NOVEMBER/DECEMBER 2020
Spot Market Provides Benefits, Opportunities for Intermodal
The spot market, primarily for OTR moves, delivers a wide variety of benefits for intermodal providers, including a blend of market intelligence and new opportunities.
Experts said there were a wide variety of reasons for the spot market’s value to the intermodal business, relating to rates, capacity and other factors.
"The OTR spot market has an impact on all sectors of the intermodal market," said Jason Hess, Union Pacific vice president of intermodal operations. "Our committed transactions tend to follow the OTR spot market, and many times the OTR spot market is an early indicator of the direction the market is heading. It is very useful and allows us to provide competitive pricing for both our transactional and committed business."
"The OTR spot market can have a significant effect, particularly on the domestic intermodal market," said Todd Tranausky, vice president of FTR Intel. "Companies that do not normally play in the intermodal space are more likely to consider it when capacity is tight and rates in the OTR space are going up."
'Cost Savings Opportunity'
Doug Punzel, president of Celtic International, Matson Logistics Vice President of Transportation Mark Christos and others said the current OTR market can create intermodal opportunities.
"Intermodal can be a lower cost option for moving freight, especially on long-haul moves," Punzel said. "As the OTR spot rates go up and capacity tightens up, the cost savings opportunity grows. Then shippers will take a closer look at intermodal as an option."
Christos emphasized how those lower cost options create new business for rail and drayage providers.
Eagle Systems’ President Dave Hensal cited another benefit. The spot market is valuable for intermodal providers because it gives important insight into the overall freight market. Intermodal has gained some spot business when truck markets get tight, as long as service remains solid.
Robin Tull, senior manager of specialized logistics at Choptank Transport, said the 3PL relies on the spot market for 99% of its intermodal business. Choptank has found it can secure better rates by working with IMCs because they have already purchased capacity and negotiated favorable rates.
Vincent Paperiello, chief solutions officer at Hub Group, illustrated complex interactions between the OTR spot market and intermodal.
"The OTR spot market influences the OTR contract market and, in turn, the intermodal contract market," he said. "We see these influences most evident in shorter haul corridors where intermodal and OTR compete head to head. In our experience, we see a 3- to 6-month lag in the contract intermodal market after the spot OTR market moves in one direction or the other."
Intermodal business can influence the OTR spot market in some situations rather than the other way around, Christos said. That happens when the intermodal network is running at full capacity or if congestion exists in that network.
The result of those interactions can lead to wide swings in rates.
"Spot market rates are very high for OTR, and capacity is very tight on the rails," DAT analyst Dean Croke said in a mid-October interview. "The lack of rail capacity has driven some volume to truckload."
For example, in a Southern California-Chicago market, Croke said spot OTR rates rose from $1.14 a mile in May to more than $3 a mile in late September, when the surge of international cargo overwhelmed port and rail capacity.
Another complicating feature is that freight often is switched back and forth between contract and spot markets. That makes it more difficult to gauge both rates and lanes where market opportunities exist.
"3PLs often choose to put contract freight on the spot market, unless the contract explicitly and strenuously objects to it," said Nick Wynkoop, product manager, rates and analytics, at Truckstop.com. "Carriers regularly reject tenders, to the point that in a hot market 25% of contract freight might be rejected, which in turn is freight that usually must hit the spot market."
Other factors could inhibit creation of a large-scale intermodal spot market.
Libby Ogard, president of Prime Focus LLC, cited the other two factors that affect spot intermodal moves – fleets’ driver assignment choices and chassis supply.
Large motor carriers tend to pull freight off the railroads in soft markets to keep drivers working, she said. Chassis issues are driving up the cost of intermodal as they sit under boxes at a warehouse or are being used as storage, she said, forcing some customers to use the OTR spot market to secure capacity.
Ogard also said the spot market for intermodal is stronger when drayage distances are 30 miles or shorter and becomes less attractive as road haul distances increase.
Intermodal Spot Market Size
Just how large is the spot market for intermodal, relative to contract freight?
Christos said intermodal accounted for a total of 19% of the freight volume moved by participants in the Transportation Intermediaries Association’s latest 3PL Market Report. Both contract and spot market intermodal loads are included in that 19% total.
Ogard believes that 90% of intermodal freight moves under contract, meaning that 10% is spot business. Christos estimates 80% of intermodal freight moves under contract.
Kristy Knichel, who is president of Knichel Logistics, emphasized that its large percentage of contract freight provides some insulation for intermodal from the spot market.
She explained that OTR truck rates change more easily because the trucking market is extremely fragmented, with 97% of carriers running 20 trucks or less, while the intermodal market is concentrated with just a handful of major suppliers.
"Although an intermodal spot market is not nearly as prevalent compared to OTR, an effective intermodal spot market is important to help maintain market share during times of a depressed OTR spot market and during a strong OTR spot market," she added, and an opportunity to expand the intermodal footprint.
Future Growth Opportunities, Limitations
A larger, more active intermodal spot market could create some future opportunities in several different ways, but there are limitations as well.
A larger spot market would give BCOs more information about intermodal rates and help them "to make rational decisions about their modal shares between OTR and intermodal," Tranausky said, and make it easier for new intermodal shippers to access the marketplace.
Building awareness of intermodal’s advantages is important, Punzel said.
"In some cases, shippers have been hesitant to consider intermodal," Punzel said. "In a lot of lanes, they could secure cost savings and experience transit times similar to over the road shipments."
Christos believes the best growth opportunities likely are in lower density lanes where there are ample opportunities for OTR conversion to rail.
Choptank’s Tull said a larger intermodal spot market would create an opportunity for 3PLs to have more rate options to offer customers.
On the other hand, Union Pacific’s Hess believes opportunities for spot market activity to grow are limited, because the railroad’s primary focus is committed contract business.
Tull and Christos cited another factor – equipment supply – that limits spot market opportunities.
"Maybe if [asset owners] put more equipment on the spot market, it might boost domestic intermodal," she said. "Right now, extra equipment simply doesn’t exist."
Christos said available equipment now is typically allocated to premium intermodal shipments like e-commerce, LTL and parcel moves.
While there can be overall questions about equipment availability, there is a particular spot market opportunity that has emerged in backhaul lanes where railroads need to balance their equipment flows.
"International container assets need to return to coastal ports one way or another, loaded or empty, and identifying incremental laden traffic opportunities to fill them through the spot market is worthwhile as it benefits both the ocean carriers and the domestic shippers," Christos said.
Hess said Union Pacific offers a program to 3PLs to use 40-foot ISO equipment for shipments from inland gateways such as Chicago to West Coast destinations, such as Seattle. Intermediaries that participate in the EMP and UMAX programs have access to this capacity.
Punzel said reloading of 40-foot international boxes en route to a port particularly focuses on dense products that don’t need 53-foot equipment.
There could be another opportunity related to international intermodal. Tranausky believes a more active spot market could emerge for the domestic portion of international intermodal headhaul moves if pricing is attractive and shipments are easy to arrange.
However, Knichel said 3PLs’ ability to use the spot market for the domestic portion of an inbound international move is limited because large ocean carriers have buying power to keep control of that freight.
Size matters in other ways, when it comes to spot market opportunities. DAT’s Croke said that the OTR truckload spot market is much larger and simpler to operate than domestic intermodal. Truckstop’s Wynkoop said that
in addition to being more complicated to operate than OTR moves, the domestic intermodal market includes a smaller number of companies, each of which has larger market share.
Spot Drayage Market Emerges
While there is growing attention to the OTR long-haul spot market and intermodal’s role in it, supplier DrayNow is offering a different option. DrayNow’s President Mike Albert explained that his company offers a spot market for drayage services, having arranged 70,000 moves over two years since it was founded with 6,700 participating carriers.
The attractiveness of a spot drayage market is growing, he said, because of the COVID-related disruption in freight markets that have created wide swings in demand this year, which in turn have sparked more freight to move back and forth between OTR and intermodal.
At the same time, smaller truckers’ increasing technological prowess gives them the ability to access a spot drayage market that increases their new business opportunities.
A spot drayage market also offers potential benefits in the form of greater efficiency and potential cost savings that can be significant, Albert said, because the trucking portion represents about one-third of the door-to-door price of an intermodal move.
"What we are trying to do is to educate customers that we can aggregate and share data without sharing whose data it is. The spot market for drayage will be more valuable if we let supply and demand interact," Albert said. "If we start doing that, we will gain efficiencies far beyond what the current mentality can do. We all will gain if we are willing to share data."
