The rail carload and intermodal segments are facing two different outlooks for 2023. Carload is performing better than expected, while intermodal is struggling to compete with trucking.
The rail industry is currently seeing two separate story lines develop as the intermodal and carload segments follow different paths. One is growing in line with the underlying economy, while the other is declining significantly on strong modal competition.
Intermodal was once thought of as the growth driver of rail volumes, and while it could return to those heights in the future, it has a steep hill to climb. The last 18 months have been ones of disappointment and uncertainty for intermodal. Both international and domestic freight volumes struggled to find their footing after a post-pandemic surge of traffic created congestion all along the supply chain. In recent quarters, intermodal has been buffeted by the tremendous uncertainty created by the lack of a labor contract for dockworkers at West Coast ports and the economic reality of lower-than-average active truck utilization.
While the International Longshore and Warehouse Union and Pacific Maritime Association tentatively agreed in June to terms for a new six-year agreement, it is less clear whether traffic will immediately start to flow back to the West Coast ports. Overall intermodal volume is expected to decline by 8% from 2022’s weak levels, before returning to modest growth in 2024.
Over the last few years, West Coast ports have lost market share to their East and Gulf Coast peers because of a combination of congestion and uncertainty over the now-resolved labor situation. The labor situation dragged on for nearly a year beyond when the West Coast port labor contract expired in July 2022, meaning many shippers diverted cargo for well over a year. In that time, they developed new relationships with drayage providers, ports, and warehousers that they may be unwilling to sever only to return to the West Coast and lose some alternative routes.
The move to East and Gulf Coast ports has eroded one of intermodal’s key advantages over trucking: length of haul. A 250-mile to 550-mile length of haul makes trucking much more competitive compared to rail intermodal than the 2,000-plus mile lengths of haul that are routine for imports from the U.S. West Coast into the interior.
At the same time, active truck utilization declined dramatically over the last few quarters and is below its long-run historical average, making truckers hungry for any and all available freight. As a result, intermodal has had to work to sell its value proposition at a time when rail service was also experiencing struggles. Lower truck rates, combined with the perceived better service reliability of trucking, has made for challenging competitive dynamics for rail intermodal as can be seen in FTR’s Intermodal Competitive Index shown in Figure 1.
That tough competitive environment is expected to remain in place until the second half of 2024, when it will ease back toward a more neutral footing over the course of the year. Until that happens, expect intermodal volumes to remain at or below five-year average levels.
Intermodal wildcard
Carriers have tried to adapt to the changing port dynamics and competitive truck market by introducing new and expanded services for intermodal containers leaving the Port of Houston, Texas. Gulf Coast ports have experienced tremendous growth in the post-pandemic period as shippers work to serve the growing Texas market. The new intermodal services, most of which started on June 1, are railroads’ attempt to capture some of this additional volume.
The wildcard when it comes to intermodal volumes is if and how flows change in response to the railway merger of Canadian Pacific and Kansas City Southern (CPKC) that took effect earlier this year. Mexico is expected to post its second consecutive year of double-digit percentage intermodal volume growth in 2023 before downshifting to low single-digit results. That expected downshift could be altered by the new service offerings and partnerships announced in the wake of the CPKC transaction. Not only has CPKC added several new partners and beefed up its cross-border offerings, but other railroads responded by creating their own expedited intermodal services from Mexico into the upper Midwest.
These services could cause Mexican intermodal to outperform the 2% year-over-year growth expected and help it break its traditional status as an intra-Mexico (rather than cross-border) move. It is too early to adjust the base expectation higher or to know what the magnitude of the impact will be from the new services coming out of Mexico.
Better than expected
In a marked contrast with intermodal, carload volumes are performing better than expected through the first half of 2023 and are expected to grow for the full year. Carload volumes are expected to increase by 2% this year, in line with or slightly faster than overall gross domestic product (GDP) growth.
Coal, the largest carload sector by volume, has held up better than expected through the first half of the year, despite low natural gas pricing that should be denting domestic demand. It is expected that coal volumes will weaken as the year moves along, but its first half steadiness is already enough to likely ensure it avoids a negative outcome for the full year.
Chemicals volume started 2023 essentially in line with the prior year and five-year average levels, but it has shown some weakness as the end of the second quarter nears. This is worrisome not just for carload volume levels but also for what it could mean for the overall economy, as the base chemicals produced in this sector feed a number of manufacturing and industrial processes across the economy. New chemical facilities set to come online in 2024 and 2025 should boost volumes over the longer term, but the next few quarters could be a challenge.
Crushed stone, sand, and gravel traffic remains a bright spot for loadings as it has for the last six quarters. Federal and state infrastructure dollars should keep that sector moving forward for quarters to come as additional money is disbursed.
Metals and automotive are two more sectors that appear to have a solid foundation for carload growth over the next few quarters, as automotive production remains strong to rebuild inventory and meet demand.
Forest products traffic, however, is likely to be challenged in the next few quarters as lumber copes with the machinations of the housing market and pulp and paper appears to be settling into a pattern of lower volumes for a longer period of time.
Key factor: service
In general, slow-and-steady growth is expected to rule the day moving into 2024 for carload traffic, while intermodal faces headwinds for the next year. While those competitive pressures for intermodal will abate slowly over the next year, it will be 2024 before volumes truly turn around. Indeed, the competitive situation is not expected to place intermodal on level footing with its truckload competition until late next year.
In the long run, the primary factor determining rail companies’ success—whether intermodal or carload—will ultimately be whether carriers can deliver on the service expectations of their customers.
Service levels remain an area of dispute between carriers and shippers. While progress was made early in the year for both overall velocity for intermodal shipments and dwell time, these two metrics slipped back toward historical averages at the beginning of the second quarter and held there for most of the period.
Meanwhile railcars online, which measures the total number of railcars actively hauling freight in the North American rail system, remained stubbornly high until the end of the second quarter. Typically having a high level of railcars online is good, but only if they are supporting freight growth. Over the last few years, however, shippers have been adding and keeping railcars in the fleet to compensate for poor rail service (and not growth). So in this case, as service improves and freight growth is slow, railcars should be coming out of the fleet. We did begin to see this trend in the waning weeks of the second quarter, as railcars online came to a level that is in line with its historical average and closer to the levels other metrics had been holding.
The ultimate test of the health of the rail sector going forward will be whether carriers can improve service levels, as they will have a large impact on rail’s ability to reclaim and maintain market share from trucking in the intermodal and carload realms.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.
Honoring supply chain professionals and companies for their contributions to the industry is a tradition at the Council of Supply Chain Management Professionals annual EDGE Conference. The following are some of the recognitions given out this year.
The 2024 Distinguished Service Award was presented to Heather Sheehan, owner of Crispy Concepts LLC, instructor with Penn State University, and board member and adjunct faculty member with the University of Denver’s Transportation & Supply Chain Institute.
Sheehan, along with Roger Penske, chairman of Penske Corp., were inducted into CSCMP’s Supply Chain Hall of Fame.
Travis Kupla, Ph.D, of the University of Arkansas, won the Doctoral Dissertation Award for his paper “How Supply Chains Respond to Disruptions: Three Essays on Responses to Operational, Geopolitical, and Natural Disaster Disruptions.”
The Bernard J. La Londe Best Paper Award was given to Matias G. Enz from the University of Missouri-Saint Louis, and Douglas M. Lambert from The Ohio State University for their paper “A Supply Chain Management Framework for Services.”
Wenting Li and Dr. Yimin Wang of Arizona State received the E. Grosvenor Plowman Award for their research paper, “A Procurement Advantage In Disruptive Times: New Perspectives On ESG Strategy And Firm Performance.”
The Teaching Innovation Award was given to Dr. Shane Schvaneveldt of Weber State University for his paper, “A Lean 5S Experiential Learning Game for Logistics and Supply Chain Management.”
To see a full list of honorees, please visit cscmp.org and click on the tab "Academia & Awards."
Supply chains today are facing an onslaught of disruption and change from geopolitical events to technological advances to economic shifts. Supply chain partners that successfully navigate those changes together will seize a competitive advantage that will win them market share and increase profits.
The “2025 Third-Party Logistics Study,” spearheaded by Dr. C. John Langley of Penn State University and developed in collaboration withNTT DATAand Penske Logistics highlights the crucial role that change management plays in the relationship between third-party logistics providers (3PLs) and their customers. Unveiled today at the Council of Supply Chain Management Professionals (CSCMP) EDGE conference, the study delves into the dynamic nature of relationships between shippers (companies that manufacture goods or provide services) and third-party logistics providers.
“While users and providers of 3PL services continue to report successful relationships, they find themselves having to deal with an increasingly wide range of challenges,” said Dr. C. John Langley, Professor, Supply Chain & Information Systems, Penn State University. “While examples include economic concerns, geopolitical unrest, and changing markets for supply chain services, they also are taking advantage of change management processes to benefit from new and improved capabilities such as artificial intelligence (AI) and direct-to-customer proficiencies.”
The survey found that both shippers (61%) and 3PLs (73%) agree that supply chain change management is vital. Respondents from both groups indicated that the top factors that are driving the need to change their operations were shifting customer demands, economic factors, and technological advancements. In particular, both shippers and 3PLs believe that improvement and change is needed in supply chain visibility, with 69% of shippers and 68% of 3PLs citing it as an area of concern.
AI as change agent
One technological advance that is enabling change in supply chain operations, according to survey respondents, is AI. Both shippers and 3PLs agree that AI can be pivotal in automating data analysis, identifying patterns, solving problems, and automating repetitive tasks. Top implementation areas for AI cited by respondents include supply planning and demand forecasting (33% of shippers and 19% of 3PLs) and transportation and route optimization (27% of shippers and 22% of 3PLs).
The e-commerce effect continues
Omnichannel retailing and e-commerce continue to exert pressure on supply chain operations for shippers and their third-party logistics partners. Both shippers and 3PLs view delivery speed and visibility as strong areas of differentiation. According to the study, 48% of shippers and 53% of 3PLs reported that customers routinely expect deliveries in less than two days, and 27% of shippers and 26% of 3PLs noted that there are three-day or less delivery expectations. Shippers (44%) and 3PLs (38%) are willing to absorb a small percentage of the costs related to shipping speeds.
The Annual 3PL Study surveys 3PL providers and users of 3PL services to understand the current state of 3PLs and how 3PL relationships are evolving with their customers. The 2025 study and past versions are available for download at www.3PLStudy.com.