Looking at the Intermodal market with Larry Gross, President, Gross Transportation Consulting

LM Group News Editor spoke with Larry Gross, President of Gross Transportation Consulting, on the state of the intermodal market. Topics covered included: intermodal service, M&A activity, how tariffs are impacting intermodal, and Peak Season prospects, among others. Their conversation follows below. 

Logistics Management (LM): What are your thoughts on the recently-announced CSX–BNSF intermodal partnership?

Larry Gross: If you look at AAR (Association of American Railroads) statistics, only about 14% of intermodal activity interchanges between railroads, not including rubber tire [trucking] transfers Chicago, where, say, the BNSF delivers it and it is then driven across town, gets back on an Eastern railroad and goes beyond. There is quite a bit of that. But basically, what the railroad is doing there, is kind offloading the complexity of the system onto the user and onto the city of Chicago. The thinking is it could just let the city of Chicago be its sorting hub, instead of doing it steel wheel [via train]. They only want to do steel wheel when there are large concentrated volumes. And the problem with the rubber tire is that it has significant costs associated with two lifts, plus a cross town haul, and the chassis, and everything else. So, I would say that it is a burden on intermodal. I mean, you can make up for if it's a very long-haul move, but it sort of knocks you out of a lot of the shorter-haul markets. I'm very much in favor of seeing these railroads [CSX and BNSF] working closely together to try and get that 14% up. The reason for that is because trucking has a national network, and intermodal has regional networks, single-line networks. The [Union Pacific-Norfolk Southern] merger is one way to deal with it. I would say it's a high-cost way to deal with it, and a risky way to deal with it, in terms of regulatory issues and service and a lot of different aspects. And to the extent that it's good, it's theoretically going to grow the business. I think the only place where potentially a merger will actually grow volume is intermodal. And this theory that, somehow, it's going to reverse decades of carload losses is just a fantasy.

LM: An industry stakeholder noted that this partnership between CSX and BNSF provides a lot of the benefits of a transcon merger minus the STB hassle. What do you think about that?

Gross: I think it is a step in the right direction. What is ultimately needed is a truly seamless, multifaceted connection. It is just a small step and hopefully one of many that are to come. If you look back at what’s gone on from 2006-2024, that is an 18-year period, in which GDP rose 42%. Trucking volume is up 29%. Carloads for the U.S. big four—BNSF, UP, NS, and CSX—are down 12%, and that is not including coal. Theoretically, the UP-NS merger is going to drive growth. If carloads could grow in tandem with GDP, that would be a major achievement, much less taking share back from trucking. But the story is a little bit better for intermodal, because in some of these mid-range markets, intermodal is underrepresented. The merger could help that, but it does not happen by magic. They would also need to make significant changes in operating their intermodal network. And in these potential markets that the merger could potentially access, there are not any Los Angeles to Chicago [hauls] in those markets. It is a complex and dispersed market. If they are going to wait to run 200 or 300 container trains from point A to point B, then they are not going to be able to access this market. It takes more than a merger. It takes, I would say, a significant change in the intermodal go-to market strategy to be able to attract some of this potential growth. A merger is not the only way to do it.

LM: Is it fair to say that the UP-NS merger has a way to go before it crosses the finish line?     

Gross: Yes. Those who claim they know what the STB is going to do is nonsense. There is sort of this knee-jerk reaction that the Trump administration is pro-business and will approve this pro-business merger—and that never captures the merger position with the railroad, because this is big business against big business. You have all the shippers that are big businesses not in favor of it and the railroads wanting to do it. I don’t think Trump has an attitude towards it at all, and the STB is down a member, which needs to be addressed. This obviously is sufficiently important to warrant a full membership.

LM: How do you view the current state of intermodal service?

Gross: Service levels are great. The system is running very well, and the most significant sort of reading is that one of the things that the STB tracks is how many intermodal trains are being held in the terminal, for lack of crews or power or other reasons. That number is running at historically low levels. So, what that is an indicator of is that there are adequate resources available to handle the volume. You've had these really sort of fairly sharp surges and drops associated with the tariffs, and the system has taken them in stride, as have the Ports of Los Angeles and Long Beach, which had very high-volume months in July. The main reason there are no service issues is because if you look all the way downstream, there is no congestion. The volume is flowing through the system like it should.

LM: Given all the moving parts regarding trade and tariffs, how do you view the collective impact on intermodal?

Gross: I think there's two questions. One is, what is sort of the raw impact of the tariff, and then the other is what is the impact of all of this uncertainty? I think that, from a timing standpoint, if we have a Peak Season, and I am not sure we will, it is probably going to be very muted. It was later than normal the last two years. In theory, we would be right there now [this interview was conducted in late August]. Based on AAR numbers, around the 39^th and 40^th weeks of the year are the busiest, intermodally-speaking. But that has not happened for two years, and I don't think it's going to happen this year either. There was a lot of pre-buying and a lot of distortion, and, all of that is just pure waste. What we're seeing is the application of real estate negotiating tactics to trade. If you're buying a New York hotel, then it probably makes sense to be unpredictable, and it makes sense to come in with these maximalist positions and then back off and it's fine. And if you don't come to a deal, well, you go on to the next deal. But this is completely different, because there are huge costs associated with that strategy, even if you end up in a somewhat better place than you might have otherwise. There are tremendous costs associated with it to small businesses and a lot of people getting hurt by all of this. And what I think is happening is that is that investment is being frozen, planning is being frozen, and waiting for clarity. Who's going to build a factory in the U.S. that may end up being a higher-cost facility, if you really have no idea how long this situation is going to last or where it's going to end up?

I'm not very optimistic about the general economic situation right now, because of the tariffs, plus unemployment situation and the immigration situation. The U.S. economy is super robust, and it has the ability to shake off a lot of stuff and it is massive. But there are those who are looking at the current situation and saying, ‘see, look, we're still growing. It's just this tariff concern.’ And I would just say that this story is still unfolding, and it's going to continue to unfold. From an intermodal perspective, there's a whole bunch of folks in the intermodal world that are just saying, ‘well, we just need the truck situation to straighten out and then intermodal will come back into its own.' It is what I call the Goldilocks scenario, not too hot, not too cold, just right. There is no argument that we are now three years into a very low-growth truckload environment, with too much capacity, and the recovery is always six months out. It is always ‘wait until next year,’ and we are still in that spot. If you look at intermodal, though, it has grown 4% in the last 10 years [based on Transport Futures data], while trucking has grown 19% [based on IANA data]. Intermodal has not really been able to significantly grow throughout the PSR (Precision Scheduled Railroading) era, and that's a very fundamental problem. It is more than just market conditions not being ideal.

As are so many aspects of tariff policy, the devil is in the details—and the details are lacking and are murky. How do you enforce it, what are the rules, which people need to know, in order to avoid running afoul? It is just hugely destructive that these changes are being made and people have no ability to plan for it or react to it. There is a lack of understanding of just how long the supply chain needs to adapt to these things. If tariffs end up at 15%, for example, that may not be enough for companies to bring production back into the U.S. What it will end up being is a very regressive tax, a value-added tax, which will probably be felt most acutely by lower-income people, for whom this is a bigger percentage of their spending, and it will become very difficult to reverse. The reason is because the government is going to get used to that revenue source very quickly. There are really two options here: tariffs can either be a tool for bringing volume back to the U.S. and spur manufacturing or they will be a revenue source. It cannot be both.

LM: Shifting back to Peak Season, is it fair to say that what we are seeing this year will not represent a true peak?

The evidence seems to be that there was a post-tariff mini-surge, which was very concentrated in California and not elsewhere to nearly the same extent and is already running out of steam, coupled with rates plummeting. I suspect when the August port volume numbers come out that July will have proven to be a one-hit wonder. One of the problems we are having right now is that these changes are coming so fast and furious that the data does not have the ability to keep up. There are some things I track that point to a much softer environment.