These are frustrating times for the nation's railroads. At the start of the new millennium, the sector was humming along, fueled by heavy trade in basic commodities as well as a spike in imports. Intermodal service quality was on the rise; capital spending on locomotives, railcars and infrastructure was strong, and some messy merger problems were finally being cleaned up. Even the serious congestion on Western railroads, caused by a surge of containers from Asia, proved to be a temporary glitch.

Then came the triple whammy of recession, recovery and bad weather. Rail volumes peaked in 2006, according to Matthew K. Rose, chief executive officer of BNSF Railway Co., then hit bottom three years later as a result of the Great Recession. The industry started to recover in the third quarter of 2009, but the path back to prosperity would be anything but smooth.

With last year's sudden resurgence of customer demand, the railroads were caught short. They had furloughed huge amounts of equipment, and were slow in bringing it back. Overall, the industry decreased units by 20 percent during the trough of the recession.

"We haven't seen that in modern railroading history," Rose said at last month's annual meeting of the North American Rail Shippers Association (NARS) in San Francisco. At one point, he noted, a total of 400,000 railcars were off line. "Some short lines had turned themselves into storage facilities. We were kind of chasing the demand up."

Last year saw growth of 11.5 percent, but the rails struggled to keep pace, especially on the labor side. Then, just when the industry might be expected to find its footing, the nation was hit by severe weather conditions, including flooding along the Mississippi River and tornados in the Midwest.

Rail services across the country were seriously impacted. "Not since 1996-97 have we seen these kinds of disruptions in terms of service outages," Rose said. "We've been dealt some very difficult hands to play." BNSF workers had to don wetsuits in order to inspect a bridge over the Mississippi.

None of this has stopped the railroads from spending money on improving the system. Rose said the industry maintained capital-spending levels throughout 2009, acquiring some 2,000 locomotives (even as the railroads were keeping all that equipment out of service). BNSF plans to invest more than $3.5bn this year in improvements to its core network; Rose predicted total industry expenditures of $12.6bn for 2011, up from $10.7bn last year.

New railcar orders in the first quarter of 2011 were "fantastic," said Eric Starks, present of logistics consultancy FTR Associates, at the NARS conference. "It suggests that we're going to continue to see some healthy demand in the market."

Industry tribulations aside, intermodal remains the railroads' biggest success story of recent years. For years, many transcontinental shippers shied away from rail in favor of long-haul truck, which was faster and more reliable than trains. The soaring price of fuel, coupled with a chronic shortage of drivers, has caused them to take another look. At the same time, the railroads have been getting their act together on intermodal service quality.

Domestic intermodal moves have hit record levels in recent months. "I've never seen domestic freight this strong coming out of recession," said Starks. He believes the market will grow as fast or faster than international freight over the next several years. The 53-foot container, he said, "is becoming the equipment of choice."

"This is a terrific time in intermodal," agreed Mark Yeager, president and chief executive officer of Hub Group, Inc. "There's more positive momentum than I've ever seen in my career." Four thousand containers are being added this year to accommodate increased demand for capacity by shippers, he said.

The international side of intermodal is trending along similar lines, with volumes up by 18 percent in 2010, according to Yeager. Between 2006 and 2010, intermodal's share of the international market rose from 5.5 percent to 7.5 percent. The biggest growth area has been in corridors of between 500 to 1,000 miles, which in the past were considered too short to benefit from the economics of rail. High gas prices have a wonderful way of forcing shippers into a new way of thinking about their logistics networks.

Lowe's Companies Inc., the nationwide chain of home improvement stores, is among the major retailers to embrace intermodal in recent years. Vice president of transportation Steve Palmer said the company has been shifting over to rail for shorter lengths of haul, in the neighborhood of 500 to 600 miles. Between 2006 and 2010, Lowe's boosted its use of domestic intermodal from 18,000 to 56,000 loads. Palmer said the option saves money on energy costs while offering more capacity and a higher number of accepted loads than over-the-road truck.

"We are in this to stay," he said. "As the economy turned down, we didn't go back to over-the-road. Intermodal has been a real success for us."

Lowe's does have some long-term concerns about intermodal, including the question of consistent transit times and pricing policies, safety issues related to drayage, and the distance between intermodal ramps and the retailer's distribution centers. In addition, there are signs that rail capacity is tightening. Starks recommended that shippers act quickly to lock up space. "In some cases, it may be too late," he said.

Yeager said the industry's growth trend could be reversed if there's a serious deterioration of service levels, whether from natural causes or excessive demand. So railroads will need to be diligent about those aspects over which they have control, then hope for the best. Right now, though, it would appear that the industry has managed to weather several years of bad luck, and is getting back on track.

- Robert J. Bowman, SupplyChainBrain

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