Insights - August 2016 - (Page 7)

Strong Future for Relationship-Focused 3PLs Ahead of IANA's 2016 Intermodal EXPO, Thom Albrecht, former managing director Albrecht of the transportation group for BB&T Capital Markets, shared his views on factors driving intermodal growth and merger and acquisition activity in the sector. His observations offer a preview of the EXPO panel discussion that he will moderate entitled, "Merger Mania: Can the Small 3PLs Survive?" Insights: Do you see long-haul trucking capacity affecting intermodal growth, and how? Albrecht: Absolutely, the direction of truck capacity is one of the biggest drivers for intermodal growth. I would say that capacity may not be tight the way we would think of it, say for the carriers, until late 2016 or even next spring. I would also suggest it looks a little bit better for October and November than it did earlier this year. But I estimate that there's 3 percent to 4 percent excess capacity and if the industry works off that [excess] at let's say 1 percent per quarter, then that basically suggests that equilibrium for truck capacity will not be obtained until probably late Q1 or second quarter of 2017. Until truckload capacity is tighter, shippers will continue to hedge their trade-offs between trucking and intermodal services. Insights: Does that mean it's more of a pricing issue until capacity gets tighter? Albrecht: Trucking capacity has been extraordinarily loose, so except for your most strategic shippers or the lanes that make the absolute most sense for the railroad, we have seen more trade-offs in the last nine months or so than we've seen in years as shippers have taken advantage of that loose truckload capacity. So, it's imperative that truckload capacity at least be closer to equilibrium so the conversation about intermodal can stand on its own economics. Insights: Are there other factors such as fuel prices that affect intermodal growth? Albrecht: Obviously, the direction of fuel prices is another important variable. But, when you go back to truckload capacity for a moment, the narrative has absolutely been set. We have been seeing very weak new truck orders; however, this takes time to filter through the marketplace. We are seeing a deterioration of carriers' revenues and profits which will inevitably lead to more carriers failing and going out of business. But when you have 3 percent or 4 percent excess capacity that's not worked off in 90 or 100 days, that's typically close to a year-long process. That process began around March or April [of 2016] and will run its course over the next year. Insights: Are there still market opportunities for smaller intermodal 3PLs? Albrecht: When we talk to smaller 3PLs, we find a lot [more] dismay and discouragement than we have seen in a long time. Many are also struggling with the rate environment. They are struggling for relevancy with shippers, and even with the carrier base. It depends on whether you're talking about small 3PLs with their primary focus on intermodal, or those small 3PLs where their primary focus is truckload. There can be some differences. On the intermodal side, for example, if it's a non-asset IMC, but it is a team with a lot of executives with mainly railroad experience and strong shipper relationships, they're probably weathering the storm fairly well. If it's a younger entity that's five years old or less, and they [were] just getting credibility prior to the freight market loosening, I think they're going to struggle a lot. That's what we've heard from the marketplace, and that's true of both intermodal and freight brokers. So, it depends on experience and depth of relationships and other things. Small by nature does not necessarily mean there's an automatic advantage. We've heard from a lot of shippers - certainly not all of them - that given the looseness in capacity for both intermodal and trucking, they have a propensity to look to the larger IMCs who own assets because this is the best access they've had to them in several years. So for a smaller IMC to thrive, again, it's going to go back to the relationships and to the value-add that they've been able to provide for a longer period of time. Insights: How do you see consumer confidence and consumer spending affecting freight volumes and intermodal growth? Albrecht: Well, first of all, consumer spending is absolutely critical to intermodal growth, at least in terms of creating additional shipment demand. The other question is whether [the freight] 3PLs - continued on page 9 August 2016 | Intermodal Insights 7

Table of Contents for the Digital Edition of Insights - August 2016

Insights - August 2016
DOT FASTLANE Grants Benefi t Intermodal
FECR’s Hertwig to Receive Silver Kingpin Award
IANA Committee Meetings at EXPO
National Truck Driver Awareness Week Request
Nominees Sought for IANA Board
A Conversation with Former IANA chairman David Wedaman
Thom Albrecht Shares His Views on Intermodal Growth and M&A
Freight Reports
Port News
Sustainability News
People in the News
Speakers Announced for Intermodal EXPO 2016
Commerce Affirms Duty on Chinese Tires
In Brief
2016 Sponsors
Welcome New Members
Intermodal Calendar

Insights - August 2016