Parcels' role in Intermodal Rail
***Breaking news as I write this post that a tentative agreement has been reached. I’m sure a big sigh of relief is being felt from all shippers, the railroads, and the US government. However, since I’m already finished with this post, I’m sending it out to try to show the importance of parcels when it comes to intermodal rail services.
Talks continue between the union and rail management as hopes for an agreement before midnight tonight dim. Shippers are scrambling to make contingency plans while other transportation modes – air, trucking, and perhaps barge – prepare to handle additional volume should there be a rail strike.
Much has already been written on the potential financial impact of a strike such as higher food prices. According to the Association of American Railroads (AAR), the estimated cost of a nationwide freight railroad shutdown is more than $2 billion a day. This figure also includes the shipment of e-commerce purchases and other small parcel shipments.
Yesterday, Sept 14, the National Retail Association issued a statement.
Part of the statement reads: “The timing coincides directly with peak shipping season for the winter holidays, and a strike would have devastating consequences for retailers’ supply chains and could cripple the U.S. economy. American businesses and working families are already facing increased prices due to historically high levels of inflation. A rail strike would create greater inflationary pressure and challenges for businesses and consumers. Smooth and stable operations on the rails is crucial as we enter the busy holiday season.”
Indeed, the AAR notes in a report, The Economic Impact of a Railroad Shutdown, that “UPS may be the single largest rail customer. A single intermodal container or trailer railroads carry for UPS could contain 1,800 to 2,000 packages. A train with 100 containers or trailers could have 200,000 UPS packages headed for our doorsteps.”
UPS utilizes intermodal services to ensure on-time deliveries. Shippers that utilize UPS, or FedEx for that matter, purchase speed not the mode of transportation.
Without rail intermodal, UPS may need to lean into their domestic air network should there be a strike. This will add additional costs to UPS’ bottom line should that happen.
Likewise, FedEx may also have to utilize its domestic air network. But the potential added costs to shift FedEx’s network may have a bigger financial impact as compared to UPS. FedEx is already facing additional costs in purchased transportation costs due to the firing of one of its largest Ground contractors. Toss in a potential rail strike and…yeah, let’s hope FedEx will have a Merry Christmas in order to recover some of these costs.
Let’s side-track a bit here because I find FedEx interesting. The company is a bit of a latecomer to fulling embracing the advantages of intermodal services.
It wasn’t until 2010 that FedEx really embraced intermodal services and the announcement came in a Norfolk Southern Q4 2010 earnings call:
“With respect to new services, we are pleased to announce this afternoon that we've been selected as the primary eastern rail carrier for FedEx as it launches its new intermodal service. FedEx will systematically use rail intermodal service for the first time in its nearly 40-year history when it rolls out its revamped less-than-truckload operation next Monday. We are very excited about this developing opportunity and look forward to a long and successful partnership with FedEx,” Norfolk Southern CMO Donald Seale told investors on January 26, 2011.
Fast forward to this year and we see it’s become an integral part of FedEx’s Ground network….
What about the USPS you may ask? Or perhaps you may not ask but you should, particularly as it works to reinvent itself. It’s a bit murky in regard to how it utilizes intermodal rail currently. It’s likely that it is doing it via a UPS contract but regardless, as it shifts away from using air as much as it once did to relying more on ground transportation, it seems probable that they would embrace intermodal rail more today than they once did.
I did find this tidbit in a 2019 report – “The Postal Service Headquarters MTE group coordinates the replenishment of MTE across the MTESC network by contracting with six intermodal (truck and rail) transportation suppliers. Intermodal transportation suppliers are contracted to provide trailers for one-way trips by truck or rail within 48 hours of notification.” (MTE = Mail Transport Equipment, MTESC= Mail Transport Equipment Service Center).
One of the findings in the report was this – “We found that overall costs to move MTE intermodally decreased from $21.3 million in FY 2017 to $14.1 million in FY 2018 (33%), while HCR transportation costs increased by $16.1 million in FY 2018. In addition, for the same time period, intermodal trips decreased from 14,612 to 9,361 (36%) while HCR trips to transport MTE increased from 43 to 4,982 (11,500%).” (HCR = highway contract route)
Let’s hope that the tentative agreement holds but meanwhile, shippers of all types of goods need to have contingency plans already in place to keep such threats at bay.
Stay tuned to JOC for more updates on the rail situation as well as JOC’s senior editor, Ari Ashe social media shares.
-Cathy
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I wear a number of hats these days. Catch my weekly column on air cargo, freight forwarding, and the express markets, and the occasional podcast on Air Cargo World. I’m also helping out the Reverse Logistics Association as a research manager and at JOC I help out as a research analyst and write a weekly LinkedIn article, Freight Forward, summarizing JOC articles and providing an outlook for the week ahead.
In September I’ll be participating in a panel discussion on returns at the CSCMP Edge conference in Nashville and I’ll be moderating a panel session on the middle and last miles at JOC’s Inland Distribution conference in Chicago.
Speaking of JOC….be sure to catch Substack columns from Eric Johnson, Ari Ashe, and Bill Cassidy - all three are fantastic!