PACER POISED FOR
‘TRANSFORMATION’

in lanes where rail has not been competitive with trucking, said Thomas L. Finkbiner, senior chairman of the University of Denver’s Intermodal Transportation Institute.

More broadly, he said, no one in the industry is talking about a near-term recovery.

This is the time of year when intermodal volumes normally pick up after a winter and springtime lull, but the freight market no longer has a normal pulse. Traffic levels now stay in a narrow range for weeks at a time, with little seasonal shift.

Intermodal experts are not even looking for a traditional peak season.

Retailers don’t yet see much indication that consumers will be buying when year-end holiday sales begin, so stores are not as likely to stock up now with goods from overseas, said Michael Ward, chairman, president and CEO of eastern railroad CSX Transportation.

As a result, he expects “not much of a peak season,” unless consumer demand begins to perk up soon.

This year’s market economics are so far off the charts that FTR’s Gross said it’s best to ignore the traditional seasonal variations or yearly changes and just look at month-to-month intermodal activity. Even by that standard, he said, “it’s not really going anywhere.”

What that means, Gross said, is “we’re bumping along the bottom, and barring another leg downward by the economy, we think we’re at the bottom.”

That’s good if it means the decline is finally ending. But “our sense at FTR is we’re going to bump along the bottom for a while,” Gross said. “And when we come out of it, we’re going to come out at a pretty leisurely pace, a pretty slow recovery.” JOC

400,000 May April March Feb. Jan. Source: Intermodal Association of North America

AS IT STRUGGLES to stay on track and regain speed, Pacer International faces a deadline.

The intermodal traffic consolidator has a long-term, low-rate transportation contract with Union Pacific Railroad that expires in 2011. For years, analysts have said Pacer’s business model is largely based on making profits from those low UP rates.

The $2.1 billion company’s future may hang on what rates it can negotiate when the contract comes up for renewal, with a railroad that holds the pricing power.

That’s put Pacer in a unique position as it strives to recover from a 20 percent drop in first-quarter intermodal freight volume and a 2 8.7 percent decline in revenue.

The company reported a $13.7 million net loss in the first quarter on $358.6 million in revenue. Before its figures were adjusted for good will impairment charges, however, Pacer’s intermodal unit had a $183.6 million loss for the quarter.

The first quarterly loss in its history galvanized the company. It is seeking to transform itself and shift its business model, said Brian C. Kane, executive vice president and CFO.

“We feel we have enough runway to complete the transformation” before the UP contract expires in 2011, he said. “We believe we have already taken a lot of steps to get us part-way there.” The company shed 140 jobs, or 8 percent, of its work force in the first quarter, suspended its stock dividend to save cash and reduced salaries by 10 percent.

Pacer also plans to cut some operations, such as separate accounting offices for varied business units, while increasing its cartage broker business and retail intermodal sales.

“I think if we do those things we can have a viable entity,” Kane said.

As for Pacer’s model, Kane said, “we recognize from a cost perspective” — mainly for selling
and administrative expenses — “that we don’t match up well with some of our facing competitors.”

Its business is largely domestic intermodal, much like its main rivals, but those companies have adapted to more modern pricing.

Meanwhile, tougher market pricing in this recession has cut into revenue and profit margins for most box traffic middlemen and railroads.

Kane said the two-month waiver to its credit agreement negotiated on July 1 with creditors led by Bank of America was a first step toward a more secure financial standing.

“I believe that working with our banks, we will come up with a solution that will satisfy everybody,” he said.

However, J.P Morgan analyst Thomas Wadewitz said the banks appeared to require “harsh” terms for the waiver and are “tightening their grip” on the company. “We believe the rising financial pressures on (Pacer) and potential for bankruptcy will increase the share gain opportunity” for competitors J.B. Hunt Transport Services and Hub Group, Wadewitz said.

With no clarity on how UP might re-price its traffic, some observers say intermodal shippers are worried by the uncertainty. For Pacer’s managers, “it’s largely outside their control” said Thomas L. Finkbiner, senior chairman of the University of Denver’s Intermodal Transportation Institute. “The decision for Pacer now lies entirely with UP.”

Kane stressed that Pacer had picked up two large retail customers in the first quarter and their feedback has shown them “very satisfied with our service.”

In May, Pacer began direct rail service to and from the Puerta Mexico Intermodal Facility operated by Ports America in Toluca, west of Mexico City, expanding its cross-border business.

“What we’re trying to accomplish is something that we need to do irrespective of the market,” Kane said. Still “in the current economic condition you would say our task is probably a little bit taller.”