Intermodal markets: What would a rebound look like?

First-quarter commentary from the North American Class I rails regarding intermodal was mixed: Some railroads grew volumes (Canadian Pacific), some kept volumes flat (CSX), while others saw steep declines (Union Pacific).

Two comments stand out — and we discuss both later in the note — from railroad management this earnings cycle. CSX said its intermodal business would slow “for the foreseeable future,” and Union Pacific COO Jim Vena cited intermodal’s lower revenue per carload to its industrial business. The implication, we believe, was that a railroad looking to maintain record-low operating ratios (Union Pacific achieved 59% in Q1) would not try to grow a low revenue side of its business relative to the other services it offers.

The reluctance of some rails to aggressively grow intermodal has to be balanced against J.B. Hunt’s belief that millions more — 7 million to 11 million more — shipments currently being moved over the highway every year can be converted to intermodal. Add to that what may be a structural realignment of West/East freight flows across the North American continent.

What seems to be fundamentally at issue is the duration of the cost-cutting cycle the railroad industry has entered, the long-term sustainability of very low operating ratios, and the point at which public markets will start to look for growth, not just efficiency.