A trucking and rail strategy that boomed during pandemic shocks is heating up again

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Containers are transferred from freight trains to trucks.

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Transloading, a logistics strategy utilized by trucking companies to alleviate container congestion during the pandemic, is gaining popularity once again. This resurgence is attributed to the increasing volumes of containers being redirected from the East Coast to U.S. West Coast ports.

Transloading involves transferring freight between truck and rail, as confirmed by logistics companies to CNBC. The demand for this service has increased among U.S. importers due to the emergence of new shipping routes following diversions in the Red Sea and restrictions in the Panama Canal.

"We are observing a significant shift in cargo movement from the East Coast to the West Coast," said Michael Aldwell, who serves as the executive vice president of sea logistics at Kuehne + Nagel. This shift is primarily due to challenges faced at the Panama Canal and Red Sea, as well as concerns about a possible labor strike at ports on the East Coast and Gulf.

The February Transportation Intelligence report by economic forecasting firm FR indicated that in 2023, 65-70% of U.S. imports were transloaded inland, compared to less than 60% in 2021.

Chris Sikora, who oversees port services at CH Robinson, mentioned that the logistics company has expanded its transloading operations at ports nationwide. This move is in response to retailers and suppliers showing a preference for smaller loads when moving their products.

"The issue of insufficient or excessive space has led to this situation," Sikora explained. "We are relocating a variety of items, such as kayaks and clothing."

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Retailers could reduce transportation and labor costs associated with imports by $500 to $1,000 by using transloading. Sikora mentioned that with the rise of e-commerce and small businesses importing around 3,000 containers annually, transloading has become a popular solution for them.

Logistics professionals explain that the growing trend of transloading is on the rise as U.S. importers opt to distribute their shipments to various international ports to enhance flexibility. Rather than consolidating containers at a single port for later dispersal, the practice involves splitting the freight overseas and loading it into multiple containers destined for different ports closer to respective distribution centers. This approach of handling smaller loads of freight saves importers both time and money, as highlighted by logistics experts.

The current global supply chain issues are expected to drive further growth in transloading.

"Make the most of the current lack of traffic to transport some of your goods and establish a transload supply chain through the West Coast. This way, you won't have to set it up during a crisis," suggested Aldwell.

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Tim Robertson, the CEO of DHL Global Forwarding Americas, mentioned that transloading has become a valuable option to add flexibility to the supply chain. The company now operates multiple transloading facilities on both the east and west coasts.

The increase in freight transportation from the East Coast to the West Coast was initially identified in February through the ITS Port Rail Ramp Freight Index.

Paul Brashier, who serves as the vice president of drayage and intermodal at ITS Logistics, shared with CNBC that the company has experienced a notable rise in demand. As a response, ITS Logistics is reactivating capacity that was previously not in use due to the effects of Covid-19.

"We have been requested to increase our capacity to meet the needs of our clients during the anticipated surge in demand for transloading services in the third and fourth quarters," stated Brashier. "We are looking at a significant 75-80% rise in transloading demand."

The idea of shippers using various ports closer to their customers and transloading can be observed in the Department of Transportation's Import data.

"It reduces time by a third, minimizes transportation, and allows clients to be agile," Sikora explained. "There has been a noticeable increase in shipper demand due to the utilization of different distribution centers."

The surge of global challenges in the supply chain is leading to increased calls for an early push in the shipping season by importers and more frequent use of transloading.

Bryan Kempisty, the CEO of PortX Logistics, mentioned to CNBC that the company typically has an 18-day lead time to watch for any delays or issues in the supply chain. This allows them to notify customers in advance so they can decide if containers need to be redirected to a different port or if the freight needs to be transloaded.

He mentioned that the delays at the Suez Canal and Panama Canal have led to nearly a 20% rise in traffic at West Coast ports. *"If you were accustomed to a 30-day shipment period, and now it's taking 60 days, the peak season could possibly shift to June due to disruptions in the industry. This will also impact decisions on transloading," noted Kempisty.*

Matt Schrap, CEO of Harbor Trucking, which represents truck companies that service the West Coast ports, mentions that typically 30% of the containers arriving are intended for rail transportation, while 70% are transported by truck.

"Approximately half of the cargo will be transloaded," explained Schrap. "Transloading containers is a common practice at our ports, and we are well-equipped to handle more of it."

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Transloading can help trucking companies that provide this service increase their profits by cutting costs related to container usage and fuel, and by boosting resource efficiency.

Bruce Chan, director of global logistics & future mobility for Stifel, mentioned that the logistics sector is currently at a pivotal point due to a significant shift in how retailers and importers are reevaluating their supply chains.

"From a supply chain, efficiency, and ESG perspective, it is logical to utilize West Coast transportation," mentioned Chan. "Logistics firms should adapt swiftly to handle the complexities of evolving supply chains in order to retain big clients with a range of solutions and investments."

He mentioned that with the growing number of transportation hubs in the logistics network, spreading out freight across up to five different ports could benefit transport companies like J.B. Hunt, ITS, and CH Robinson.

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Susquehanna International Group analyst Bascome Majors mentioned J.B. Hunt, along with two other major intermodal providers, Hub Group and Schneider, as companies that would see significant benefits in the publicly traded transportation sector due to a shift of East-to-West Coast port activity from labor disruptions and an increase in transloading from the West Coast.

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<p>Aside from companies like Schneider and J.B. Hunt, Union Pacific railroad is expected to benefit from the shift in freight, as stated by Jason Seidl, a transportation analyst at Cowen Group focusing on air freight and surface transportation.</p>

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"This presents an opportunity for Union Pacific to increase market share by offering a reliable, user-friendly, and consistently efficient transport service," Seidl commented. "One of the main challenges for intermodal transportation is enhancing the reliability of operations. With truckload rates still low, the focus is on providing excellent service."

Chan explained that Schneider and Knight-Swift's investments in intermodal transportation could enhance their appeal to long-term investors compared to the more volatile truckload sector, which tends to attract hedge funds seeking short-term trading opportunities.

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"On the change to intermodal transportation, we are observing that companies providing short-distance transportation services like Universal Logistics Holdings have a considerable presence on the West Coast. They stand to benefit from favorable trends," explained Chan. "Additionally, the trucking industry as a whole can expect a rebound in long-distance shipments, as they inherently incur higher costs."

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The recovery of container volume on the West Coast, although expected, will likely have a limit. According to Chan, it is unlikely to reach the levels seen in the past decade when comparing market share between the West Coast and East Coast. Instead, it may stabilize at around a 50/50 split. In the short term, there is a prediction of increased traffic to the West Coast due to potential strikes by the International Longshoremen's Association, as well as diversions via the Red Sea and Panama Canal.

The freight industry has reached low contract rates following a period of industry decline. While Chan mentioned that moves of 10%, 20%, or 30% at these levels are substantial, it's important for investors to remember that rates have dropped significantly more in recent years.

"I anticipate a recovery, but I predict it will be modest," mentioned Chan. "The market currently has too much capacity, especially in trucking. There is a need for adjustments to reduce trucking capacity."

Mexico's expanding international trade presence

The opportunity for transloading is also on the rise in Mexico.

"We are noticing a growing interest in cross-border transportation," Seidl mentioned. He highlighted a recent decision made by the Surface Transportation Board to approve the merger between Canadian Pacific and Kansas City Southern. This development has resulted in increased and enhanced choices for shippers. Seidl also pointed out the successful rail-ferry service provided by Genesee & Wyoming, which operates between the ports of Mobile, Alabama, and Coatzacoalcos, Veracruz, crossing the Gulf of Mexico."

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D'Andre Larry, who heads the intermodal division at Uber Freight, a subsidiary of Uber Technologies, told CNBC that customers are interested in the expanding cross-border traffic market.

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"We operate a large and successful cross-border business unit in Mexico that handles a significant amount of traffic going to and from Mexico," mentioned Larry. "At the border, we perform transloading services. We offer intermodal transportation options from Mexico, as well as truck services from Mexico. Customers are interested in intermodal transportation as it allows them to achieve both cost savings and reduce carbon emissions."

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