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January 6 2020

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Januar y 6 2020 | The Journal of Commerce 95 In Perspective 2020 ANNUAL REVIEW & OUTLOOK Surface Transportation Surface Transportation AFTER FINISHING 2019 on a weak note, US railroads are eager to turn the calendar with the hope 2020 will be a rebound year for intermodal. Growing business in the first half of 2020 will be a tough task, accord- ing to industry analysts, although the forecast is more promising for the second half of the year. Low spot truckload rates will continue to ripple through the US rail sector, and shippers will easily find capacity at competitive rates in early 2020. Forecasts call for a 1 to 3 percent increase in volume compared with 2019, according to industry analysts at the JOC Inland Distribution Con- ference in October. Railroads and intermodal mar- keting companies (IMCs) will be relieved to see positive numbers after a dismal 2019. By mid-De- cember, the fourth quarter was shaping up to be the weakest since 2016, with total intermodal volume — including domestic and interna- tional container traffic — was down 7.3 percent from the 2018 peak and 4.3 percent from 2017, according to figures from the Association of American Railroads (AAR). Among the Class I railroads, BNSF Railway and CSX Transporta- tion were set to end the year with volume at a three-year low, the AAR data showed. Union Pacific Railroad's intermodal volume was down 6.8 percent from a year earlier and 0.4 percent compared with 2017, so it's likely to join BNSF and CSX when the final Decembers are tallied. Assuming no major surges in volume, Kansas City Southern Railway will end 2018 with inter- modal volume down about 5 percent versus 2018 and close to flat with 2017, and Norfolk Southern Railway will be the only US Class I railroad to end 2019 worse than last year but stronger than 2017. Steel-wheel interchanges have been elimi- nated, and service to secondary locations has been axed. Pressure, in the form of widening rate differentials and trailer-on-flatcar (TOFC) service cutbacks, is being brought to bear on the remaining TOFC traffic in an effort to convert it to container. Demurrage rules have been tightened. Most importantly, the railroads have attempted to hold the line on rates or even attempted increases, even as the trucking market softened. Domestic intermodal volumes have inevi- tably been affected. According to PSR advo- cates, this reflects "the pain before the gain," the necessary process of streamlining and optimizing the intermodal product offering in a way that will eventually yield volume growth plus improved profitability. Those advocates point to intermodal growth in Canada as evidence supporting this theory. But movements of domestic intermodal equipment within Canada were down 11.6 per- cent in the first 10 monhts of 2019, even worse than the decline in the US. Close examination reveals that the Canadian growth story is actu- ally one of gains in cross-border movements of international containers. In other words, it represents share shift rather than an increase in the size of the intermodal market. All this portends a difficult 2020 for inter- modal. Economic growth is slowing, burdened by the US-China trade dispute and uncertainty wherever one turns. Much depends on the future course of US trade relations, which are impossible to predict from one tweet to the next, but freight demand also will be under pres- sure, and 2019 intermodal headwinds, includ- ing the flow of import cargo toward east coast routings, are likely to persist. The most likely scenario is minimal growth of 1 to 2 percent. The domestic outlook depends heavily on the course of the economy, but it also depends greatly on whether the railroads maintain their current approach. It takes more than just running the trains on time to convert traffic from the highway. Once lost, shipping customers demand great incentives to convert back to the rail. There is little reason to expect intermodal to regain lost share if the current approach is maintained "as-is." With growth in truck freight projected to slow to a crawl, it's unlikely that a tightening truck market will come to intermodal's rescue. A hopeful outlook is that domestic intermodal stabilizes at current levels, but substantial volume gains may remain out of reach. JOC Larry Gross is president and founder of Gross Transportation Consulting. Contact him at Rail on the rise? Modest intermodal rebound possible in 2020 By Ari Ashe "If you're not thinking of intermodal as part of your broader strategy, you could be in some serious trouble eventually." IMCs, also known as "channel partners," argue that railroads misjudged the market when quoting contract prices in January 2019. Railroads pushed high single-digit increases as truck rates were plum- meting, a combination that led to IMCs losing business. There are still too many trucks entering 2020, according to the largest truckload carriers, so IMCs have urged the Class I railroads not to make another miscalculation. Railroads, though, are firm in their conviction not to cave on rates because of a weak truck market in 2020. "We are not trying to chase market share," UP CEO Lance Fritz said on an Oct. 17 earnings call. "As the economy strengthens, which it will at some point, and as truck capacity tightens up, which it will at some point, we are in a great place to take advantage." "Union Pacific is still going to be pushing price from a preci- sion-scheduled railroading (PSR) perspective. I don't think it'll be as aggressive as it was last year, with high single digits. It's probably going to be low singles, barring any major event between now and March," Adam Rodery, vice president of in- termodal and rail with Mode Trans- portation, said at the JOC Inland Distribution Conference.

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