Financial Perspectives – Spring 2008

Focus on Freight | The Intermodal Freight Transport Sector

William H. Fisher, CFA
Managing Director, Equity Research Logistics Services Group

Intermodal freight transport involves the movement of materials using multiple modes of transportation. Overall growth in this sector has been buoyed by several constants in recent years, one of which has been the ongoing increase in West Coast imports. However, that trend has slowed and we do not anticipate a rebound.

Instead, the biggest driver of domestic intermodal freight transport in 2007 was a sharp increase in shorter-haul load growth. This trend was seen in the growth of certain intermodal distribution lanes – paths of transportation from the point of freight supply to point of use – including key lanes originating and ending in the Southeast, South Central, Midwest and Northeast regions. These lanes saw container increases of 20% in the fourth quarter of 2007.

We believe the 2007 growth marks a sustainable trend driven by three main factors:

• MAJOR INVESTMENTS IN RAIL NETWORKS, particularly in the eastern network, with transit time improvement of up to 40% between Dallas and the Southeast, as well as upgrades that should improve service from the Mid-Atlantic to Midwest and up and down the East Coast.
• HIGHWAY CONGESTION AND FUEL USAGE, as freight movement by train is close to three times more fuel efficient than by truckload on a perton- mile basis.
• LOWER TRANSPORTATION COSTS related to certain companies’ ability to offer a similar service (in terms of time) in certain short-haul lanes at a lower cost than the far larger truckload market.

Given these factors, we expect continued rapid growth in shorter-haul Eastern U.S. routes. In addition, intermodal rail speeds continue to improve, which in turn drives utilization, while a higher mix of shorter-haul moves will mean increased ability to haul more loads per month.

On the negative side, as previously stated, we do not see much prospect for a rebound in near-term West Coast imports. However, this should only directly impact the major public intermodal players under specific conditions, and represents only about 20% of domestic business. Certain companies are moving to get intermodal volumes back in positive territory and are providing far greater domestic container access in 2008 to the Western network, so we think pricing will be more competitive in that market.

Lastly, fuel surcharges remain a major wildcard. They surged in fourth quarter 2007, as well as year-to-date, reflecting rising fuel prices. Given surcharges likely could be up 1,000 basis points in the first quarter, reported pricing could be altered and possibly mask underlying core pricing trends.

In summary, just like the political rhetoric today, change is the one thing we suggest is in the cards for the intermodal sector in 2008. Overall, volumes should remain healthy for the players adept at moving shorter-haul loads. However, pricing will likely be depressed, particularly on some longer-haul lanes. Companies able to pass through and make a spread on fuel surcharges may be able to mitigate some of the core price weakness.

Raymond James & Associates and Raymond James Financial Services are wholly owned subsidiaries of Raymond James Financial, Inc. (NYSE-RJF).

The information contained in this newsletter has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. We may, from time to time, have a position in the securities mentioned and may buy or sell such securities in the course of regular business.

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