J.B. Hunt sees its first annual intermodal decline in 2019 27/01/20

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Source: http://trn.trains.com/news/news-wire/2020/01/27-jb-hunt-sees-its-first-annual-intermodal-decline-in-2019

J.B. Hunt sees its first annual intermodal decline in 2019

Rail pricing in East cited as factor
By Bill Stephens | January 27, 2020


A string of J.B. Hunt intermodal containers head west on a BNSF Railway train at Lemont, Ill., on Dec. 22, 2019. The firm's intermodal volume suffered a first-ever drop in 2019.
TRAINS: David Lassen

J.B. Hunt’s intermodal volume sank for the first time ever last year largely due to tougher truck competition in the east.

Truck rates fell last year while J.B. Hunt partners Norfolk Southern and CSX Transportation generally increased intermodal rates.

“In today's environment, there is a challenge to grow in the east because the customers are able to secure truckload capacity at rates equal to or better than intermodal,” Darren Field, J.B. Hunt’s executive vice president of intermodal, told investors and analysts on the company’s earnings call this month. “And until we can offer economics and service, combined, that outperform truck, we’re going to be challenged there.”

Service on both Norfolk Southern and CSX Transportation improved in the second half of 2019, Field says.

But neither railroad cut intermodal rates amid stiffer truck competition, rail executives have said.

NS, J.B. Hunt’s major intermodal partner in the East, has embarked on a “yield-up” pricing strategy as it adopts an operating model based on Precision Scheduled Railroading.

Likewise, CSX executives say they won’t cut rates to gain volume. CSX dropped service in hundreds of low-volume intermodal lanes in 2017 and 2018 as part of a bid to reduce complexity and boost reliability, which cost J.B. Hunt up to 70,000 loads annually.

Intermodal had its second-best year ever in 2019, according to the Association of American Railroads. But overall domestic intermodal volume last year fell 6.1%, according to data from the Intermodal Association of North America.

J.B. Hunt’s intermodal volume slumped 3.4% last year, to 1.9 million loads. J.B. Hunt’s eastern loads declined all four quarters of 2019, while its transcontinental loads were up in the third and fourth quarters. BNSF Railway is J.B. Hunt’s partner in the West.

The company’s intermodal profits grew 2% per year over the past six years, well below the 11% growth over the prior six-year period, Susquehanna Financial Group analyst Bascome Majors points out. His question to J.B. Hunt executives: Is intermodal still a growth business?

Over the long-term the answer is yes, Field says, noting that J.B. Hunt believes there are 8 million to 10 million loads it can convert from highway to intermodal.

“The reality is we have to produce the combination of economics and service that convince that customer base that intermodal is the right solution for them,” Field says.

That’s not easy with rail rates where they are now.

“In today's environment, our customers are expecting a more truck-like service environment with a benefit in the economics. Obviously, they're not going to give us intermodal business at rates that are higher than they can get the … truck for. They do expect some version of a discount, and it’s up to us with our rail providers to develop service solutions that will continue to drive intermodal growth as we move into the next several years,” Field says.

Nonetheless, J.B. Hunt executives say they expect the company’s intermodal volumes to rise this year.

Intermodal analyst Larry Gross agreed with J.B. Hunt’s view of the marketplace.

“The only reason someone gets on the rail versus utilizing a truck is to save money,” Gross says. “If there is an opportunity to save money, the next question is: is the service (reliability and speed) good enough that the shipper can feel comfortable taking advantage of the savings opportunity? Intermodal is just about always slower than truck and because it is more complex, with more steps required to get the freight from A to B, it tends to be less reliable with more transit time variability. So if intermodal doesn’t offer savings, then it won’t get the freight.”

Todd Tranausky, a rail and intermodal analyst with FTR Transportation Intelligence, says it’s unlikely intermodal will regain market share this year.

“With the truck market forecast to only slowly tighten back to its historical utilization rate of 91% over the course of 2020 and the way railroads have alienated shippers with their rate and operating practices, we expect that shippers will stay with truck as long as possible, even after it becomes more expensive than rail,” he says.

Gross predicts that the Class I railroads that are shifting to Precision Scheduled Railroading operating models will eventually seek more intermodal volume growth.

“The simplest way to goose growth will be to become more competitive on rates and I think we will see that at some point,” Gross says, noting this would likely have a negative impact on operating ratios and profit margins.

“The more difficult but ultimately more rewarding way to grow would be for the railroads to pivot from focusing on making their own lives easier by simplifying their intermodal offerings and go back to making their prospective customers’ lives easier,” Gross says. “This means figuring out how to deal with more complexity while maintaining adequate levels of both service and profitability.”

Intermodal, which is almost evenly split between international and domestic segments, represents roughly half of all rail traffic.