Railroads creating new services to win back market share from trucking

North American Class I railroads and their partners are showing a flash of creativity not seen in years in launching new domestic, international and cross-border services in recent months.

While the moves are more of a rail rejuvenation than a renaissance — railroads to some degree are still aligned with precision railroading principles — they are doing a more effective job juggling the interest of investors while providing new products to serve shippers.

It's been a long path since CSX Transportation, Norfolk Southern Railway and Union Pacific Railroad were culling lanes in the name of "lane rationalization" and precision scheduled railroading (PSR). Between 2017 and 2019, all three railroads canceled lanes it considered "low volume," part of implementing PSR in the US with fancy labels such as "Unified Plan 2020" and "TOP21."

Not only were lanes eliminated, but partners who sell services to shippers, known as intermodal marketing companies (IMCs), felt as though railroads no longer cared much about converting highway freight.

"We were seeing dollars being pulled out and the focus shifted to internal profitability and efficiencies rather than customer service," said Rick LaGore, CEO of InTek Freight and Logistics, a non-asset IMC. "Things are now far different than five or six years ago."

The early implementation of PSR in the US came at a heavy cost, namely lost business.

The domestic intermodal market share of long-haul freight has fallen from 7% in mid-2018 to 5.6% this year, according to the Intermodal Association of North America (IANA) and Larry Gross of Gross Transportation Consulting. Gross estimates domestic intermodal has lost between 1 million and 3 million loads annually because of market share loss over the last five years.

To reverse the trend, railroads are creating new services in international and domestic intermodal, but also finding other ways to help IMCs convert highway freight.

"Since June, there has been a lot more creative thinking by the Class I railroads themselves to win new business versus the IMCs doing the creative thinking and then having to nudge the Class Is," LaGore said.

Railroads also understand their creative solutions must not only take freight off the highway now, but keep it off the highway.

"We make service, we sell service, that's the only product that we make," Andrew Lynch, NS's group vice president of intermodal, said at IANA's conference in September. "If we want to give our customers a runway and an avenue to grow, it needs to be reliable, it needs to be resilient and it needs to be over a long enough time frame that we can continue to compound wins, getting out of the pendulum swing of win freight, lose freight, re-earn it back and then lose it again."

Partnerships are key

New partnerships have popped up to convert highway freight in Mexico.

Canadian Pacific Kansas City (CPKC) is teaming with Schneider to convert highway freight onto the Mexico Midwest Express train to Chicago.

"Our goal is to stay ahead of customer needs and solve unique supply chain challenges, and together with CPKC we offer speed, efficiency and the added benefit of sustainability," Michael Baumgardt, senior vice president of intermodal for Schneider, told the Journal of Commerce.

Three other railroads — Canadian National Railway, Ferromex (FXE) and UP — are working together to run the Falcon Premium from Mexico to the US Midwest, which is also aimed at winning freight that has historically gone on highways.

To make that a reality, both rail options will have to deliver consistent, reliable service and transit times that are comparable to the trucking industry.

"We need to work with the FXE as if we're one railroad," UP CEO Jim Vena said at the Stephen's Inc. investor conference early this month. "I've spent a number of hours and days with the FXE over the last few months to make sure ... we can leverage the network that they have and the network we have together."

BNSF and J. B. Hunt Transport Services are also teaming with Ferromex to provide cross-border solutions in Mexico. But the truly creative idea is the new Quantum service, which quite literally has BNSF and J. B. Hunt employees sharing an office in Fort Worth, TX, in a bid to deliver a 95% on-time service level.

"The ideas for the solutions we design originate from listening to our customers, and if you ask them, we believe they will tell you intermodal will regain share as our core intermodal service levels continue to improve," Spencer Frazier, executive vice president of sales and marketing for J. B. Hunt, told the Journal of Commerce. "Improving intermodal service and consistency will regain trust inside their organizations."

Partnerships have also formed on freight between Mexico and the US Southeast. In June, CPKC and CSX announced a deal to create a service with Schneider between Mexico and the Southeast, which could launch in late 2024 if federal regulators approve the agreement. In October, UP announced a service with Ferromex, CSX and NS to move rail-owned containers to the Southeast.

There are also new cross-border services with Canada as CN and NS announced in September routes between Toronto and Atlanta, Toronto and Kansas City, and Calgary and Atlanta using steel-wheel interchanges to create a more seamless experience for shippers.

International intermodal also being creative

There have also been several developments for international intermodal this year.

In April, the Georgia Ports Authority received clearance to build an inland port in Gainesville, Georgia, served by CSX, with Kubota Tractor as the anchor tenant. The inland port is aimed at getting cargo owners to use overnight rail service rather than a truck on the highway.

Norfolk Southern launched a new route from the Port of Virginia to Memphis this spring and is targeting 2024 to sell the service to ocean carriers negotiating contracts with cargo owners. In October, the railroad also reversed some of the cuts made in early 2022 to reduce service from Cincinnati, Cleveland and Columbus, Ohio, which had made it more difficult for exporters to send cargo to West Coast ports.

"We doubled our franchise in the first part of my career up through 2018," Shawn Tureman, NS's vice president of intermodal and automotive marketing, said at the Journal of Commerce's Inland23 conference in September. "Now there's a second chapter to this. We can grow two to three times GDP [gross domestic product] in our intermodal franchise, and to do that you have to be moving fast."

In November, CN reached a deal with top shippers using Gulfport to launch a trial intermodal service to rail reefer containers to Chicago. CN told the Journal of Commerce that if the pilot is successful, it would consider adding routes into Canada.

Service is the lynchpin

Still, none of these new services will work if the service is poor. Railroads have acknowledged that one reason they've lost market share is chronic service disruptions, resulting in shippers having little confidence in the product.

While intermodal train speeds in the third quarter were the highest for that period since 2020, according to the US Surface Transportation Board, many shippers are taking a wait-and-see approach as far as how the rails perform when volume rebounds.

"The ultimate proof is us showing we can deliver strong service with higher volume," Tom Williams, BNSF's group vice president of consumer products, said at the Inland23 conference.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.