Truckers traveling via train? Yep, the smart do so with increasing frequency. Earlier this month, J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) announced that its already successful "Secret Formula" for Intermodal success will henceforth include much more of a current ingredient, one known as "NSC" or Norfolk Southern Corporation, (NYSE: NSC), which reported Intermodal revenues for this year's 1st nine months of just slightly less than JBHT's $1.2 billion of Intermodal biz. for the same three quarters.
Once a prosperous "traditional" trucking company, JBHT long ago started weaning itself of that declining business model; and today JBHT generates ~55% of its total revenue and ~74% of its total operating income from Intermodal. By using its closely-monitored company-owned trucks and company-paid drivers (the so-called asset-based approach) to handle the tedious drayage assignments (moving Intermodal containers to and from railroad yards), in combination with sophisticated computer systems and other tools of enlightened management, while engaging the railroads to perform all the "heavy-lifting" of moving freight cross country, JBHT produces mind-shattering results, expanding its market shares and sustaining its net income in seemingly facial defiance of this otherwise sluggish current economic environment.
JBHT Scripts Another Award Winner
Experienced industry analysts promptly and repeatedly harmonized that the new JBHT-NSC alliance could soon begin yet another successful multi-year "run on Broadway," similar to the success of JBHT's 20 year-old Intermodal alliance west of the Mississippi with the Burlington Northern Santa Fe railroads. Back in 1989, JBHT and the Santa Fe railroad took the transportation industry by surprise in announcing their Intermodal partnership. That deal was the first such North American collaboration between a railroad and a trucking firm, so unique that, until this week, many believe it had yet to be matched; it clearly began a tectonic shift in the landscape of commercial freight transportation throughout North America. Now, clearly, JBHT is scripting another such performance and plans for it to win Tony Awards on the east side of the street!
NSC, headquartered in Norfolk, VA, has long been admired for its efficient operations and operating margin accomplishments. Itself the progeny of 100+ railroad mergers, reorganizations, and consolidations, NSC now operates its trains over a system of ~21,500 route miles in 22 states, the District of Columbia and Ontario, Canada, with many NSC rail lines paralleling key Interstate highway truck routes. Presently serving almost all of our East Coast, plus 20 sea and lake ports, NSC is leading multi-billion dollar investments initiatives and build-outs of its Intermodal network throughout the East, with the Crescent Corridor, the Heartland Corridor, the Meridian Speedway, the MidAmerica Corridor, the Pan Am Southern Corridor, the Patriot Corridor, and also via a partnership with the Florida East Coast Railroad developing direct Intermodal service in central Florida.
Truckers prefer the West
Despite that near half of our Nation's population and, thus, business opportunities reside east of the Mississippi River, for decades truckers transporting commercial freight cargos have preferred to "not go there," and oft times for good reasons. E.g., Out West the toll roads and toll bridges are cheaper and fewer, diesel fuel cost less, road speed limits are higher, traffic is much less congested, truck repair labor costs are lower, truckstops and highway rest areas are bigger and easier to find, and some say Out West even the coffee shop waitresses are much prettier!
Over the past quarter-century, the trucking industry's vehicle miles traveled increased 105 percent while available highway lane miles grew only 4 percent, according to U.S. Department of Transportation data. That translates to the highways within high-density Eastern populations now, near every single day, exceeding their capacities, and becoming more unfriendly to big trucks at an even faster rate. Annually converting possibly hundreds of thousands of Eastern U.S. shipments from the vehicle-congested highways to NSC's nearby Intermodal rail routes will solve many of the aforementioned challenges and complaints, while simultaneously augmenting JBHT's and NSC's net incomes.
Coming Up, the Mixed Doubles Final Event
The two overwhelmingly dominant Intermodal freight shipping railroad operators in the Eastern United States are NSC and CSX Intermodal, part of CSX Corp. (NYSE: CSX), while Union Pacific Corporation. (NYSE: UNP), Burlington Northern Santa Fe Corp. (NYSE: BNI) and Kansas City Southern (NYSR: KSU) operate the dominant Intermodal freight shipping railroads in the Western United States. NSC competes directly with CSX for rail Intermodal business east of the Mississippi, and during this year's 1st nine months, NSC generated 30% more Intermodal revenue than did CSX. Throughout North America, JBHT Intermodal faces robust competition from only one similarly jumbo trucking company possessing considerable Intermodal abilities and assets, privately held Schneider National, Inc. Schneider's Intermodal segment long ago followed JBHT's lead by forming a strong alliance with BNI regarding its Intermodal shipments in the West; late last May, Schneider named CSX as its exclusive core Eastern Intermodal carrier.
What's developing here is Intermodal's Eastern U.S. equivalent of a Wimbledon mixed doubles final event; in the Centre Court we'll be watching team JBHT-NSC vie against the Schneider-CSX duo, while those truckers' and railroads' shareholders feast on fine Pimms spritzers accompanied by strawberries and cream.
$195.00 of Operating Income per JBHT Intermodal Load
Intermodal has long been considered a handsome profit center for the railroads, and JBHT's financial statement disclosures reveal that JBHT is now also minting money the Intermodal way. From every $1,000.00 of its Intermodal revenue JBHT extracts ~$102.00 of operating income; that's about $195.00 of average operating income achieved from each JBHT Intermodal load, and there were 663,386 such loads at JBHT during the first nine months of this year (17,000 loads per week = $3.3 million of JBHT Intermodal weekly operating income). Schneider's Intermodal results are likely near those of JBHT's, but Schneider's privately-held status allows it to withhold words to the public about the parts of its money machine.
All things considered, NSC is a superb East Coast partner for JBHT Intermodal. Close observers believe the new JBHT-NSC alliance will offer pricing incentives sufficient to attract substantial additional business from Eastern region shippers who have previously relied almost exclusively on traditional truckers' pricier highway-mode for freight movements. Plus, NSC's wholly-owned subsidiary, Triple Crown Services Company (at times, a direct competitor to JBHT Intermodal), might fit quite well within JBHT Intermodal's new East Coast tennis bag.
A Confusing Battleground
At current first glance, the battle lines here might appear to be sharply drawn, but upon closer look, you'll find them really quite hazy. For example:
(1) BNI simultaneously grants preferred status to (and, quid pro quo, receives preference from) both JBHT and Schneider, while those two jumbo truckers continue battling each other. Yet BNI still courts Intermodal business from many other truckers. BNI also operates a subsidiary called BNSF Logistics that directly competes with the Intermodal and other business pursuits of JBHT, Schneider, and many others, including two of BNI's largest "second tier" Intermodal business sources, Pacer International Inc. (NASDAQ: PACR) and Hub Group Inc. (NASDAQ:HUBG). Concurrently, PACR and HUBG daily compete with each other and with freight brokers CH Robinson Worldwide, Inc. (NASDAQ: CHRW) and Landstar System Inc. (NASDAQ: LSTR) for Intermodal and other business throughout the U.S., Canada, and Mexico, while both CHRW and LSTR boast strong direct Intermodal relationships with PACR and, of course, with each of the Class 1 railroads.
(2) PACR has long conducted the lion's share of its Western U.S. Intermodal business with UNP while also recently increasing its volumes BNI; but earlier this month PACR announced an extension and rewrite of its "marriage contract" with UNP, just a few months after HUBG began shifting most of its Western Intermodal business away from BNI to UNP.
(3) BNI, CSX, KSU, NSC and UNP of course all conduct Intermodal business with numerous direct competitors to JBHT, Schneider, PACR and HUBG (and also with many other truckers, freight brokers, 3PLs, etc.). And,
(4) Given their each substantial but still finite rail trackage footprints, BNI, Canadian National (NYSE: CNI), Canadian Pacific (NYSE: CP), CSX, KSU, NSC and UNP (Collectively, the "Big Seven") each daily share the others' rails, interchange rail cars and Intermodal containers, and cooperate with each other as heartily as they do compete with each other. In fact, and despite the reality that hardly any Intermodal service provider (railroad, trucker, or other) can every day deliver to its each and every major customer all the trumping-power priority special attention they promise, near every single major and minor Intermodal counterparty in the North American Intermodal continuum speaks near identical words while trying to convince freight shippers that "no one else is as well connected and as well resourced as are we."
Considering all that, it's little wonder that Intermodal industry gatherings, like the Intermodal Association of North America's "2009 Intermodal Expo," underway this week and attracting near 10,000 Intermodal participants to California's Anaheim Convention Center, often seem to outsiders as confusing as redneck family picnics!
JBHT's Gravy Train
Since year-end 2000, JBHT has consistently beaten the railroads at their own Intermodal game. From January 1, 2001 through September 20, 2009, the Big Seven North American Class 1 railroads' composite Intermodal revenue has grown at the meager compounded annual growth rate (CAGR) of ~3.3%, while JBHT's Intermodal revenue has chalked up an impressive CAGR of ~10.6%, triple that of its railroad collaborators! And intermediaries CHRW, HUBG, LSTR and PACR are all experiencing considerable difficulties retaining and growing their Intermodal revenues and operating incomes, due in no small measure to the formidable competition presented surely by JBHT and perhaps too by Schneider. See Chart #1.
There's no doubt about it; JB Hunt Transport Services has found and is riding its Gravy Train!
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Don't forget the the positive impact that JBH received when the BNSF went "private" in regard to it's intermodal fleet. I would have loved to have been one of the hand picked few that the BNSF gave prefered rates. Taking nothing away from JBH's success; however, growth levels might be a direct result of JBH's competitors being forced to load up under JBH's contracts ( or one of the other privileged few with equiptment and favored nation rates) on the BNSF. I don't think this is what deregulation was about, but I could be wrong!!!
With respect, Freightfinder, I do believe you are wrong. It is my understanding that BNSF intermodal made the decision several years ago that it was not really in the equipment business. That led to contracts that favored those IMCs and others who provided their own equipment. This is precisely what JBH does. JBH has a significant investment in the equipment it uses. It saves BNSF the capital cost of acquiring and trying to manage that equipment. I'm not aware that BNSF is mistreating IMCs that wish to do business with it. I remember the late Phil Yeager's reaction to the original JBH contract with Santa Fe. He said that as long as Santa Fe treated all players fairly when it came to loading and grounding, etc., then it was up to him to be competitive. Phil was one of the greats of the intermodal business.
The leasing companies did all those same things and were given rates that were not competative with IMCs and others that had fleets. Years prior to the "privatization" the BNSF tried to deal with only a handful of customers through minimum level requirements. This was met with strong opposition and the BNSF backed off. Over the next few years a fleet build up occured with most of those that would have met the minimum requirements. The fleet got to critical mass and the BNSF then went "private"... Mission accomplished, they are only dealing with a handful of customers!!! I agree with your kind memories of Phil, he was a wonderful man. I understand why the BNSF went private I just don't understand why they wouldn't want as many fronts as possible working to get loads on their railroad.
I can't answer your question, Freightfinder, but I do know that virtually any business prefers to deal with fewer high-volume customers than the opposite. Intermodal, which you seem to know quite well, and particularly domestic intermodal, is under tremendous pressure to keep costs as low as possible. Perhaps, handling higher volumes from fewer customers is one way to do that?
True enough... But the impact of even one of those large accounts leaving is hard to backfill. In these times, even harder. Maybe JBH is next in line for BerkshireHathaway? Thanks for your feedback Larry. Have a great holiday!!!
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