Intermodal expert Larry Gross offers up straight talk on the state of the sector at RailTrends

“Anytime the supply chain is on ’60 Minutes' or the front page of the Washington Post, it is probably not because we are doing such a great job. Certainly, intermodal has had a very difficult 2021 so far.”

Those were the opening comments made by Larry Gross, president of Gross Transportation Consulting, at the RailTrends conference hosted by Progressive Railroading magazine and independent railroad analyst Tony Hatch last month.  

Gross told the audience, comprised on high-ranking freight rail and intermodal stakeholders and decision-makers, the intermodal volume and output peaked in March, followed by volume—despite unrelenting demand—falling, for the most part since then.

“On the domestic side, we kind of got kicked in the head by the Polar Vortex in February and never quite recovered to where we were before in North America,” he said. “On the international side, it held up for a while. And through October there has been five months of declines for IPI volume (international market or inland point intermodal) movement of 20-, 40-, and 45-foot containers off of ships loaded with import cargo. A big chunk of that is simply that the system is bogging down, due to too much volume trying to be squeezed through that keyhole, and it is resulting in congestion and lower velocity. That is often the case in regards to domestic [intermodal].”

What’s more, he explained that ports are absolutely working at maximum capacity, so no matter how many vessels arrive, the system cannot see any more volume flowing through the ports, and railroads are not seeing that, which he said is one of the choke points.  

Addressing the ongoing supply chain crisis, Gross quipped that responsibility for it can be spread like peanut butter, with that being directed towards freight railroads, shippers, chassis suppliers, ocean carriers, and ports.

“That is what makes this problem so difficult to unravel, because it is the product of 100,000 individual companies making individual decisions that make total sense for them individually but collectively it is a disaster,” he noted. “When everyone tries to get goods through the same spot, and the quickest route to the nation’s heartland, as Christmas approaches is the Port of Los Angeles and the Port of Long Beach, it does not work.”  

And as a result of this capacity limitation, in looking at intermodal participation versus imports, he said it shows a number that has declined, explaining that what is happening now.

“What we are seeing now is a trend away from IPI and towards transloading, and that is because of the difficulties we are seeing inland in Chicago and places like that a few months ago, when these routing decisions were being made…and people went away from IPI towards transloading as a way to get around that,” he said.  

In more normal times, he said intermodal is seen as what he called a safety valve, but in a role reversal this year, it was trucking serving as that safety valve instead, due to a lack of capacity, hindering the ability to flex upward.

Taking that a step further, Gross said that despite what is anecdotally said, in regard to the truck driver shortage, motor carriers have been able to increase volumes, and that trucking rates out of Southern California are “through the roof,” because of volume being diverted away from intermodal to be driven via expedited to the final destination.

That sentiment was driven home by data from IANA and Gross Transportation Consulting showing that the market share of intermodal, for dry van and reefer (refrigerated) truckloads moving 500-plus miles between the second and third quarter of 2020 to now. At first, he said, there was a big jump up because of the recovery and since then it has been way downhill ever since.

“Through the third quarter of this year, we are down somewhere in the 6.3% range for that domestic piece, and total share is at its lowest point since the fourth quarter of 2009,” he said. “We have given back all of the gains that we have achieved since 2009. You hear a lot about how the driver shortage is going to force people back to rails, because they cannot find trucks due to the capacity shortage, here in New York City I have one word: ‘fuhgettaboutit.’ The trucking industry is going to find the drivers it needs; the only way intermodal is going to gain volume is not answering the phone when someone cannot find a driver and a truck.”

Over the remaining weeks of 2021, Gross said that rather than seeing a peak, there instead will be a plateau, which he said is very unusual, adding that a recovery will not occur until there is a break in inbound volume, which is not likely to occur until the first half of 2022 or later.

And he noted that the rate environment is going to continue to be very strong, as carriers have to pay all of these drivers that they have to find and pay them a lot more, too.

“In 2022, this endless surge will end, and that is going to create a lot of capacity once we get fluidity restored,” he said. “And there are thousands of domestic containers coming in from China that have been acquired by private container operators, most of which we hoped would arrive in 2021 but now are not arriving until 2022, due to congestion.”

At the same time, Gross observed that trucking capacity utilization, which is currently very tight, is going to loosen, with the expectation that things are going to feel pretty normal next year compared to this year—and will feel really different —maybe closer to the 2019 than the 2021 environment.

“Fasten your seatbelts,” he said. “The damage from 2021 is reparable, but it won’t be easy and it will take a lot of work to rebuild from what has occurred here in 2021. This all represents an opportunity and we are getting our act together operationally speaking. And if we go back to business as usual after all of the failures and disruptions we have had, with regards to the sector in general, that will be a major failure.”  

That speaks to the need for the changes that need to occur, he said, stating that the

good news is that a lot of supply chain rules, or “givens,” like JIT (just-in-time inventory management), or globalization, not necessarily reshoring, are open to modification.

“What we are going to see is offshoring and the flow of volume, jobs, and goods offshore is going to slow down,” he said. “What that means is we can no longer have our import TEU (Twenty-Foot Equivalent Units) outgrowing the economy, it is going to be more in line with the economy. That will have major implications with regard to intermodal; it means if we are going to grow, we are going to grow on the domestic side. That is where it has to happen.”

A big part of that growth will come from improving supply chain resiliency, according to Gross.

“If every aspect of the supply chain is right-sized and squeezed to the level of maximum efficiency…. the unexpected happens with great regularity, whether it is climate events or geopolitical events or medical events,” he said. “We need to be thinking about focusing on resiliency and also adding some surge capacity, too. We have had capacity stolen by reduced velocity. If your normal chassis turn is 4.5 days and it is now taking 9 days, all of a sudden you need a lot more chassis to do the same work.”

And when viewing capacity from the perspective of being behind the eight ball from an operational standpoint, he said it becomes extremely difficult to dig out, because intermodal productivity goes down once things get congested.

“If there is one thing to help us avoid problems the next time around, one thing is we have got to be more proactive to avoid getting behind the eight ball in the first place, and if you are reacting to congestion, it is already too late,” he said. “I am kind of pessimistic we can dig our way out of the current problem without a break in volume, but I do see even now signs that we are beginning to turn the corner because the supply chain problem is morphing from a general supply chain problem to a Los Angeles/Long Beach problem or maybe even a West Coast U.S. problem.”

East Coast ports like Savannah and New York/New Jersey have been more effective in dealing with it and are less congested but nothing like LALB, he said, adding that one thing that could happen is that a lot of this IPI volume, which has a lot of routes it could take, could avoid LALB for quite some time in order to get around all of this congestion—something that is not good for railroads

“It is going to be a west to east migration as truck has a much higher share,” he said. “Once the levee breaks things are really going to change in a hurry but it is hard to pinpoint when that will be.”