Intermodal volumes expected to rise in second half of 2022, 2023

Intermodal volume growth has been limited by sub-par rail service, but it is expected to improve in the second half of the year and 2023, analysts said.

In a recent industry note, analysts Justin Long and Jack Atkins, senior associate George Sellers and associate Cameron Hoglund, all of Little Rock-based Stephens Inc., expect the intermodal market “to see a re-acceleration of growth in the years ahead from a combination of the economic value proposition, an ongoing shortage of truck drivers, normalizing rail service, the potential for higher fuel prices and an enhanced focus on ESG [environmental, social and governance].”

The analysts estimated that intermodal contract rates are between 15% and 50% lower than truckload contract rates, depending on the transportation destination and length of haul. They said this provides a compelling economic argument amid high freight rates.

According to DAT Freight & Analytics, rising fuel surcharges kept spot rates elevated in February, and the average contract rate for van freight rose 10 cents to $3.09 per mile. It rose for the 21^st consecutive month and hit $3 per mile for the first time.

“Spot market rates and volumes naturally decline in February as more truckload freight moves under contract,” said Ken Adamo, DAT chief of analytics. “Volatile diesel fuel prices have given the market a jolt, and shippers and carriers are reviewing their playbooks for ways to reduce empty miles and improve fuel efficiency.”

Still, spot rates for van freight fell for the first time in nine months, down 1 cent to an average of $3.10 per mile in February, from January, according to DAT.

The Stephens analysts also highlighted other benefits of intermodal service, including the additional capacity and fuel efficiency provided compared to trucks. One intermodal train equals 280 trucks, and rail is four times more fuel efficient than truck, the analysts said.

However, they added that the recent headwind has been inconsistent rail service that has limited intermodal volume growth. But they expect rail service to improve in the second half of 2022 and 2023.

Using FTR Intel data, the analysts noted the market available to the intermodal industry and pointed to the 81.3 million truckload moves in 2021 that were more than 550 miles. They explained the long-haul truckload market is the most likely to be converted to rail. They said there were 9.2 million domestic intermodal moves in 2021.

“This implies domestic intermodal composes 10.2% of the long-haul market, leaving significant room for improvement,” the analysts said. “To be fair, not all of these truckload moves would make sense for domestic intermodal based on the type of freight and the origin/destination pairings.”

But if intermodal were to add 0.25% in market share annually, this would lead to 2.2% in domestic intermodal growth each year. In the near-medium term, the analysts expect intermodal to recapture the nearly 0.9% of market share it’s lost to truckload since 2015.

According to the analysts, recent announcements by carriers to switch their western intermodal service provider from BNSF Railway Co. to Union Pacific Corp. are expected to be a tailwind for Lowell-based carrier J.B. Hunt Transport Services Inc.

Also, J.B. Hunt and its western rail partner, BNSF, recently announced a joint initiative to improve intermodal service. J.B. Hunt plans to expand its intermodal fleet to up to 150,000 containers over the next three to five years. This would be an increase of 43% from the 105,000 containers the carrier had at the end of 2021.

J.B. Hunt owned about one-third of the nearly 315,000 domestic intermodal containers as of the end of 2021, according to the analysts. Hub Group had the second-largest share, with about 45,000 containers.

Goldman Sachs recently upgraded its J.B. Hunt share rating to buy, from neutral, amid views the supply chain will begin to return to normal in the second half of the year and lead to improved results.

“If we are moving in the right direction in terms of improved supply chain fluidity, it should translate to the better box turns that we now anticipate, and most importantly lead to catch-up volume growth as anchored ships unload and better overall ability to translate underlying industry volumes into Hunt realized container loads,” said Goldman Sachs analyst Jordan Alliger.

The supply chain is expected to improve as a result of better labor participation, allowing for better supply chain velocity and reduced dwell times, along with the easing of port congestion as more equipment becomes available, according to Alliger. According to the Seeking Alpha note, a GDP growth outlook of 3.3% for 2022, compared to the 5.7% rise in 2021, was viewed as “allowing for supply chains to catch their proverbial breath.”

Goldman Sachs increased the 12-month target price for J.B. Hunt shares to $231, from $209. Over the past 52 weeks, shares of J.B. Hunt (NASDAQ: JBHT) have ranged from $155.11 to $218.18.