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Feb.6, 2017

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18 THE JOURNAL OF COMMERCE www.joc.com FEBRUARY 6.2017 INTERMODAL MARKET REPORT SPECIAL REPORT THE RAIL INDUSTRY'S history of market dominance and devotion to shareholder value could hamper US domestic inter- modal rail shippers' hopes that a lull in domestic volume growth will galvanize the Class I railroads to adopt dynamic pricing, introduce service fl exibility, and offer them access to more inland terminals. That's especially true after domestic intermodal volume rallied in the last few months of 2016, giving some railroaders' renewed confi dence in their product and prices, many making promises to keep those prices above the rate of infl ation, which is expected to trend upward any- where from 2 to 3 percent this year. "We are done cycling some of the losses of 2016," Fredrik Eliasson, chief sales and marketing officer at CSX Transportation, told investors and analysts on a fourth-quarter earnings conference call Jan. 18. Although North American intermo- dal volume began to rally in the latter months of 2016, total volume for the year was still down 1.6 percent year- over-year, according to the Association of American Railroads. Domestic container volume growth, in particular, slowed from 6.4 percent year-over-year in the fi rst quarter to 3.3 percent in the third, according to the Intermodal Association of North America. That decline was a result of a con- fl uence of factors, including declining freight demand, fl ush capacity on roads and rails, low consumer spending on goods that move via container, and low fuel prices tugging down trucking rates, making that mode more attractive to shippers. All this has come at a critical time for the Class I rail industry, which is struggling to offset the continued plunge in many carload segments, especially coal, by aggressively going after domestic intermodal business. "The (rail) industry has some real challenges. If it's going to compete (with trucking), it's going to have to be more forward thinking," said Mark Yeager, senior adviser at private equity fi rm CI Capital Partners and former president of transportation provider Hub Group, who spoke at the 2016 JOC Inland Dis- tribution Conference in November. "(If ) pricing gets aggressive, you'll have to be able to compete; service is disrupted, you'll need alternatives." That's a tall order for hardline North American railroaders who are describ- ing current service, which has only just rebounded to the levels seen before the catastrophic 2013-to-2014 winter, as a historic achievement. During the height of the so-called freight recession last year, railroads were telling sales teams to "sell through the trough," and assured investors that the push for a greater share of domes- tic containerized cargo would not be "a revolution." It did not bode well for ship- pers that wanted to see greater pricing and service fl exibility by North Ameri- can railroads. Now that some railroaders are convinced the industry has cleared the industry recession, those prospects seem even more unlikely. Some railroads struggled to win domestic business in the fourth quar- ter. Kansas City Southern Railway saw intermodal volume decline 1 percent compared to 2015 fi gures, pinning the loss on competition from cost-effective over-the-road competitors. "We are weathering the storm to the best of our ability," Pat Ottensmeyer, KCS president and CEO, told investors and analysts on an earnings conference call. Meanwhile, CSX, the same railroad telling employees to "sell through the trough," posted a 4 percent year-over- year uptick in intermodal volume in the HOPES DERAILED Railroads fail to meet shippers' desires for competitive pricing, hinterland reach, and fl exibility By Reynolds Hutchins

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