US Imports - Implications on Transportation/Drayage Industry
World Trade December, 2006
by Satish Jindel

With increasing number of US businesses sending the assembly and production of goods to offshore locations, there has been a dramatic increase in containers imported into U.S. Specifically, the growth in imports has increased the total number of containers arriving at U.S. ports from 11.1 million TEUs in 2000 to 17.3 million in 2005.

Ocean carriers continue to struggle with repositioning empty containers, which originate fully loaded overseas, then wind up scattered across the U.S. at their final destination. Railroads, meanwhile, are finding they have better leverage with their customers who ship intermodal containers (compared to coal and other raw materials) and in turn, this has spurred changes in the business model of Intermodal Marketing Companies (IMC), who have gone from non-asset-based companies to asset based. Hub Group is one example. The company owned 2,000 containers in 1998, and now has 10,600 containers that are used to support its customers' intermodal shipments.

The trucking industry has felt the impact in ways that has made it more challenging to manage capacity and profitability. When the ports and railroads were unable to handle the increased container volume that spiked in 2004 and 2005, trucking companies saw an increase in demand and resulting profitability. However, despite the continued growth in imports, truckers are beginning to experience a decline in tonnage and demand for their services. According to the American Trucking Association, truckload freight volumes were rather soft this past August, with the index only 0.3 percent above August 2005 levels. This softness has resulted in supply/demand imbalances and lower profits for some of the larger truckload players that anticipated this year's volumes to meet or exceed those from previous years.

The influx of containers in the transportation system has prompted other changes, such as cross-docking or trans-loading and intermodal yards at locations like Kansas City, Columbus, OH and Alliance, TX. Union Pacific Railroad is spending about $200 million in new intermodal yards in Salt Lake City, UT and Dallas, TX to provide better intermodal service. Truckload carrier Schneider National is investing millions of dollars to build an intermodal facility in Columbus, OH. Additionally, Schneider has completed the acquisition of American Port Services, provider of port transloading/deconsolidation services, to enhance its portfolio in offering port-to-door import logistics.

The most noticeable impact of the increased container traffic has been on the least known segment of the trucking industry - drayage. It is no surprise that not much has been written about the drayage industry. Even people within the transportation industry either have little awareness of the drayage industry or at a loss to name one company that has nationwide presence or even large regional coverage for drayage service.

Drayage industry has been around since 1950s when Malcolm McLean invented the intermodal containers. While these 20' and 40' intermodal containers have resulted in bigger boxships - today's vessels can carry up to 10,000 TEUs- these containers have also contributed to the recent rapid growth of drayage industry. We estimate that the drayage industry has increased from $8 billion in 2000 to $12 billion in 2005, at 9 percent compounded annual growth rate, or three times GDP, making it one of the fastest growing segments in the transportation industry.

A few characteristics of the drayage industry that have lead to lack of attention and a highly fragmented nature in spite of the $12 billion market size are:

• The business has been very localized to individual ports or rail yards.
• The short distance trucking made it feasible for people with minimal capital and used tractors to operate in the market as owner operators.
• Even the larger drayage companies do not promote their service in trade publications to create awareness of the industry.
• Lack of barriers such as regulation, technology or capital allowed many small businesses to enter this market on a light-asset model.
• Lack of market appeal by large transportation carriers fueled an environment that allowed the drayage sector to grow into a highly fragmented segment - with close to 500 carriers that utilize over 13,000 owner operators.

Nonetheless, while the drayage sector thus far has not been as severely affected as other transport providers by the influx of more intermodal containers in the system (aside form the obvious increase in its own volumes), all that is starting to change. Last year's implementation of the PierPASS program at the ports of Los Angeles and Long Beach, which required containers to be drayed during off-peak hours or pay a surcharge, is one example. New federal security regulations, such as the Transportation Security Administration's Transportation Worker Identification Credential (TWIC), rising insurance rates, and even environmental issues are rapidly transforming the industry.

In November, voters in California approved an aggressive clean-air measure that could force the replacement of more than 16,000 trucks with new ones within five years. Although freight locomotives and marine vessels cause more than half of all port-related air pollution, rail and marine officials claim interstate and international immunity from California's air pollution laws.

Indeed, the value proposition for transportation providers that can also offer drayage service at multiple ports and rail yards nationwide is gaining prominence. This development is stimulating the environment for industry consolidation, as evidence by:

• Hub Group's purchase of Comtrak - one of the larger drayage companies.
• Universal Truckload Services' purchase of four drayage companies in last 12 months.
• California Cartage's expansion beyond ports in Southern California with new terminals in Seattle, Chicago, Savannah and Norfolk.
• Maersk now owns one of the largest drayage company (Bridge Terminal Transport, with over 3,000 owner operators and 40 terminals) and continues to expand.

Consolidation in many segments of the transportation industry has already occurred. Yet, consolidation in the drayage industry has hardly started and offers attractive returns to those that have the right strategic and tactical plan to support the evolving market needs.

Satish Jindel is the President of SJ Consulting Group, Inc. transportation and logistics consulting firm, based in Sewickley, PA.