International Intermodal Congestion To Persist Through 2021: UP

The supply chain disruptions occurring within the international intermodal sector will likely persist through the end of the year, according to Union Pacific President and CEO Lance Fritz.

UP UNP has taken numerous actions to mitigate the impact to customers and it has been working with all the parties within the supply chain, but UP's capacity to meet the demand is limited, Fritz said during UP's second-quarter 2021 earnings call on Thursday.

"It's likely these issues will persist through the end of the year, as the capacity to move boxes from our ramp to the final destination falls short of demand," Fritz said.

UP recently decided to temporarily suspend eastbound international intermodal service from West Coast port terminals to the Global IV intermodal facility in Chicago to help ease "significant congestion" at inland terminals, especially Chicago, and at the ports. The suspension is aimed at helping ocean carriers reduce backlogs. The suspension began last Sunday and is scheduled to run for seven days.

UP has temporarily reopened the Global III facility in Chicago to serve as inland storage.

The supply chain disruptions, and particularly those in the intermodal space, that began at the West Coast ports have started to move east and are affecting inland terminals, including Chicago, according to Eric Gehringer, UP executive vice president for operations.

"We are working proactively with our commercial team and ocean carrier customers to address the congestion while continuing to sustain shipment volumes to and from the ports," Gehringer said.

To address the congestion UP has added more short wells and long wells as well as more chassis, and it has increased train starts, according to Kenny Rocker, UP executive vice president for marketing and sales. UP has also been communicating with customers on a daily basis, meeting with the ports, and enlisting subsidiary Loup Logistics to work with BCOs to come up with drayage solutions at the ramps, Rocker said.

Although the congestion could persist through the remainder of the year, UP executives said they believe the congestion is "transitory." Executives also noted that they have also been able to attract more business away from trucks as well as "price to the market," although they noted that they wanted service levels to improve.

"We can still convert [from the] truck with our current service product, but that's in no way saying the current service product is adequate or appropriate for truck conversion in the long run," Fritz said.

Those improvements in service include the reopening in late August or September of the Dry Canyon Bridge in Hotlum, California, which had been closed due to fire damage. UP has had to reduce train lengths and reroute some traffic as a result of the bridge closure, according to Gehringer.

As UP looks to the second half of 2021, the railroad said it doesn't foresee any substantial issues with its headcount. Unlike CSX CSX, which said during its second-quarter 2021 earnings call on Wednesday that it is actively seeking new hires, UP sees its headcount to stay at around 30,000 employees, and the railroad doesn't expect to undergo any significant hiring programs, Fritz said.

However, in the long term, "we've got to make our jobs more attractive over time so that we can continue to attract a really big pool to our jobs," Fritz said, noting possible steps such as taking one employee out of the locomotive cab and bringing the person to the ground, which would turn the role into shift work.

UP is also "encouraged" by the interest in the Inland Empire intermodal terminal in Southern California, which opened in late June, as well as the Twin Cities intermodal terminal that provides domestic intermodal service between Minneapolis-St. Paul and Los Angeles.

The railroad has also secured business that travels less than 500 miles, and it is looking forward to a reported new intermodal partnership with truckload carrier Knight-Swift that will begin next year. Knight-Swift previously had a relationship with UP competitor BNSF (NYSE: BRK-B).

In response to a question about how UP views an executive order by President Joe Biden that targeted ocean carriers and freight railroads, among others, Fritz responded that it has been working with the Surface Transportation Board, the regulatory body that will seek to implement the order's directives, to show how regulations affect the freight rail industry.

"We're trying to help all of the administration understand the impact of some of what they've got inside the [executive order] in terms of urging the STB to reregulate the railroad," Fritz said.

"And so, stepping back a little further, we've been helping the STB see the impact of potential regulation and the multiplicity of regulation, and the retarding impact that could have on our ability, for instance, to help relieve highways, to take trucks off the highway and bring them onto the railroad, to continue to help industries reduce their greenhouse gas footprints. And doing it all with an ability to invest in our own infrastructure," Fritz said.

For more on UP's second-quarter 2021 financial results, go here.

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