The trucking and rail strategy that thrived during pandemic disruptions is experiencing a resurgence.

• The increase in freight cargo being pushed back to West Coast ports has led to a rise in the use of "transloading," a strategy that involves moving cargo between trucks and trains, which became popular during the Covid supply chain disruptions and is predicted to continue.
• Transloading requests from shipping clients are on the rise for companies such as CH Robinson, DHL, Uber Freight, and ITS Logistics.
• The logistics model is expected to benefit transport stocks such as Union Pacific, JB Hunt, Schneider, and Knight-Swift, but their business models are still under stress due to the recent freight recession, according to Wall Street analysts.

Transloading, a logistics strategy used by trucking companies during the pandemic to alleviate container congestion, is gaining traction once more as West Coast ports experience an increase in container volumes being redirected from the East Coast.

The process of shifting freight from truck to rail or rail to truck is known as transloading. According to logistics companies, there has been an increase in demand for this service among U.S. importers as they seek to transport more freight on new routes due to the Red Sea diversions and the Panama Canal drought restrictions.

According to Michael Aldwell, executive vice president of sea logistics for Kuehne + Nagel, there is a significant increase in cargo movement from the East Coast to the West Coast, which he attributes to factors such as the Panama Canal, Red Sea, and the possibility of a labor strike at East Coast and Gulf ports.

In 2023, U.S. imports moved inland via transload accounted for between 65-70% of the total, compared to 2021 when it was less than 60%.

Chris Sikora, director of port services for CH Robinson, stated that the logistics company has boosted its transloading and staging at ports across the country due to the growing preference of retailers and suppliers for smaller loads of goods.

"The lack of sufficient or excessive space has resulted in this," Sikora stated. "We are relocating items ranging from kayaks to clothing."

Transloading can help retailers save between $500 and $1,000 in transportation and soft labor costs related to imports, especially for smaller businesses importing up to 3,000 containers annually, as explained by Sikora to CNBC.

U.S. importers are shifting their freight to multiple international ports to be more agile, resulting in an increase in transloading, according to logistics executives. Instead of sending containers to a single port for division and dispersal, the freight is divided overseas and loaded onto multiple containers bound for different ports, closer to distribution centers. This approach saves importers time and money, as smaller freight loads are more efficient, logistics experts said.

The current global supply chain issues should fuel more transloading growth.

Aldwell advised taking advantage of the lack of congestion to move cargo and establish a transload supply chain via the West Coast, thereby avoiding the need to set it up during a crisis.

DHL Global Forwarding Americas CEO Tim Robertson stated that transloading is a valuable option for adding flexibility to supply chains, with several transloading operations now available on both coasts.

The ITS Port Rail Ramp Freight Index first brought attention to the significant increase in freight volume being transported from the East Coast to the West Coast in February.

ITS Logistics' vice president of drayage and intermodal, Paul Brashier, tells CNBC that the company has experienced a significant increase in demand and is bringing back mothballed capacity to meet it.

"Brashier stated that we will be required to increase our capacity to serve clients during the third and fourth quarter surge, which is expected to result in a 75-80% increase in transloading demand."

The Department of Transportation's Import data reveals the practice of shippers transporting containers to multiple ports and transloading them closer to their end customers.

"Sikora stated that the use of various distribution centers by shippers has resulted in a noticeable increase in demand, as it takes a third less time and requires fewer transportation moves, allowing clients to be more nimble."

The global supply chain problems are contributing to the growing demand for an early start to the shipping season and the use of transloading.

PortX Logistics CEO Bryan Kempisty informs CNBC that the company typically has a 18-day lead time to detect supply chain slowdowns and disruptions, allowing customers to make informed decisions on diverting containers to another port or transloading freight.

Kempisty stated that the Suez Canal and Panama Canal disruptions have led to a nearly 20% increase in West Coast ports, resulting in a longer transit time of 60 days from the previous 30 days. This could potentially shift peak season to June, and transloading decisions will also be impacted.

According to Matt Schrapp, CEO of Harbor Trucking, which represents the truck drivers that service the West Coast ports, the typical distribution of containers is 30% bound for the railroad and 70% moved by truck.

"Schrapp stated that approximately half of the transloading will occur, and our ports have the capability to handle more transloading containers."

By offering transloading services, trucking companies can increase their profits by reducing costs associated with container usage and fuel, and improving resource efficiency.

Stifel's director of global logistics & future mobility, Bruce Chan, states that the logistics industry is facing a significant turning point due to the evolving mindset of retailers and importers regarding their supply chains.

"West Coast transit is the most efficient option from a supply chain, efficiency, and ESG standpoint, according to Chan. Logistics companies must adapt to the complexity of the evolving supply chain in order to maintain strong relationships with major shippers and offer diverse services and investments."

The increase in transportation nodes in the logistics system will benefit transport companies such as ITS and , as they can now bring freight into as many as five different ports.

Bascome Majors, a Susquehanna International Group analyst, identified J.B. Hunt and two other large intermodal providers as the companies that would benefit the most from an incremental shift in transports from the East to West Coast due to labor disruption and an increase in transloading off the West Coast.

According to Jason Seidl, Cowen Group air freight and surface transportation analyst, railroad should also benefit from the freight shift, in addition to intermodals like Schneider and JB Hunt.

"Union Pacific can increase its market share by providing a reliable, user-friendly, and consistent transport product, according to Seidl. The main challenge for intermodal is improving the consistency of its business, as truckload rates remain low, making service crucial."

Schneider's intermodal investments can make them more appealing to long-term investors compared to the more volatile over-the-road truckload space, which primarily attracts hedge funds seeking short-term trading opportunities.

""Drayage providers with a significant West Coast presence can benefit from positive tailwinds during the intermodal shift, while trucking may see a recovery in cross-country moves due to their higher costs," Chan stated."

The West Coast container volume rebound will not reach the historical 10-year levels of market share compared to the East Coast, but it will normalize closer to a 50/50 split. In the short term, there will be a significant diversion to the West Coast due to the International Longshoremen's Association strike threat and the Red Sea and Panama Canal diversions.

The freight industry is experiencing a decline in contract rates due to a recession, with significant drops in rates occurring in recent years. This is an important factor for investors to consider.

"Although I believe we'll experience a recovery, it will likely be subdued," Chan stated. "Our market remains in an overcapacity state. A correction in trucking capacity is necessary."

Mexico's growing cross-border trade profile

The transloading opportunity is also increasing in Mexico.

"Cross-border interest is on the rise, according to Seidl. The Surface Transportation Board's approval of the Kansas City Southern merger last year has provided more and better options for shippers. Additionally, Genesee & Wyoming's rail-ferry service between the ports of Mobile, Alabama, and Coatzacoalcos, Veracruz, across the Gulf of Mexico is thriving."

Uber Freight's head of intermodal, D'Andre Larry, reveals that customers are inquiring about the expanding market of cross-border traffic.

"Larry stated that our Mexico business unit is a thriving cross-border unit with a large amount of traffic in and out of Mexico. We engage in transloading at the border and offer intermodal services out of Mexico, as well as trucking services. Customers seek intermodal solutions to capture both cost and carbon savings."