2019 will almost certainly go down in intermodal history as an “annus horribilis” (Latin for “horrible year”). And what a year it has been. As these words are written at the end of October, year-over-year growth in movements of international containers via rail, which came in at 5.4% in 2018, has completely stalled, registering a barely measurable gain YTD of just 0.1% thus far. (Source: IANA ETSO data) And that, compared to the domestic intermodal sector, is the good news! Volume through the end of September was down a whopping 6.4% y/y. Quite a cold shower for the industry after enjoying a 7.6% y/y gain in 2018, due in no small part to the ELD-powered trucking capacity crunch.

It’s fair to say that comparing this year with last year’s inflated results may not be painting a true picture. Indeed, comparing YTD International moves through September with the same period from 2017 shows a gain of healthy 6.8%. But Domestic volume is up only 0.6%. That’s essentially no growth in domestic intermodal for two years, even while the economy was expanding at a fairly brisk pace.

It is fair to characterize this year’s drop as unprecedented. Domestic container loadings have declined 5.6% YTD. Assuming the year remains in the red, it will be the first-ever y/y decline in domestic container activity. Even during the Great Recession, domestic container loads declined slightly only for a couple of quarters, and still managed to register a gain for the year. Further, from the peak in 2018 Q2, the share of long-haul truck shipments handled via domestic intermodal declined for four straight quarters before stabilizing in 2019 Q3 – another unprecedented event since the year 2000.

In discussing the cause for the decline, railroad quarterly financial presentations point the finger at excess truck capacity. This is certainly true, but it is also certainly not the whole story. A big piece of the puzzle is the transition of most of the railroad industry to Precision Scheduled Railroading, or PSR. This, along with the attendant relentless focus by the railroads on lowering their operating ratio has contributed to the intermodal volume losses, even as railroad operating and service metrics have improved, and profitability has been largely maintained.

The structure of International intermodal meshes quite well with the dictates of PSR, which calls for the operation of very large, point-to-point trains with minimal intermediate work events. Mega-ships deliver mega-dollops of traffic to the railroads, so big trains are a natural inland extension. Service frequency is not really much of an issue, when the door-to-door transit time for overseas origin to domestic destination is measured in weeks.

None of this applies to domestic intermodal. Domestic truckload flows are complex, dispersed and service sensitive. After growing the intermodal network throughout first half of the decade, under PSR the railroads have largely reversed course and embarked on a great simplification effort. Steel-wheel interchanges have been eliminated and service to secondary locations has been axed. Pressure, in the form of widening rate differentials and TOFC service cutbacks, is being brought to bear on the remaining TOFC traffic in an effort to convert it to container. Demurrage rules have been tightened. Most importantly, the railroads have attempted to hold the line on rates or even attempt increases, even as the trucking market softened.

Domestic intermodal volumes have inevitably been affected. According to PSR advocates, this reflects “the pain before the gain”, the necessary outcome of streamlining and optimizing the intermodal product offering in a way that will eventually yield volume growth plus improved profitability. PSR advocates point to intermodal growth in Canada as evidence supporting the theory. But movements of domestic intermodal equipment within Canada are down 11.6% year-to-date…even worse than the U.S. deficit. Close examination reveals that the Canadian growth story is actually one of gains in cross-border movements of international containers. In other words, it represents share shift rather than an increase in the size of the intermodal market.

What does this portend for 2020? It will likely be a difficult year. Economic growth is slowing, burdened by the ongoing trade war and uncertainty wherever one turns. Freight demand will also be under pressure. Much of course depends on the future course of U.S. trade relations – impossible to predict from one tweet to the next. But 2019 intermodal headwinds, including the flow of import cargo towards east coast routings, are likely to persist. The most likely scenario calls for minimal growth – a point or two if we’re lucky.

The domestic outlook also depends heavily on the course of the economy, of course. But it also depends greatly on whether the railroads maintain their current approach. It takes more than just running the train on time to convert traffic from the highway. Once lost, shippers demand even great incentives to convert back to the rail. There is little reason to expect intermodal to regain lost share if the current approach is maintained “as-is”. With growth in truck freight projected to slow to a crawl, it’s unlikely that a tightening truck market will come to intermodal’s rescue. A hopeful outlook is that domestic intermodal stabilizes at current levels, but substantial volume gains may remain out of reach.