Domestic Demand Will Continue To Drive CSX’s Intermodal Business

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CSX’s (NYSE:CSX) intermodal business accounted for around 39.3% of the overall volume and generated close to 14% of the total revenue for the six months ended June 27. [1] Intermodal combines two different modes of transport, such as rail-to-truck or rail-to-ship, to mostly carry manufactured consumer goods in containers. In the second quarter of 2014, CSX’s intermodal volume received a significant boost due to an increase in international shipments at U.S ports. Because of this, we believe that intermodal volume growth may be slower for the remaining part of the year. However, domestic demand will continue to drive growth in CSX’s intermodal business. We believe that CSX’s ongoing investments in expanding its intermodal capacity will help the company take advantage of the tightening trucking capacity in the U.S.

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Expedited holiday season imports may lead to a slowdown in international intermodal volume

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Many retailers had expedited their holiday season shipments, which were due for later in the year, into the second quarter. Retailers were concerned about possible disruptions that could have been caused by the ongoing labor contract negotiations between ILWU and PMA, which led them to import their holiday season merchandise earlier than usual. Because of this move, container traffic at U.S. ports reached an all-time high during the second quarter of 2014. [2] CSX’s international intermodal shipments benefited from this event and grew 6% during the second quarter of 2014.

The higher than usual growth rate during the second quarter will have a negative impact on intermodal volumes in the second half of the year. Since shippers have already imported some of their third and fourth quarter merchandise, they will have fewer shipments later in the year, leading to a slowdown in international intermodal volume growth. CSX expects its international intermodal volumes to grow low single digits due to the impact of the high volume in the second quarter. [3]

Declining fleet size and limited working hours have tightened trucking capacity

The demand for intermodal services in the U.S. has been increasing primarily due to tightening trucking capacity. Declining fleet sizes and availability of truck drivers have significantly impacted the freight transport capacity of the trucking industry. Additionally, an increasing number of carloads are shifting from trucks to railroads due to the cost advantage of railroad’s intermodal service.

  • Industrial production in the U.S. has been increasing due to the improving economy. Industrial output increased 3.9% and 5.3% in the first and second quarters of 2014. [4] The growth in industrial output will continue to stimulate demand for freight transport. However, the trucking industry will not be able to fulfill this demand due to its declining fleet size. [5] 
  • The U.S. trucking industry is presently facing a dearth of truck drivers. Currently, 30,000 truck driver jobs remain unfilled in the U.S. [5] The new Hours-of-Service safety regulation for commercial vehicle drivers has put further pressure on the trucking capacity by limiting the number of working hours for truck drivers.
  • Transporting freight by trucks is 10 times expensive compared to railroads and is a less preferable means of long haul transport. [6] The price difference is expected to increase in the future driven by the price increase by trucks to counter the rising fuel prices and the declining trucking capacity.

New intermodal terminals will help cater to increase in demand

In December 2013, CSX had estimated a growth of more than 500,000 units this year in its demand for intermodal business, for which it planned to expand capacity and build new terminals to cater to this growth. [7]

  • It invested in building new terminals in Winter Haven, which opened earlier in the second quarter, and Montreal, which is expected to become operational later in the year. Together, these two terminals add a lift capacity of 350,000. [3]
  • It has increased its locomotive count by 10% year-on-year by bringing out units from storage and taking on additional leased locomotives. [3] In the second half of 2014, their locomotive count is expected to increase by approximately 100 locomotives, which are presently out of commission and will soon be repaired and reactivated.
  • CSX also has long term plans to build terminals in Baltimore and Pittsburgh. CSX already has 45 terminals which help cater to regions east of the Mississippi River. It has also undertaken expansion projects for its existing terminals in Atlanta, Columbus, Boston, Detroit, Louisville and Charlotte.
  • CSX is one of the partners in the National Gateway project, a public-private partnership which aims to increase the use of double stacked trains by developing double stack cleared rail corridors which will help improve rail traffic. [8] Double stacked trains have the advantage of better fuel efficiency and therefore, are a preferred method of transporting intermodal freight. They offer both economic and environmental benefits.  Currently, 90% of CSX’s intermodal volume moves through double-stacked cleared lanes and after the completion of the National Gateway in 2015, this volume is expected to increase to 95%. [9]

CSX’s Northwest Ohio terminal offers strategic advantage and capacity addition

CSX’s northwest Ohio terminal offers a cost effective system to manage freight moving within its network. Instead of the traditional network of corridors to cater to intermodal traffic, the northwest Ohio terminal operates in a ‘hub and spoke’ network.  The northwest Ohio terminal forms the central ‘hub’ of CSX’s intermodal network in eastern U.S. and reaches out to other terminals connected to it as ‘spokes’. This format enables CSX to cater to new and smaller markets efficiently, thereby increasing profitability. Since its inception in 2011, the northwest Ohio terminal has contributed 20% to the overall volume growth and has also managed to free capacity at CSX’s Chicago terminal by allowing the transcontinental traffic to flow through the northwest Ohio terminal. [9] By the end of 2014, CSX plans to increase the capacity of the northwest Ohio terminal by 50%, a total of 3 million annual lifts, which should help cater to the growing intermodal demand.

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Notes:
  1. CSX Q2 2014 Financial Report, www.csx.com []
  2. Retailers Step Up Holiday Imports In Case Of A West Coast Port Strike, June 9 2014, www.forbes.com []
  3. CSX’s (CSX) CEO Michael Ward on Q2 2014 Results – Earnings Call Transcript, July 16, 2014, www.seekingalpha.com [] [] []
  4. Statistics for Industrial Production, Capacity, and Utilization: Total Industry, www.federalreserve.gov []
  5. 2014 Trucking Outlook – Q2 Update, April 30 2014, www.spendmatters.com [] []
  6. Cost Per Ton Mile for Four Shipping Modes, January 6 2012, richardtorian.blogspot.in []
  7. Fredrik Eliasson Addresses Credit Suisse Global Industrials Conference, December 4 2013, www.csx.com []
  8. The National Gateway background, www.nationalgateway.org []
  9. Fredrik Eliasson Addresses Deutsche Bank Global Industrials and Basic Materials Conference, July 5, 2014, www.csx.com [] []