Peak Season Q&A: Larry Gross, President of Gross Transportation Consulting

Logistics Management Group News Editor Jeff Berman recently caught up with Larry Gross, president of Gross Transporation Consulting, about the 2019 Peak Season, trade and tariffs, sourcing, and modal conditions. A transcript of their conversation is below. 

LM: How do you view the 2019 Peak Season so far?

Larry Gross: The 2019 Peak Season is looking pretty subdued compared to last year, but that was to be expected as last year was a weird year, or an exceptional year. To put it into better context, it is useful to look at it across a couple of years.

LM: What is the best way to do that?

Gross: I always divide up intermodal into the domestic side and the international side. That is particularly important this year, because the performance has really been divergent. If I look at international intermodal through November, it is down about 1.4%…it really held up very well, I think, and now the fourth quarter is absolutely going to be negative. The reason is because last year the pre-tariff surge happened, with volume pulled forward from the first quarter into the fourth quarter so the annual comps are going to look really bad. But anytime you look at year-over-year comps, it can say more about the last year than the current year. I would not expect, nor be alarmed, that annual comps are going to go fairly and significantly negative for international in the fourth quarter.

LM: How should that be viewed from a volume perspective?

Gross: If you look at the volumes, they are OK for international. I will be interested to see what happens when the November data comes out…as there are some signs of things weakening. If you look at the AAR (Association of American Railroads) data, the peak was early and very subdued. Keep in mind with the AAR data that there is no distinction between international and domestic; it is more of the 40,000-foot view, when you look at the domestic side.

LM: What about the international side?

Gross: Year-to-date is up 4.9% compared to 2017 [through October], so considering the economy is growing at a 2%-to-2.5% rate, it seems OK to me. With Peak Season, there are so many times people have unrealistic views of what it is. They tend to remember the best-performing ones and then anything less than that will disappoint.

LM: That is in line with how many C-level carrier executives do not view peak in the same way as they did even just a few years ago, due to changing industry fundamentals and dynamics. Do you also see that?

Gross: Yes, I do, and I track long-term seasonality trends, which show that the month of December is becoming more important, because of e-commerce and everybody wanting their goods when they want them. That is a long-term secular trend, not just for this year.

LM: Are there other factors related to how December will become more important?

Gross: I think of every month as stronger or weaker than average. So, if you look at February, it is always weaker than average, and October is always stronger than average. December was always kind of average, and now I think it is going to get stronger than that.

LM: Shifting gears towards the trade outlook and environment, many issues remain. What, in your opinion, can shippers do to mitigate the ongoing effects of the U.S.-China trade war?

Gross: Even when a U.S.-China trade deal is signed, the damage has already been set into motion. Things will never be the same, and this is something that shippers have to learn over and over again, which is the value of diversified sourcing. They had to learn in in regards to Southern California in the mid-2000s, when labor disruptions occurred and everyone got hurt by that. This led them to realize they needed to diversify their port strategy, and that is when you saw the four-corner strategy come into play. They had to learn the hard way that having a successive dependence on a single routing was a bad idea. And now the same thing is going to be learned with regard to sourcing. The geopolitical risks of being completely reliant on China are too great.

LM: Does that come with the expectation that we are increasingly more likely to see sourcing out of places like Vietnam, Malaysia and other countries?

Gross: I think so, yes. The question is how fast that can happen, and the answer is not very fast. But the four-corner strategy did not happen overnight either. These things take years, but they are like glaciers in that they are inexorable.

LM: What happens then if the White House starts to levy tariffs on exports out of these countries?

Gross: Things are going to move either way. It is the same reason why I now conclude there is no driver shortage. Why? Because they will find the drivers, they have to. So, we have an appetite, in this country, for goods, and we are going to get them. The reason you are not seeing any pull-forward now is that everybody is sort of on overload, and it is impossible to react intelligently to a chaotic situation. You just have to buckle your seatbelt.

LM: What about the need, and importance, of shippers taking steps to rebalance inventory levels, in regards to forecasting and demand management?

Gross: I think that it will be more difficult to maintain very lean inventory levels, given the uncertainty and amount of potential disruption. When you put it together with the low reliability of ocean transport…and IMO 2020 and other things, there are just too many variables. It becomes more and more difficult to maintain very lean inventories.

LM: How do you view domestic intermodal as it relates to peak?

Gross: Things are not looking so hot. Year-to-date volume is down 6.2%, according to IANA data, and it is barely even year-to-date through 2017, so there is really no growth in two years. There is no doubt that intermodal has lost share, on the domestic side, versus truck, and this is a function of the changes that are being made as a result of PSR (Precision Scheduled Railroading) and the railroads’ conscious decision to hold pricing in the face of softening market conditions. Intermodal has become less competitive, and, at the same time, railroads have been pruning the network because the railroads are very selective on what they want traffic-wise. The problem is mainly on the railroad domestic container fleet side. That is where the weakness is, much more so than on the private container side.

LM: That sounds like a pretty tough story to tell, right?

Gross: Well, it is unprecedented. This is going to be the first year in which domestic container volume falls year-over-year. It has never happened before, not even during the Great Recession. Domestic containers are now down 4.7% year-over-year; that has just not happened before.

LM: Can that volume be regained?

Gross: I do not expect that volume to be regained, no. I think, though, there are indications lately that things are stabilizing. But I see no prospects, in the near-term, of a bounce-back. And the industry seems to think that current trucking conditions are abnormal, so they are waiting for things to tighten back up. My view is that last year was abnormal so this year is fairly normal. The market is not going to come riding to the rescue.  

LM: What is your take on the impact of IMO 2020?

Gross: Maybe that turns out to be another Y2K. I don’t think it will be a seismic earthquake, but I think it will definitely have an impact.