Rail/Intermodal
Intermodal volumes show no sign of an inflection point into positive territory and are unlikely to show one for the foreseeable future. Intermodal will be in a negative competitive position through most of 2023 and 2024 before edging up as competing trucking capacity tightens up.
Import slowdowns and shifting have added to intermodal’s malaise by making truck more competitive as length of haul lessens relative to the 2,000-mile lengths of haul that are common for imports from the U.S. west coast.
Domestic volumes are expected to fare worse in 2023 than their international counterparts because of the lack of transloading infrastructure at non-U.S. west coast port complexes. Somewhat concerning for overall intermodal growth is the lack of trailer conversions to container freight.
Trailer volumes declined by 30% in 2022 and are on a similar trajectory in 2023. That would be fine if a portion of that traffic was being converted from trailers to containers, but container volume moving down nearly 7% in 2023 does not anticipate any conversion happening.
Rail rates for intermodal freight are expected to decline on a year-over-year basis during the first three quarters of 2023 before turning up slightly as the peak season ramps up. This will be in sharp contrast to the outlook for carload rates which are expected to see increases remain in the mid-single digits and possibly higher.
Carriers have been steadfast in their focus on rail inflation-plus pricing in recent years and there is no sign that will change any time soon. In fact, that focus is likely to be even more intense in the wake of last year’s labor agreement which will lead to higher employment costs for the carrier over the life of the agreement. Most have already made the sizeable back-pay payments required under the retroactive aspect of the agreement.
As carriers move toward local negotiations, the costs of the contract may continue to rise due to additional paid time off. Those costs will ultimately be passed on to shippers in the form of higher rates.
CP-KCS Merger
Late last week, the Surface Transportation Board issued its final environmental impact statement (EIS) on the proposed merger between Canadian Pacific and Kansas City Southern. The statement included no significant additional mitigation beyond what CP has already agreed to with various neighborhoods, shippers, and carriers.
Importantly, and unlike other transactions of the last decade, the EIS included no requirement that the carrier fund grade separations around roads that will be impacted by higher than historical train counts once the companies consolidate operations.
The EIS publication starts a 30-day waiting period before the board can issue a final decision on the merits of the transaction. As the board is already beyond the statutory deadline for a merits decision, final action is likely soon after the waiting period expires. There appear to be no major hurdles to final approval by the agency and no reason for the carriers to walk away given the lack of additional significant mitigation measures.
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