Whitepaper: Why domestic intermodal and international intermodal are distinct markets

Mike BaudendistelFreight Market Blog, White Papers

Intermodal Containers

The two intermodal markets are showing divergent freight volume trends in 2020

Intermodal Rail 101: What is intermodal rail and why is it important? 

In short, intermodal refers to utilizing two or more methods of transportation for the movement of a single shipment. In the context of domestic transportation, the term almost always refers to intermodal rail, which involves the movement of semi-trailers (referred to as trailer-on-flatcar, or TOFC) or containers (referred to container-on-flatcar, or COFC) utilizing both truckload and railroad transportation as part of a single move. 

Trailers or containers are hauled by a Class 8 tractor at the beginning and the end of the move, first from port or shipper location to a railhead, and later, from railhead to receiver location. The trailer or container moves on the railroad on a flatcar during the rail portion of the move. An example of an intermodal move would be the movement of imported goods that come through the Southern California ports and ultimately terminate in Schaumburg, a suburb of Chicago. The container moves on the railroad during the ~2,200-mile long-haul portion of the move and the container is moved via truckload from a rail terminal in Joliet, Illinois on top of a chassis to Schaumberg, roughly 40 miles away. (Note: 40 miles is the approximate average length of haul for drayage, or short-haul ground movements associated with larger movements within a supply chain.)   

Intermodal utilizes the advantages of both the truckload and railroad modes.

Intermodal leverages truckload’s ability to travel anywhere there is a paved road, including to or within a shipper or receiver’s facilities, and railroad’s ability to move goods over the surface of the earth at the lowest cost and most fuel-efficient manner available. As an alternative to truckload for applicable freight, intermodal rail can often save shippers 10%-15% of the price of a shipment (and more in some cases) with roughly half of the fuel surcharge of a truckload move. Therefore, the conversion of truckloads to intermodal loads is one of the key ways that shippers can optimize their supply chains to reduce transportation costs while also highlighting their usage of intermodal as an environmentally friendly or “green” initiative. Those advantages led intermodal rail volume to grow at roughly 2x GDP for most of its history.  

Intermodal container volume, the larger of the two segments, has been a growth area while intermodal trailer volume has been declining.

Total Intermodal Containers, United States of America: Container on flatcar and trailer on flatcar
FreightWaves SONAR: the blue line shows total intermodal container-on-flatcar (COFC) volume; the green line shows total intermodal trailer-on-flatcar (TOFC) volume

While rail intermodal has some clear advantages over truckload, intermodal also has a few drawbacks. 

Intermodal is typically considered a lower-service offering than truckload. Intermodal service levels between long-haul origin and destination pairs are typically one day longer than the truckload duration. In addition, there is a greater potential for service failures and more potential for inconsistent service that is less time-definite given the greater number of points of handling. As a result, the best compliment that can be bestowed upon intermodal service is that it is “truck-like” or indistinguishable from moving freight directly over the highway. Therefore, freight with expedited or strict service requirements is typically not a candidate to move via rail intermodal. Freight that needs to be refrigerated is also typically not a candidate for intermodal service due to potential for spoilage and the relative lack of refrigerated intermodal equipment. Note, though, that some companies are pursuing refrigerated intermodal as an under-penetrated growth area. 

One measure of improved service: intermodal train speeds have risen over the past year on the western U.S. Class I railroads.

Weekly Intermodal Train Speeds, BNSF Railway Company
FreightWaves SONAR: the blue line shows weekly average speed for intermodal trains on the BNSF Railway while the green line shows weekly average speed for intermodal trains on the Union Pacific Railway 

In addition, there are limitations associated with intermodal that are not present with truckload. First, intermodal typically only makes economic sense over long lengths of haul; it typically is uneconomic to move freight via rail intermodal for lengths of haul that are less than 500 miles. Intermodal becomes more competitive with truckload as lengths of haul rise. Second, the origination and termination points must be close enough to their respective rail terminals to limit the number of drayage miles that are out of route compared with transporting via truck directly from the origin to the destination. Third, there must be sufficient freight density in a particular lane (for example, Los Angeles-to-Chicago) to warrant railroads dedicating intermodal capacity to that lane. If that volume does exist, then intermodal units are typically moved in unit trains. As a result, relative to truckload, intermodal volume is concentrated in a small number of highly dense lanes that are anchored by large cities. Los Angeles-to-Chicago and Los Angeles-to-Dallas are the densest intermodal lanes. 

Domestic intermodal and international intermodal two distinct markets

The terms “international intermodal” and “domestic intermodal” refer to whether the containers being moved are international equipment or domestic equipment and, in turn, which party owns the equipment, not whether the goods were actually manufactured overseas. In fact, a large percentage of the goods transported via domestic intermodal are, in fact, imported goods that were manufactured overseas for North American consumption. 

International intermodal refers to the movement of 20-foot, 40-foot or 45-foot containers (typically owned by the international containership lines or international container leasing companies) and are the same containers that travel overseas on containerships. Meanwhile, domestic intermodal refers to containers or trailers that are owned by domestic transportation companies, such as truckload-based intermodal providers (e.g., J.B. Hunt), domestic equipment providers (e.g., TTX), domestic leasing companies or  domestic equipment pools. Domestic equipment does not leave North America. 

Much of the freight that is classified as domestic intermodal shipments consists of imported goods that are “transloaded,” or taken out of smaller 40-foot international containers and put into larger 53-foot domestic containers. That makes the intermodal move more efficient (since three 53-foot domestic containers can move as much freight as five 40-foot containers), eliminates the need to reposition empty containers back to the ports and allows shippers to decide upon freight termination points later in their supply chains. As a result, while domestic intermodal is a larger volume segment than international intermodal, about 60% of intermodal freight consists of imported goods that were manufactured overseas for consumption in North America.

Domestic intermodal and international intermodal should be considered separate markets because the two intermodal segments have different demand-drivers, market participants and capacity considerations. As a result, as shown in the SONAR chart below, the two segments have shown very different volume trends, rising and falling at different times. 

Divergent intermodal volume trends: domestic rising and international falling

Total Outbound Domestic Rail Container Volume, United States of America
FreightWaves SONAR: Daily domestic containerized intermodal volume (presented as a seven-day moving average) is shown on the blue line and international intermodal volume is shown on the green line. 

International intermodal volumes driven by international trade volume, port market share and transloading activity

International intermodal consists primarily of movements of 40-foot international containers (also referred to as ISO containers or intact movements) and also consists of 20-foot and 45-foot container movements to a lesser extent. As shown in the chart below, 40-foot container movements are roughly four times the volume of 20-foot container movements. Among the container sizes, the larger container sizes of 40-feet and 45-feet are best suited for lighter weight imported goods, such as clothing, while 20-foot containers are best suited for heavier imported goods, such as racks of wine. 

International intermodal volume consists of 20-, 40- and 45-foot container movements

Outbound Rail Volume 40' Containers (Loaded), United States of America
FreightWaves SONAR: the above chart shows the three segments of international intermodal: 20-, 40- and 45-foot container movements. Data are presented as a seven-day moving average of daily container movements. 

The advantage of international intermodal is that fees and delays associated with transloading are avoided in order to get goods to market quickly and efficiently. International intermodal is particularly efficient when ports have on-dock loading, where international containers are taken off the containership and placed directly on the railroad flatcars to be moved via rail. The ports of Los Angeles, Long Beach and New York/New Jersey are examples of ports where all, or nearly all, of their terminals contain on-dock rail facilities.

Maritime imports shipments into the L.A. port complex serve as a leading indicator for international intermodal volume.

US Customs Maritime Import Shipments, Los Angeles, CA
FreightWaves SONAR: the blue line shows maritime import shipments coming into the ports of L.A. and Long Beach inclusive of containerized and non-containerized freight. The green line shows outbound loaded international intermodal volume from the L.A. metro area. 

The main disadvantage that international intermodal has compared to domestic intermodal is the need to reposition empty containers because of the tremendous imbalances of freight flows in North America. Those imbalances are because of the locations of the largest overseas trading partners of the U.S., the location of the largest U.S. ports of entry, the locations of U.S. population centers, and the fact that the U.S. imports much more than it exports. As an illustration, China is the U.S.’s largest overseas trading partner. The ports of Los Angeles and Long Beach are the country’s largest port complex and 80% of the U.S. population lives in the eastern or central time zones. So, most imported goods have a long way to travel once they reach the U.S. West Coast ports. That results in full international intermodal containers going east and a portion of the international intermodal containers going back west empty. 

A lane imbalanced: international containers full eastbound from Seattle to Chicago, half empty going back westbound 

Total Outbound International Rail Container Volume (Loaded) Seattle to Chicago
FreightWaves SONAR: blue line and green line show loaded international intermodal containers from Seattle to Chicago and from Chicago to Seattle, respectively. The green and orange lines show empty containers from Seattle to Chicago and from Chicago to Seattle, respectively.

Domestic intermodal has the added dimension of being highly competitive with truckload, particularly in shorter-haul intermodal lanes.

As noted above, domestic intermodal volume represents a combination of imported goods that have been transloaded into domestic equipment (typically 53-foot containers) and pure domestic freight that originates and terminates within North America. When considering truckload-based indices as an indicator of intermodal demand, using long-haul truckload (which FreightWaves defines as lengths of haul exceeding 800 miles) is most appropriate given the length of haul associated with most intermodal movements, with the caveat that many long-haul shipments do not fit well into the intermodal network.  

Long-haul truckload volume outperformed domestic intermodal volume during the past year, but volumes in the past 30 days have moved together as the truckload market improved.

Long Outbound Tender Volume Index, United States of America
FreightWaves SONAR: the blue line shows the FreightWaves long-haul outbound tender volume index (defined as truckload volumes exceeding 800 miles in length of haul) and the green line is domestic containerized intermodal volume (primarily consisting of 53-foot containers) in the U.S. 

The relative strength of the domestic truckload market has a greater impact on domestic intermodal volumes and pricing than it has on international intermodal. In fact, the Surface Transportation Board, the independent federal agency that oversees the railroad industry, exempts intermodal traffic from issues related to market dominance because intermodal is deemed to always be competitive with truckload. But, while truckload may always be a viable alternative to intermodal, the competitive nature differs by origin-destination pair and the strength of the truckload market. Intermodal has the greatest competitive advantage in transcontinental lanes, such as Los Angeles-to-Atlanta. Rail movement makes up a dominant share of those miles (with short drayage trips on each end). Intermodal is generally at a competitive disadvantage in the shorter-haul truck lanes that are concentrated in the eastern one-third of the U.S. 

Due to their competitive nature, intermodal rates and truckload rates typically move in the same direction, with truckload rates often acting as a ceiling for the rates that intermodal providers can charge shippers. The chart below shows intermodal spot rates and truckload spot rates in the L.A.-to-Dallas lane that have generally been tightly competitive over the past year, reflecting a loose truckload market in 2019 and early 2020.    

Reflecting a competitive marketplace, intermodal and truckload rates typically move in the same direction

Intermodal Rates, Los Angeles to Dallas
FreightWaves SONAR: the blue line shows domestic intermodal rates from L.A. to Dallas and the green line shows the weekly all-in truckload rates in the same lane 

FreightWaves SONAR provides users with a range of intermodal data that is unique in the marketplace and contextualizes the intermodal data with maritime and truckload data.  

As shown in several of the examples above, SONAR contains daily rail volume data for intermodal rail container movements broken down by lane, metro area, container size, loaded status, and intermodal segment (international versus domestic). That differs from other sources of intermodal volume data that present volume data from one week or one month ago with much less granularity. In addition, SONAR provides unique data series for intermodal spot rates and intermodal tender rejections. Users can get ahead of changes in intermodal demand by utilizing maritime data contained in SONAR that provides import volume by port and lane in addition to data on daily ocean rates that serve as a major leading indicator of intermodal demand. And finally, no picture of the intermodal marketplace is complete without the data related to the truckload industry painted by the industry-leading truckload data contained in SONAR.