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October 2014
— by Jeff Stagl, Managing Editor
Intermodal has become a big business driver for CSX Corp. Merchandise and intermodal volumes now account for more than three-quarters of the Class I's total revenue, and intermodal generates about 39 percent of total traffic versus 30 percent five years ago.
In the second quarter, CSX's intermodal revenue increased 6 percent to nearly $450 million compared with second-quarter 2013's total. In addition, volume rose 7 percent to a new quarterly record 691,000 units.
Domestic volume climbed 8 percent in the quarter, primarily driven by truck-to-rail conversions, and international volume grew 6 percent, mostly propelled by retailers anxious about potential port disruptions stemming from longshoremen contract negotiations.
By year's end, CSX projects the annual volume to reach about 2.7 million units, which would represent a 50 percent increase from 2009's 1.9 million loads.
To keep the intermodal traffic gains coming, CSX executives are targeting more markets to tap and more truck conversions to land, especially since the trucking industry is dealing with higher fuel and insurance expenses, a tight driver market, constrained capacity, and new hours-of-service and safety regulations that impact their operations. The near- and long-term outlook for building business is promising, CSX execs believe.
"A multiyear trend of steady, sustainable intermodal traffic growth has continued in 2014, and we have every expectation that this trend will continue," said Executive Vice President and Chief Commercial Officer Clarence Gooden in an email. "We expect the intermodal business to grow on a long-term, secular basis."
But taking on more volume is one thing and accommodating it, another. CSX execs are trying to ensure the railroad has the necessary capacity to handle growing intermodal demand now and in the future.
Although operating capacity is vital — for example, the railroad has expanded its locomotive fleet 10 percent so far this year by taking units out of storage and taking on additional leases — physical capacity is equally or perhaps a tad more critical.
To that end, the Class I has undertaken expansion projects at intermodal facilities in Atlanta; Boston; Charlotte, N.C.; Columbus, Ohio; Detroit; and Louisville, Ky. The railroad operates 45 terminals and tries to ensure each is well prepared to take on additional volume.
"We project volume for each terminal five years out," said CSX Intermodal Terminals Inc. President Wilby Whitt, adding that in most cases, the railroad has been "fairly successful" in forecasting demand and prepping facilities for traffic growth.
Preparation is vital to reaching the very-successful stage. With volume-boosting opportunities pegged from the Midwest to Northeast to Southeast, CSX leaders are counting a bit more heavily on three major terminal projects that promise to better prime the intermodal network for what's to come:
The projects will enable the railroad to perform 1.35 million more container lifts annually. It takes a lot of capital to complete these types of projects, and the more than $200 million allocated for the facilities shows the Class I is willing to commit the necessary dollars, CSX execs say.
"We continue to invest in our network to meet shipper demands in this growing segment," said Gooden.
One huge investment: the National Gateway, a double-stack corridor CSX is developing between Mid-Atlantic ports and the Midwest through an $850 million public-private partnership.
The railroad completed the first phase between its Chambersburg, Pa., intermodal facility and the Northwest Ohio Terminal a year ago, and now is focused on finishing the second phase, which calls for completing double-stack clearances between Chambersburg and ports in Baltimore and Norfolk, Va.
The Northwest Ohio Terminal is the gateway's central hub, and the ILC and Valleyfield facilities will feed into or off the corridor as part of CSX's hub-and-spoke strategy. The railroad aims to position intermodal facilities to best attract and amass traffic, then transport the freight to a number of destinations and in various directions, much like the spokes of a bicycle wheel radiating out from the center.
"The hub-and-spoke capability is a great supplement to our corridor network. It allows us to efficiently connect lower-density markets and provide intermodal service to and from more places," said Gooden. "With our Northwest Ohio Terminal, we are able to aggregate sufficient volume to profitably serve smaller markets, very similar to how the major airlines use hubs to create density for towns that they could not serve profitably point to point."
A hub-based strategy increases the number of origin-destination pairs that can be served, but slows transit times and appeals more to container ship operators and truckers not needing truck-like service, said Stifel Financial Corp. analyst John Larkin, who follows CSX, in an email. Conversely, a corridor-centric strategy is designed to divert traffic from the highway.
"It is not clear which strategy is better and which is worse. It is clear that they are different and that they appeal to a different strata of customers," said Larkin. "While CSX has just the one major hub now in North Baltimore, I believe they may next build a similar facility in the Southeast, and may ultimately finish off their triangular system with a final hub facility in the Mid-Atlantic/Northeast."
The Winter Haven and Valleyfield terminals are at the end of CSX's "network tentacles," and serve the role of originating and terminating traffic, he said.
"By building collection and distribution terminals at the extreme ends of the company's intermodal network, CSX increases the odds that intermodal is economical for its customers," said Larkin. "These terminals attract long-haul traffic that can, in effect, amortize the terminal costs associated with each load over more and efficient line-haul miles."
The Valleyfield facility is a prime example of a hub-and-spoke network's advantages, said Whitt.
"It opens rail as an option for shippers that couldn't access rail before," he said.
Designed to handle up to 100,000 container loads annually, the 89-acre facility will feature three rubber-tire gantry cranes to transfer containers between trains and trucks.
The terminal is under construction in the Perron Industrial Park about 40 miles from Montreal and near Autoroute 30, providing access to the area's greater distribution and consumption market.
The Valleyfield terminal will connect the region with CSX's U.S. network, enabling shippers in the Quebec area to expand on north-south trade opportunities presented by the North American Free Trade Agreement and connect to new markets, CSX execs say.
After it opens by late 2014 or early 2015, the terminal will provide service to points in the Ohio Valley, Northeast, Southeast and West, including Chicago, California, Texas and Mexico.
"Valleyfield gets us to places we couldn't get to before," said CSX Vice President of Intermodal Bill Clement. "Our customers buy our entire network, so it's vital to add another large market like Montreal, which is the seventh largest in North America."
The Valleyfield facility will introduce many new intermodal lanes, creating cross-border opportunities for shippers to take advantage of highway-to-rail conversions, said Gooden.
In addition, it will connect to the Northwest Ohio Terminal, "giving cross-border shippers the ability to go between Eastern Canada and the majority of markets served in the United States, rather than just a few big markets that could be served on a point-to-point basis," he said.
The Northwest Ohio Terminal already has helped the Class I capture more intermodal traffic and provide customers with higher levels of service, said Gooden. Volume in new lanes enabled by the $175 million facility has contributed about 20 percent to overall traffic growth in recent years, he said.
"Broader intermodal market reach — a byproduct of our hub-and-spoke capability — allows shippers to take advantage of more highway-to-rail conversions as a cost and efficiency opportunity in their supply chains," said Gooden.
The 185-acre Ohio terminal features 24,000 feet of track, 100,000 feet of block-swapping track, five wide-span cranes and parking spaces for 280 units. The facility handles more than 30 trains per day and performs 2 million container lifts per year.
The $40 million expansion — which is designed to increase the terminal's capacity by 50 percent — calls for adding two wide-span cranes, and several processing, receiving and departure tracks. Eight 3,000-foot processing tracks will be extended to 5,300 feet. Trackwork is slated for completion by late November, while work to erect and commission the two wide-span cranes is expected to conclude in early 2015.
"We had planned to do the expansion in a year or two. But volume is growing because the terminal is working as intended," said Clement. "We won't need another expansion after this one. It should hold for quite some time."
CSX used to bring all intermodal traffic to Chicago, but it was "expensive and incredibly inconsistent" to handle everything in such a rail-congested city, he said, adding that it's been much more efficient and cost effective to process the volumes in Ohio.
The North Baltimore terminal has freed capacity at the Chicago terminal by allowing transcontinental traffic to flow through northwest Ohio, where CSX can more easily tie small- and medium-sized markets to big markets, said Clement.
"It's important to get to all places. Our customers don't just want their freight to go from Chicago to New York, but from Chicago to everywhere," he said.
Reaching all places includes many points in Florida, where the ILC has been helping in that regard for the past six months.
Located off State Road 60 in Winter Haven, the 318-acre intermodal facility serves as a centralized hub targeting transportation, logistics and distribution needs in Orlando, Tampa and a number of cities in South Florida.
The terminal features five 3,000-foot loading tracks and two 10,000-foot arrival and departure tracks, and is projected to process about 250,000 to 300,000 containers annually.
CSX subsidiary Evansville Western Railway owns the facility, which is operated by CSX Intermodal Terminals and served by CSX Transportation. Containerized freight previously handled at CSX's Orlando terminal was shifted to the ILC.
By 2020, Florida is projected to become the nation's third-most populous state, trailing only California and Texas, and highway congestion is expected to continue increasing in the Sunshine State. The ILC will help CSX extend its reach into South Florida, said Clement.
Plans are in place to create a logistics center around the facility that would include warehousing, distribution and service facilities.
As distribution centers are developed, shippers will be able to take increasing advantage of their proximity to the intermodal terminal and to populous consumer markets in the region, CSX execs believe.
The railroad might need to expand the ILC in five to 10 years to accommodate the logistics center's growth, said Clement. There's enough land available because the terminal is situated on 70 acres at the 300-acre site.
There are other intermodal projects on CSX's near-term slate, as well, including a new terminal in Pittsburgh that might open by 2016's end.
"Pittsburgh is the last [large] market in the East we don't serve directly," said Clement.
In addition, CSX is considering a substantial expansion of its terminal in Memphis, Tenn., which the railroad jointly owns with CN.
"There are provisions in the CN agreement that we could expand the facility just for our use, or vice versa," said Whitt.
However, CSX doesn't necessarily need to do more in terms of intermodal investments, Stifel Financial's Larkin believes. Instead, the Class I and other railroads need to combine efforts to restore intermodal service to levels that were realized 18 to 24 months ago, he said.
"They also need to work with the chassis lessors to ensure an adequate chassis supply and work with draymen to ensure adequate drayage capacity exists. Otherwise, they are effectively pushing on a rope," said Larkin.
CSX is trying to improve intermodal service performance while adding and expanding facilities at the same time. Neither is an exact science, CSX execs say.
Although intermodal capacity overall is "in a good spot now," there have been a few hiccups as the railroad established or expanded facilities in certain markets, said Clement. For example, an unexpected acceleration of volume growth at a new Louisville terminal that opened in 2012 quickly constrained the facility, he said.
"In a year's time, we have exceeded capacity and are expanding the facility," said Clement. "It shows the value proposition of intermodal."
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