At intermodal’s hub
Hub Group typifies the shift to more diverse services in this market space.
In the railroad world, the moniker “hub” is well suited to Chicago, with its mass of rail terminals and interconnecting rail lines.
Appropriately, the intermodal giant Hub Group is headquartered in the Chicago suburbs, moving this month from Downers Grove to nearby Oak Brook.
Founded in 1971 by the late Phillip Yeager and his wife Joyce, the company is now run by their sons David, chairman
and chief executive officer, and Mark, vice chairman, president, and chief operating officer.
Publicly traded Hub is one of the two largest intermodal companies in the country, along with J.B. Hunt. Together, they have about a 40 percent market share of the domestic intermodal business. Other large intermodal companies include Pacer — which traces its roots to the original double-stack trains created by APL — Schneider National, Swift, C.H. Robinson, and Alliance.
Hub had revenue in 2012 of about $3.1 billion — 65 percent from its intemodal segment, 21 percent from drayage, and 15 percent from logistics.
“Years ago when my parents started the business, everyone was a small regional player and nobody had assets of any kind,” said Mark Yeager in a recent interview. “Once Hunt kind of got into the business in the early 90s, it’s gotten more and more dominated by large sophisticated networks and that’s what Hub had to become.”
While Hub still thinks of itself as “asset light,” it has 26,000 containers — it owns 8,500, leases 6,000 and has others on a dedicated basis from railroads.
Yeager said the company is moving more towards ownership as a means of reducing its equipment costs.
“We were at one time a franchise-type of model and we had to go to much more of a command-and-control model in order to compete with the Hunts and Schneiders of the world,” he said.
Yeager noted the intermodal industry has become more concentrated in the past decade, and “when you compare this to the highway side, this is way more concentrated.”
Hub has expanded both organically and through acquisition during the past decade, including the purchase of Exel Transportation Services in 2011 and rebranded Mode Transportation, which added about $720 million to its top line (Hub had annual revenue of $3.1 billion in 2012), and Comtrak Logistics in 2006, which Yeager said was the linchpin in the company’s drayage strategy. Hub has seen its drayage fleet grow from 750 to more than 2,700 trucks.
Two Markets. While people sometimes blend them together, the markets for domestic and international intermodal traffic are driven by very different underlying economic “themes,” Yeager said.
International intermodal traffic, movement of ocean containers to and from ports, is largely a result of consumer behavior, GDP, and import volumes, while domestic intermodal is pushed by forces that are detached from GDP, including conversion of over-the-road freight to intermodal rail, he explained.
Rising fuel costs, uncertainties about the U.S. Federal Motor Carrier Safety Administration’s Compliance, Safety and Accountability (CSA) program, hours-of-service rules, and difficulties recruiting drivers are among the factors that continue to drive interest in intermodal.
That difference between international and domestic intermodal was evident in recent statistics published by the Intermodal Association of North America (IANA).
In the third quarter of this year, while movements of so-called ISO intermodal containers used in ocean shipping were up just 2 percent over the third quarter of 2012, movements of domestic containers were up 9.4 percent.
Joni Casey, president and chief executive officer of IANA, said it was the tenth quarter in a row that “domestic container volume flexed its muscles and has outpaced international shipments driving the gains in total intermodal traffic.”
IANA also noted the third quarter “marks the first time seasonally adjusted domestic shipments exceeded international shipments. This milestone was achieved after a decade of domestic service improvement and five years of accelerated volume gains. A contributing factor was weak international container trade volumes during the recession, followed by an inconsistent rebound when movements of trailers on flat cars were combined with those of domestic containers.”
Yeager said “there is a view on the shipper’s part that the costs of trucking are going up and they need to find creative ways to reduce their supply chain expenditures. Intermodal is a way that they can do that and at the same time reduce carbon footprint and have a more sustainable carrier base rather than trying to take their business out to bid constantly and drive to the lowest price.
“People are always looking to take costs out of their supply chain, especially when you are in a tough economy like we are right now,” he said.
How much a shipper can save by switching to intermodal depends on a number of factors, but Yeager said “typically speaking, what we find is a savings opportunity somewhere between 10-30 percent. So this is fairly significant.”
He said the savings opportunities get larger as the price of fuel increases, as the length of haul gets longer (and the proportion of less expensive rail transportation increases) and distance between a rail ramp and a shipment’s final place of origin or destination decreases.
“So there are some factors that drive it but generally speaking there’s an opportunity to take significant costs, at a minimum of 10 percent, under the right circumstances any time it’s a greater distance than what a truck can travel in a single day,” he said.
“If you can’t produce a 10 percent savings it’s hard to get a lot of momentum,” he added. “But anything beyond that a shipper is really going to consider strongly as long as the service is reliable.”
There may be a one- or two-day differential in transit time between truck and intermodal rail, but Yeager said most businesses “are willing to make that tradeoff especially for goods that aren’t super high value. So the less expensive your goods are the more that inventory carrying cost of an additional day or two is somewhat irrelevant.”
While rising interest rates will put a greater burden on the cost of carrying inventory, he said Hub’s customers are very much aware of that.
The most sophisticated transportation purchasers in the world are big users of intermodal already and “actively looking to convert more of their business,” Yeager said. “When you look at the Walmarts of the world, they use a lot of intermodal. And there’s a reason for it, because they’ve done the math and they know that the equation works in their favor.”
What kind of growth potential is there? Estimates of the potential for truck to intermodal rail conversion range up to 9 million containers, but Yeager said there are also more conservative projections.
“What we like to say is the size of the opportunity is much greater than the system’s capability to absorb it,” he said “It’s not going to be tapped out for many, many, many years to come in all likelihood.
“The system can only absorb so much growth at one time,” he noted, a lesson the intermodal industry learned in 2004 when highly concentrated growth in the southern California market as a result of an upsurge in international shipping led to the U.S. rail infrastructure being “somewhat overwhelmed and bottlenecked.”
There is growing interest in shorter distance intermodal moves — last month, for example, the South Carolina Ports Authority opened a new terminal in Greer., S.C., aimed at shippers moving cargo through the port of Charleston.
Yeager said on moves of 550 to 750 miles “you really do need to have the stars aligned” for intermodal to be attractive. These include factors such as daily rail service and pick-up and delivery points that are fairly close to intermodal rail ramps.
He said most domestic intermodal moves are used to serve distribution centers.
If intermodal becomes even more reliable and customers feel comfortable with service levels it could be used more for store-direct services which have traditionally been the realm of the trucking industry, he said. But today “95 percent-plus of our business is still to a distribution center.”
One consequence of becoming more asset-intensive is that Hub has had to focus on managing those assets and developing balanced freight flows and a “very sophisticated, well managed street operation for local pickups and deliveries,” Yeager said.
“People think about intermodal cost as being all about the rail line haul. But the reality is that 25-40 percent of the cost of an intermodal movement is incurred on the street. And so if you’re not managing that effectively, in a competitive world like what we’re in, you’re not going to be able to survive,” he said. The company now turns its equipment every 13.2 days, and Yeager said the gold standard used to be two turns every month.
Today, Hub’s primary railroad partners are Union Pacific in the West and Norfolk Southern in the East. The company also has a small refrigerated fleet, called Tempstar, which operates on the BNSF, and Hub’s Mode subsidiary does a fair amount of business with both CSX and BNSF through fourth-party channels.
Yeager said railroads overlap enough so that if it had to switch from one to another, it would be able to continue to service its customers.
Own Drayage. Hub has been increasing its amount of drayage work.
Yeager said the company now does about 66 percent of its own drayage, up from 28 percent in 2006.
He said the company has put a lot of effort into driver recruitment and retention, adding about 400 drivers annually in each of the past three years and now has more than 2,700 drivers — 85 percent are owner-operators and 15 percent are company employees.
Many ocean liner companies are either selling or reducing the size of their chassis fleets and not supplying them for free to shippers.
But Hub said “by and large most railroads are still furnishing domestic chassis for the majority of the goods that are moving on their systems.”
While J.B. Hunt has its own set of chassis, other intermodal companies are “operating off the same configuration and out of the common chassis pools or rail-owned pools. Is that going to be the model over the long term? It’s not entirely clear. I think rails are coming to the realization that managing chassis is very expensive,” Yeager said. “There is a real need for them to be extremely well-maintained and in good working order. The real estate at rail terminals is very valuable and chassis take up a lot of that. So I think all the rails are looking for some creative solutions around the current methodology for managing chassis. And what that means is participants like Hub may very well need to invest in chassis in the future. And that is something we are prepared to do.”
Today, he said Hub is the only non-railroad investor in a common chassis pool that the railroads have for chassis. It has invested $30 million in that pool, which translates to about 15 percent of its overall chassis usage.
“It’s really a way for us to put some skin in the game. If it goes in a direction similar to the international world a lot of people are going to have to step up with some capital commitments to make that work and we’re ready to do that if we need to,” he said.
New corridors being developed by railroads present new opportunities for Hub. For example, Yeager said the Crescent Corridor will probably “hit its stride” in 2015, but Hub is having conversations with shippers about truck-to-intermodal conversions on lanes such as Memphis, Tenn.-Harrisburg, Pa. that they were not thinking about in the past.
Hub is also involved in the truck brokerage business, though not what Yeager calls the “you call, we haul” service.
“Some of our drivers do local pick-up and delivery work for larger customers. It helps round out their day and makes it more efficient. It is also a way for our larger customers to get some capacity with an asset that’s already coming into their facility,” Yeager said. “It’s an opportunity to take an asset and reuse it in a way that’s extremely efficient and really promotes a profitable day for the drivers.”
Intermodal companies are benefiting from more sophisticated intermodal terminals being built in some markets, including the Chicago area where both BNSF and Union Pacific have built large, modern rail terminals adjacent to a large logistics park that CenterPoint Properties has developed in Joliet, the Kansas City SmartPort, and AllianceTexas’ development outside Dallas.
While “in-town” rail ramps can be good for trucks making local deliveries, Yeager said these locations on the edge of cities can turn out to be more efficient if an intermodal company is managed appropriately, has a good balance of inbound and outbound loads, and good velocity.
Hub drivers average just over two container pickups and deliveries in a day, but Yeager said if they can be well coordinated, that number can go to three to four trips a day and “adding that one or two more trips can make all the difference for a driver as to whether they have a profitable day or not.
“If a driver is spending a lot of time at a rail ramp or sitting and waiting for customers, they’re not going to make a living,” he said. “They have to be in and out quickly and efficiently. I have to give the railroads credit — they have made the terminal operations much more efficient. And a lot more of our customers are more accommodating in that regard, so they’re open to things like drop-and-hook operations and effective pool management and they work with us more closely maybe than they did in the past to make sure that driver does get in and out as quickly as possible. And that’s a huge thing because there just aren’t enough drivers out there.”
Logistics. At Hub, logistics has been a high growth area, and the firm manages and purchases transportation for other companies.
“If you’re a company and you’re trying to manage your own transportation, it’s probably not a core competency for you,” Yeager said. “You’re probably not utilizing all the modes as efficiently as possible. You’re probably paying a little bit too much. You’re probably not consolidating your LTL (less-than-truckload) in single shipments and finding a lot of creative ways to take costs out of your supply chain.
“We’re managing north of a billion dollars in supply chain spend, so we are experts in purchasing,” he said. “We’re experts in modal optimization. We have technology that enables us to do very sophisticated LTL consolidation, modeling and things along those lines. So we’re able to add a level of expertise to transportation purchasing that realistically a standalone customer couldn’t do on its own. That’s the service we provide.”
The company provides these sorts of services to 82 companies and the three most recent customers are Green Mountain Coffee, Lumber Liquidators, and Nexeo Solutions, a supplier of chemical products and solutions.
In many cases, Hub will co-locate employees on the site of its clients, acting as the transportation group for that customer.
“We’re connected from a systems perspective, so if they have an ERP system we’ll hook right into that system. It gives them terrific visibility,” Yeager said. “We give them a lot of benchmarking in terms of the costs that they were paying, the costs that they are paying, and the costs they should be paying. So we give them a really good view within their system as to how their supply chain is functioning. And we deliver a lot of cost savings for them.”
Hub makes its money via a management fee and share of associated savings.