North American railroads are suffering from a severe case of muscle strain as they struggle to meet a record surge in demand for service this year. Through the first eight months of 2004, rail traffic was on a pace to break all previous records, the Association of American Railroads (AAR) reports.

Some of the recent surge in rail freight can be attributed to diverted highway shipments. Faced with rising rates and a scarcity of trucks and drivers, many shippers have turned to the railroads in search of lower freight costs or a replacement for a truckload carrier that doesn't have a driver to haul an extra load.

Thanks to truck diversions and a recovering industrial economy, the railroads now find themselves swamped with more business than they can handle. That's created widespread problems with track and terminal congestion. "We switched a lot of material to rail because of problems with trucking. Now we're having trouble with the railroads," fumes David Ferraino, a logistics manager for Charter Steel in Saukville, Wis. "It's very frustrating."

Although the Class I railroads are working harder than John Henry driving steel and have announced plans to deal with rising volumes of carload and intermodal freight, shippers nevertheless are bracing themselves for a rough ride. "Rail shippers will have to put up with this [situation] until the first quarter of next year," predicts Bernie Thomas, manager of transportation at Packaging Corp. of America in Lake Forest, Ill., which moves 2.2 million tons of paper yearly by rail.

This year's spike in demand caught railroads and shippers alike by surprise. During the first 36 weeks of 2004, North American railroads moved about 12 million carloads, an increase of 3.2 percent over the same period last year. "We're a derived demand," says AAR spokesman Tom White. "As the economy improves, so does demand for freight service. You've got metals up, coal up, chemicals up, grain up, lumber up. The one thing that's down is automotive traffic."

This economic boom isn't confined to the United States; it's a global phenomenon. The roaring international market is reflected in the numbers for intermodal traffic. During the first 36 weeks of this year, the rails handled 7.4 million trailers and containers, a whopping 9.4 percent increase over the same period last year.

The continuing flood of imports has spurred that growth, as more and more containers are off-loaded from ships onto trains for the journey into the heartland of America. In fact, the nation's rail system set a record the last week of August when it carried more than 226,000 trailers and containers in one week. What's especially notable about that record, says White, is that it was set before fall, historically the peak season for rail shipments in the run-up to the Christmas holidays. That record, moreover, is almost certain to be broken soon. "Everybody is predicting import traffic off the West Coast to grow at double-digit rates," says Union Pacific spokesman John Bromley.

But domestic movements—including a significant number tendered by truckload carriers—have also contributed to swelling intermodal volumes. "Part of it is a stronger domestic economy," says White. "And part of it is that the trucking industry has had its own problems with driver shortages and equipment shortages plus the increases in fuel, which have more of an impact on truck than rail. It makes it more appealing for truckers to ship by train since we are more fuel-efficient."

Source: Surface Transportation Board

Track congestion has affected the service that shippers like El-Hakim receives. She says her number one problem is that she can't be sure when her shipments will arrive. "A lane from Alabama to New Jersey used to take 10 to 11 days," she says. "It now takes 8, 12, 15, or 18 days. The main problem is a lack of dependable transit times." (For more shippers' comments on the current quality of rail service, see the sidebar, below.)

Problems with car delays and congestion got so bad that in September, Surface Transportation Board (STB) Chairman Roger Nober convened a meeting where the Class I railroads detailed their plans to keep traffic moving during the peak shipping season. Nearly 400 shippers participated in the forum in Kansas City. "It was encouraging that the rails have definite plans to handle capacity," says El-Hakim, who attended the meeting.

Those plans include going on a hiring spree to ensure a sufficient number of train crews to handle growing traffic levels—somewhat ironic, given that rail carriers have reduced payrolls over the last two decades. Norfolk Southern, for example, said it would hire 1,600 conductor trainees and 330 locomotive engineers. Union Pacific said it will have hired some 5,000 new employees by the end of this year. But it will be months before shippers and carriers see the full effects of the hiring blitz. "The big driver is manpower," says UP's Bromley. "It takes four months to train someone to be a conductor."

The carriers also said they would continue to add equipment. The Kansas City Southern Railroad, for instance, has already increased its locomotive fleet by 10.4 percent since the start of 2004. The Canadian Pacific, meanwhile, plans to lease 500 more hopper cars.

Another strategy is to add more cars to existing trains. The Burlington Northern and Sante Fe Railway, for example, is extending train lengths by 10 to 15 percent. Carriers also plan to add entire trains to their schedules. To provide that service, though, they'll need to spend heavily to expand their terminals and increase trackage. One project already under way is the second set of tracks that the Union Pacific is building alongside its key 760-mile route between El Paso, Texas, and Los Angeles.

All that investment in upgrading infrastructure and improvements to service will come at a price. "In order to justify the investment, the rates are going to go up," forecasts Peter Stone, a principal in the transportation consulting firm Reebie Associates in Stamford, Conn. "Shippers are looking at higher freight rates."

Opinion remains divided about whether the carriers' actions will be enough to solve the problem of rail congestion for next year. "With the steps being taken by railroads like CSX and UP to add crews and power, the situation should start improving by the beginning of next year," says Curt Warfel, president of the North American Rail Shippers Association and manager of customer service and logistics at Eka Chemicals in Marietta, Ga. He expects the economy's cyclical behavior eventually will take some of the pressure off carriers. "I don't see the economy sustaining the (current) rate of growth. We're going to see a slowdown in 2005, and that will help," he adds. "Short term, we've got a problem. Long term, we're okay."

Railroad consultant William J. Rennicke, a vice president with Mercer Management Consulting in New York City, seconds the view that the steps the rail carriers are taking should be able to get service back on track now while preparing for long-term needs. "The railroads are investing to put capacity in the future," he says.

Others aren't so sure. "They (the railroads) didn't catch on that there was going to be a boom, and now they're playing catch up," says Washington, D.C., transportation consultant Robert L. Banks. "There have been some cosmetic changes. But we are a long way from having a stable system we can depend on and that can perform in times of stress."

Bank believes the United States needs a cohesive national transportation policy if it is to have a stable, dependable rail system. "The country has not had a specifically defined and articulated national transportation policy since World War I," he observes. "A national policy would be the first step in the right direction."

In the meantime, most rail shippers say they aren't expecting relief from congestion problems any time soon. Says El-Hakim: "It will take most of the year before the railroads can smooth things out."

The Surface Transportation Board has posted copies of Chairman Roger Nober's slide presentation from the Sept. 9 rail-capacity summit mentioned in this story, along with links to the railroads' presentations showing their plans for managing peak-season traffic. Find them at www.stb.dot.gov under "Items of Interest."