Pacer International and Union Pacific (UP) have entered a multi-year arrangement that allows the intermodal company continued access to the railroad's network. That's welcome news to some rail users.
Foremost, the announcement puts to rest speculation about the company's tenuous financial position. Pacer will use the $30-million cash infusion received as part of the deal to reduce outstanding debt. In return, UP will receive preferential pricing for some of its business, and control management and pricing for Pacer's assets.
More telling, the partnership establishes a new rate structure for intermodal users while pressing Pacer to focus on integrated door-to-door services. This means the company will direct resources and services specifically toward retail channels rather than dually operating as an asset broker in the intermodal marketing company (IMC) space.
For its part, Union Pacific has been equally busy speculating new partnerships. In June 2009, Hub Group transferred the bulk of its containers to the Omaha-based carrier, making the railroad its preferred western intermodal carrier. Hub Group is in the process of migrating 8,400 boxes—90 percent of its assets—from Burlington Northern and Santa Fe's (BNSF) network to Union Pacific. The remaining containers will stay with BNSF.
In an interview with Inbound Logistics, Hub Group President and COO Mark Yeager said he anticipates a general stabilization of intermodal rates for shippers as the railroad controls more intermodal equipment pricing and sells directly to IMCs and rail users.
Hub Group's own asset consolidation, which was previously split 60 percent/40 percent between BNSF and UP, will bring greater simplicity to customers, added David Marsh, chief marketing officer, Hub Group. "It creates operational efficiencies with fewer terminals, faster box turnaround, and better equipment utilization," he noted.
Both arrangements with UP augur an expected swing in U.S. domestic transportation. As more shippers make a concerted effort to transition over-the-road freight to rail, capturing economies of scale and reducing carbon footprints, intermodal momentum will build.
"Intermodal is a niche movement that is becoming mainstream," said Marsh. "Domestic demand has held up even though imports have been down."
Even while control over assets is becoming more centralized, the U.S. rail network is expanding—and intermodal's reach is downsizing. "Fifteen years ago, intermodal was appropriate for hauls longer than 1,000 miles," Marsh said. "Today, it's 500 miles or fewer. The mileage band for intermodal has shrunk as its footprint expands."
One question is whether more favorable rates from the railroads will match customer service expectations. The railroad's increasing monopoly over assets and access will likely raise other concerns, especially as some captive shippers lobby for more industry regulation. Alternatively, this shift will likely raise the profile of IMCs and rail-specific service providers that can fill this niche and provide value-added capabilities.
Leaning on More
Even with less freight in the supply chain and tepid consumer demand, companies are more inclined to keep inventories flush rather than lean, according to Walt Rakowich, CEO of Prologis, a Denver-based global provider of distribution facilities.
Speaking with journalists in New York City recently, Rakowich explained that despite recessionary tactics, Prologis customers are looking at their warehouse footprints to reduce total logistics costs.
"Companies are reconfiguring supply chains to generate savings," he said. "Some are increasing inventories and adding distribution centers, locating more inventory closer to the consumer and reducing transport costs."
This shift follows distribution decentralization, as shippers transition from fewer big-box warehouses to more, smaller facilities closer to demand.
"When the price of oil reached $140 a barrel, our customer base was dramatically impacted," added Charles Sullivan, head of global operations for Prologis. "Some realized they may not need one million square feet of warehousing space here, but rather 250,000 square feet here and there."