Shifts from Trailers to Containers on the Rails: What Does the Future Hold?
In the last several years there have been signs of a shift in a long-term tendency: some Class I railroads have favored the use of containers on flatcars, rather than trailers. In response to this, what are intermodal providers doing to adjust their operations accordingly?
Jim Filter, senior vice president and general manager of the intermodal division for logistics company Schneider National, said there are greater advantages to using COFC – Containers on Flat Car – than using TOFC – Trailer on Flat Car.
"The advantage of using containers is that it doubles rail capacity," Filter explained. "For a carrier, the advantage of containers is that they last longer than a trailer and we are able to have fewer chassis than containers."
COFC Logistics President Garry Old agreed, saying that the increase in the rail efficiency can help keep intermodal costs reasonable.
Vincent Paperiello, Chief Solutions Officer, Hub Group, remarked that containers are a more economical and efficient equipment option than trailers for intermodal but that trailers also have their benefits.
"Trailers can legally scale more weight than containers and, unlike containers, are not tied to the ramp where they de-ramped. However, the industry has moved to 53-foot containers over the past 20 years due to their favorable economics," he commented. "TOFC proliferates when over the road truck capacity, and in particular driver capacity, tightens as it is a lower cost option for truckers to move their equipment in long haul service."
Also agreeing that trailers have their benefits is Peter Appel, a director with consulting firm AlixPartners.
"One of the most significant advantages of using trailers is that their large installed base and logistical simplicity sometimes makes them more readily available than containers," he explained. "Users of intermodal containers will continue to need to address artificial barriers, such as chassis availability issues, to ensure continued strong growth in container usage."
Milestone Equipment Executive Vice President Doug Hoehn also said that there’s a segment of the industry that still favors TOFC. "Package delivery carriers still prefer trailers over containers because of their time constraints on delivering packages," he said.
Regarding potential drawbacks to shifting to containers from trailers, and whether there are enough containers currently in service to keep pace with the capacity needs, Filter said that the industry currently needs more containers.
"The year began with an oversupply, resulting in rate compression," he explained. "The market became even softer during the shutdown as many intermodal shippers were non-essential and stopped shipping completely. Since the recovery, nearly all shippers have very robust demand, and many are attempting to restock."
Shippers could reduce market fluctuations, he added, by smoothing demand throughout the year and not "punishing" carriers when there is oversupply by driving rates lower.
One industry veteran, who works for an equipment lessor, remarked that since customers shifting from a trailer to a container also need access to chassis at both origin and destination in order to move the containers the final mile, difficulties with chassis shortages and quality have been reported by some prospective customers.
In a statement, Direct ChassisLink Inc. said that it could be argued that a drawback to moving from trailers to containers is that it adds a second piece of equipment – the chassis – into the equation. However, the company made the case that it has a 53-foot nationwide domestic chassis pool that can provide necessary interoperability and flexibility.
"Using our domestic chassis pool, the transition from trailer to container would be seamless. So, with this aspect managed, there are fundamentally no drawbacks when making the conversion from trailers to containers," the company said.
Regarding the issue of whether there are enough containers in service right now to keep pace with capacity needs, Patrick Gunn, sales director of intermodal for Stoughton Trailers, said that a surge in demand following the number of blank COVID-related sailings earlier in the year has presented equipment availability shortages.
"China is experiencing a drastic shortage of FEU, especially in 40-foot high cube container availability," Gunn remarked. "The blank sailings have empty containers piling up in the U.S. and European ports because of imbalance of exports to China. TEUs are also in short supply for the African markets. Empty box release restrictions and shortened per diem periods are some of the considered measures being put into effect. Surcharges and repositioning fees are adding to the woes of increased ocean freight rates."
Old added that he doesn’t think there’s enough 53-foot containers in service now to keep up with the demand.
"The surge in e-commerce has taxed the existing intermodal and OTR networks," he said. "We will see an increase in providers purchasing and/or leasing additional intermodal (container) equipment in 2021."
Paperiello, however, said the North American container fleet is as large as it’s ever been.
"The current fleet could handle 7% more volume per day through improved cycle time. Intermodal users can create capacity by loading and unloading equipment quicker. 24/7 drop and pull operations as well as flexible appointments can help better utilize existing equipment," he remarked.
Hoehn said that his company’s domestic container lease fleet is running with a high utilization during the second half of 2020, but generally there have been domestic containers available for lease and the company’s currently adding additional containers to its fleet.
As far as what 2021 holds regarding TOFC and COFC usage in intermodal, experts that Intermodal Insights interviewed offered varying perspectives.
"In the COVID-19 operating environment, supply chain uncertainty and the need for flexible, agile routing have increased the value of trucks and trailers," said Adriene Bailey, a partner in the surface transportation practice of management consulting firm Oliver Wyman.
"So, right now and through at least the first half of 2021, TOFC is likely to continue to see strong relative growth and usage," she explained.
"Longer term, the structural advantages of COFC will continue to erode TOFC market share, and individual railroad policy actions may accelerate that shift."
Ultimately, the success of rail intermodal networks will depend on how closely the customer experience – in terms of reliability, transit time, shipment visibility, flexibility, responsiveness, etc. – can match the truck offering," Bailey continued. "Trucks are expected to only get greener and cheaper over time, so railroads and intermodal providers will need to continue to invest and innovate if they want to maintain – and improve – their competitive positioning relative to trucking."
Filter said he expects the shift from trailers to containers to continue next year.
"I believe we will see strong growth in COFC usage in 2021 as customers continue to restock," he said. "As trains approach maximum capacity, there will be more pressure on TOFC to convert to COFC." Old said that next year, railroads will play more of a part in the shift to COFC.
"I feel that in 2021 the railroads will continue to widen the pricing gap between trailers and containers to encourage the use of 53-foot intermodal containers," he said.
"Rail carriers continue to convert certain lanes from trailers to containers and that should continue in 2021," Hoehn said. "However, the package carriers will continue to rely on peak intermodal trailer capacity during extreme volume spikes, which is why we have seen significant upturn in trailers moving in intermodal service during 2020. Again, this is customer specific, not a trend."
"I’d expect to see an increase in TOFC volume similar to what we saw in 2018," Paperiello added. "If OTR capacity continues to tighten, trucking companies will seek rail capacity for some long haul moves. This will not take volume out of COFC; it will just add to the overall volume mix on the rails."
Gunn said he doesn’t see TOFC substantially increasing over the current 10% of Class I railroad volume but that trailer traffic isn’t down for the count.
"Do not count TOFC out for the foreseeable future," he said. "It is not going away."