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March 2 2020

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102 The Journal of Commerce | March 2 2020 Surface Transportation CLASS I RAILROADS operating in the United States have struck a concilia- tory tone during intermodal contract rate negotiations so far this year, a shift in negotiating posture from a year ago as they seek to win back market share, according to intermodal marketing companies (IMCs). That bid to regain market share after a down 2019 for intermodal means railroads are making conces- sions that were non-starters under their take-it-or-leave-it stance a year ago, sources at six IMCs scattered across the US have told The Journal of Commerce. In some situations, railroads have agreed to flat rates or rate reduc- tions. In others, they have raised rates, but to a much smaller degree than any time since 2016. Jason Seidl, an industry analyst with Cowen and Co., told The Journal of Commerce the rate reductions are on only a small portion of the inter- modal network. Seidl said contract rates are up between 2 and 3 percent overall, in line with what IMCs have told The Journal of Commerce. "It's 180 degrees, the complete opposite of a year ago," said an IMC executive in the Southeast. "In 2019, the railroads thought demand would tighten by March. They were wrong. This year, they acknowledge it's a soft intermodal market and understand they have to be aggressive on price or suffer even more volume losses." Another intermodal executive, though, warned that negotiating posture varies by railroad, shipper, guaranteed volume, and a multitude of other factors, and not all shippers are alike. "If a cargo owner already had the lowest rates in a corridor, you may see a rate increase," the source said. "But if you were in the 50th percentile, the railroad could be willing to lower your rate or keep it flat. So there are a lot of moving parts which vary by customer. It's all over the board." Pricing correctly is vital because total intermodal volume fell 4.2 per- cent in 2019, while domestic volume dropped 6.1 percent, according to the Intermodal Association of North America, whose CEO said there hadn't been a year-on-year decline of that size since the Great Recession of 2009. If shippers don't save enough money on intermodal, similar to last year, they will place discretionary cargo on the highway, because trucks are faster and more flexible in inclem- ent weather. If intermodal rates are low enough, however, then the slower transit time is worth the wait for cost-conscious shippers. North American intermodal volume is lower once again in 2020, down 5 percent combined in the first seven weeks of the year, accord- ing to the Association of American Railroads (AAR). There are a few mitigating factors, however. Year over year, volume has plunged 13.5 percent for Union Pacific Railroad, which is likely a combination of the cargo pulled forward in December 2018 that entered the intermodal network in January 2019 ahead of planned tariffs on Chinese imports and the coronavirus outbreak in China hurting imports this year. The AAR doesn't separate international and domestic intermodal. Nevertheless, there is consid- erable pressure on the railroads to focus on not only operating ratios, but also price, volume, and service, which matter to shippers. Price and service are especially important with the fierce competition on truck rates in the eastern US and between California and Texas. "The railroads are finally start- ing to feel some of the pressure of the industry-wide freight recession and the competition of the truck market," one IMC said in a Feb. 10 notice to its agents obtained by The Journal of Commerce. "[Railroads have] become more willing to work with price and service, although it is still not enough to fully beat the truckload market in all areas." CSX more collaborative CSX has been very cooperative -13.5% -9.3% -4.2% -2.7% 0.1% 6.3% 12.8% -20% -15% -10% -5% 0% 5% 10% 15% 20% UP NS CN BNSF CSX CP KCS North American intermodal volumes mixed in 2020 Source: Association of American Railroads Year-over-year change in intermodal volume carried by Class I Railroads, Weeks 1-7 © 2020 IHS Markit Trucking | Rail | Intermodal | Air & Expedited | Distribution Under pressure Railroads more conciliatory on 2020 contract rates: IMCs By Ari Ashe

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