For the last few years, railroads have been struggling to meet rising demand and overcome service problems that have been caused, in part, by the continuing year-over-year rise in freight volumes.

According to the Association of American Railroads (AAR), Class 1 railroads moved a record 17.2 million carloads in 2005, up 0.9 percent from 2004, and 11.7 million intermodal loadings of trailers and containers, up 6.4 percent from 2004. Similar growth rates continued in the first half of this year, with carload and intermodal up more than 1 percent and more than 6 percent, respectively.

Rising freight volumes don't necessarily mean that shippers are satisfied with rail service, says Terry Whiteside, a transportation consultant and chairman of the shipper group Alliance for Rail Competition. Much of that growth is driven by intermodal and thus reflects international trade trends, he says. Besides, the service levels experienced by shippers of traditional bulk commodities tell a different story.

"Captive freight on the rails, such as coal, agriculture, and chemicals, is struggling," says Whiteside. Service in that sector is getting worse, and transit times are erratic, he contends.

The consequences for the U.S. economy are significant, he believes. "When a shipper puts a new plant on a line; goes to a railroad to get an estimate for new transit times, which usually rise by 15 to 20 percent; sizes the car fleet, which takes a year-and-a-half to build; and then learns that the railroad can't come within 50 percent of those numbers—it affects America's global competitiveness."

One reason that carriers are still having trouble meeting demand is inadequate infrastructure. But the railroads are taking a proactive approach to improving the situation, as evidenced by data released by the AAR in March. Those numbers indicate that carriers will spend more than $8 billion this year for laying new track, buying new equipment, and making infrastructure improvements—a 21 percent increase over 2005's investments.

Some examples of infrastructure initiatives include BNSF Railway Company's plan to spend $1.4 billion on capacity expansion and replacing track, signal systems, and other structures. Union Pacific is doubling some tracks on its line from the West Coast to the Midwest and is collaborating with BNSF to triple-track their lines out of the Powder River Basin on the Montana-Wyoming border. Norfolk Southern and Kansas City Southern, meanwhile, are working on a joint venture that will improve service and expand capacity on the Meridian Speedway between Meridian, Miss. and Shreveport, La.

While such projects indicate that railroads are making progress when it comes to service quality, the reality is that it will be several years before shippers' needs are met, says William J. Rennicke, director of Mercer Management Consulting.

"Railroads are in what appears to be an irreversible growth trend," says Rennicke. "They are taking the first steps toward making improvements, but things are not 'fixed.' Railroads are highly complex, and it is not easy to just add infrastructure, just like it is not easy to add two lanes to a highway. The railroads are working as fast as possible to get things done, but there will always be dissatisfaction from shippers on the actual progress being made."