Buried in the general favorable intermodal numbers for September from the Intermodal Association of North America (IANA) was an attention-getter: revenue moves occurring in domestic containers came in only 0.7% ahead of prior year. The gain pales in comparison to over 12% growth for TOFC 53’ trailers and reported ATA truck tonnage gains of 7.2% for the month. With preliminary estimates for third quarter GDP growth of 3%, Q3 domestic container growth of 3.8% doesn’t feel very impressive. What’s going on? Could we possibly be bumping into a capacity limit?

At first glance the answer seems clearly to be no. Domestic container volume was down 6% in September from August. If the fleet had sufficient capacity to handle the August volume, what happened in September?

GTC has recently developed an analysis that looks at activity per working day and this sheds some light on the matter. The analysis looks at weekend and holiday timing effects. It turns out that August had 22.6 workdays and September only 20.8, a difference of 8%. Domestic container volume for August was 684 thousand revenue moves, yielding 30,294 revenue moves per working day. When we spread September’s domestic container volume of 40 thousand revenue moves over 20.8 working days, we get a volume per working day of 30,766, an increase of 472 moves per day (about 1.6%). In fact, looking at the last 12 months (see chart), September’s activity level just about even with the peak achieved last year in November.

Yet things didn’t feel very tight last year during peak, so what’s changed? A prime suspect is equipment velocity, which has definitely slowed. Based on STB service statistics, most recently intermodal trains were operating at an average speed 3.4% below that achieved this time last year. Assuming that the average container spends about one-third of its life on the rail, this would translate into a loss of productivity of at least 1.2% or more for the fleet. Add to this the additional time consumed grounding today’s monster 12,000 foot intermodal trains once they do arrive at the terminal. Additionally, September equipment productivity was likely adversely impacted by hurricane-related disruptions. These won’t persist into October so at least some improvement appears likely. Best guess is that the total impact in September was a reduction in asset velocity of 3%.

Meanwhile, there has been limited investment in new equipment this year. Although we have not yet performed our annual fleet survey (conducted at year-end in conjunction with our friends at Drayage.com), based on channel checks we don’t think the fleet has grown by more than 1.5 to 2% since the end of last year.

Based on this “back-of-the-envelope” analysis, the capacity of the domestic container fleet was slightly lower this year than during the peak month of November last year. The question then becomes how big the capacity surplus was last November and have we now run out of cushion during the 2017 peak season? We won’t know for sure until October’s data is received in a few weeks, but it certainly is possible. Indeed, our recent channel checks with various intermodal providers indicates that during October they were “fully booked.”

 

What does this mean for the balance of 2017 and early 2018? From the robust growth figures 53’ TOFC appears to be operating as a safety valve and we expect that to continue in for the immediate future. There is very limited ability to add near-term domestic container capacity. Most domestic containers are sourced from China, so, even if orders were placed in late summer, the new boxes wouldn’t arrive in time for fall peak. Additionally, the ships are already full of holiday freight, so the ability to transport the new boxes would be questionable ion any event.

But the railroads may well improve their speeds over the road and in the terminal, boosting equipment productivity. The hurricane disruptions present in September won’t be in the October figures. Perhaps the surplus in units from the beginning of the year was, in fact, larger than the September performance would infer.

The bottom line to me is that if we are not actually bumping into the ceiling, then we are perilously close to doing so. It appears very possible that in the near term, domestic container fleet capacity will be exerting a downward effect on domestic intermodal numbers, and some potential volume could be left on the highway. On the other hand, very tight conditions are giving intermodal providers the leverage they need to raise rates and the evidence is coming in that they are making use of the opportunity. Finally, intermodal providers will need to invest in growing the fleet in early 2018 in order to properly position intermodal for the market demand that will stem from ELD implementation and tight truck capacity.

As seen on JOC.com: