“Let's agree to disagree” is an age-old saying you may be hearing around the railroad industry these days. On one side are the Class I carriers that, in most cases, are barely earning above their cost of capital—but still have pricing power at a time when volumes are largely down. On the other side are shippers that contend rates are excessive and service is still lacking.

Despite the dilemma, one thing is clear: Compared to other modes, the railroad industry is chugging along at a healthy pace, especially when you consider the current state of the economy and the fact that other transportation modes have minimal pricing power and are hand-cuffed by rising fuel costs.

And while 2006 and 2007 represented the top two years for volume in railroad history, it is not a certainty that 2008 will be another record year. Through the first five months of 2008, carload and intermodal loadings are up 1.0 percent and down 3.1 percent respectively.

But even if volumes continue to trend downward the rest of this year that does not mean that service levels will rise and shippers will suddenly be thrilled with the state of the rails.

“Some shippers still have service complaints, but they are not as intense as they were when the railroad industry was moving at full capacity,” says Bob Szabo, executive director and counsel for the shipper action group Consumers United for Rail Equity (CURE).

And while the decline in volumes due to the economy has yielded marginal improvement in service, says Szabo, container export traffic—which has never been a robust type of rail traffic—is now building since the dollar is weak and U.S. goods are more attractive overseas. With the economy expected to rebound slowly, rail carriers appear to be focusing their service on specific types of traffic, like container exports, where they can attract and build for the future.

However, this will not aid captive shippers who continue to have service problems due to the lack of competitive options, says Szabo. While many rail shippers contend that they are not getting their money's worth for the type of service they are receiving, he adds.

It's important to remember that railroad service alone is not the only requirement for improvements on the rails. Other components include continuing operational improvements as well as infrastructure build out that will meet the projected demand for increased future demand on the rails. The U.S. Department of Transportation currently estimates that demand for rail freight transportation—measured in tonnage—will increase 88 percent by 2035.

“Operational improvements are something the railroads work very hard at,” says Brooks Bentz, a partner in Accenture's transportation practice. “There is also a significant effort being made to improve service, as well as add network capacity…but for many it is not perfect and will probably never be. Even if we do get to the point where there is enough capacity, it will lead to the next problem: How do we better utilize what we have?”

A driver for improved rail service and operational efficiency is improved infrastructure expansion initiatives being done by the railroads. In 2006 and 2007, Class I railroads spent $8 billion and $9.4 billion respectively for various service-related projects, such as laying new track, buying new equipment, and making infrastructure improvements, according to the Association of American Railroads (AAR).

At press time, the AAR had not yet released projected 2008 numbers, but figures released separately by Class I carriers indicate 2008 will be flat or slightly down compared to 2007.