4  
  8. PACR 2007 10-K pg. 5  
  9. PACR 2007 10-K pg. 43  
  10. JBHT 2007 10-K pg. 4  
  11. Uti Company Website. Retrieved on July 10, 2008.
  12. UTIW 2007 10-K pg. 1  
  13. UTIW 2007 10-K pg. 33  
  14. EXPD Company Website. Retrieved on July 10, 2008.
  15. EXPD 2007 10-K pg. 20  
  16. EXPD 2007 10-K pg. 5  
  17. BNI 2007 10-K pg. 5  
  18. BNI 2007 10-K pg. 7  
  19. BNI 2007 10-K pg. 6  
  20. UNP 2007 10-K pg. 3  
  21. UNP 2007 10-K pg. 5  
  22. 22.0 22.1 22.2 22.3 22.4 Merge Global: The New Supply Chain. Retrieved on June 27, 2008.
  23. NSC 2007 10-K pg. K3  
  24. NSC 2007 10-K pg. K6  
  25. NSC 2007 10-K pg. K5  
  26. CSX 2007 10-K pg. 1  
  27. CSX 2007 10-K pg. 24  
  28. CSX 2007 10-K pg. 4  
  29. U.S. Energy Information Administration: U.S. No.2 Diesel Retail Sales By All Sellers. Retrieved on June 27, 2008.
  30. PACR 2007 10-K pg. 22  
  31. DieselNet: Emissions Standards. Retrieved on July 2, 2008.
  32. PACR 2007 10-K pg. 15  
  33. 33.0 33.1 ERE.net: Truck Driver Slowdown. Retrieved on July 2, 2008.
  34. 34.0 34.1 PACR 2007 10-K pg. 19  
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