An unprecedented surge in traffic combined with shifting rules and demographics in the freight industry has caught US railroads off guard, creating problems for thousands of companies that rely on the system.

Fears that the problem could worsen during the upcoming fall peak in rail traffic have been expressed by customers and regulators alike.

The chairman of the government’s Surface Transportation Board, Roger Nober, queried the level of preparedness in a June letter to the CEOs of the largest railroads. He said that “as all who follow the freight rail industry are aware, this increase in demand is putting significant strains on the freight rail system and challenging the ability of Class I carriers to provide the necessary crew, equipment and track capacity to carry this freight.”

Industry representatives admit to being less than fully prepared to handle the upswing in traffic.

“We’re continuing to move record volumes,” said Tom White, a spokesman for the American Association of Railroads. “Obviously there are strains in the system.”

A number of operating statistics leave little doubt as to whether the system is under pressure and which railroads are most affected. For example, average train speed during the second quarter was 7.6% lower than a year ago at the six largest North American railroads while average terminal dwell time was 14% higher. Although every railroad has seen decreased speeds, the largest US carrier, Union Pacific, stands out with an 11.2% decline. It also leads in increased terminal dwell with a whopping 27.9% increase, though CSX is not far behind with a 19.1% increase.

“It’s primarily isolated to Union Pacific,” said James Valentine, a rail industry analyst at Morgan Stanley, though he said similar issues exist across the entire industry.

“This started about nine months ago,” said Union Pacific spokesman John Bromley. “We started seeing very sharp increases in traffic, particularly in international trade, with imports from China.”

Bromley notes that the whole industry relied on much lower economic growth estimates last year than what turned out to be the case. For UP, this was compounded by its location in the western US and its large exposure to Asian imports. “In 2003 we were very conservative in estimating our manpower needs and, as it turns out, too conservative,” he said.

An aging industry

The industry’s reluctance in recent years to make large investments in capacity is understandable. Facing competition from other modes of transport, railroad pricing has gone down every year for the last thirty in real terms through 2002, with companies putting the emphasis on consolidation and cost-savings. The lack of expansion can be seen in the average age of a railroad worker - at 45 they are 10 years older than average nationwide.

“We’re an aging industry,” said White. “In the 80’s and 90’s we hired very few new people.”

A new law that went into effect in 2002 that lowered the retirement age in the industry to 60 from 62 has put further strains on the suddenly tight manpower situation.

The shortage of crew and of locomotives has led to a wave of hiring. UP’s Bromley said that 4,300 workers are being hired and trained by his company this year and that this should stay at about 2,200 a year in the near future.

“We don’t have enough people to run the number of trains so we’ve had an extremely aggressive hiring program,” he said.

It has also led to a jump in capital expenditures with UP alone buying 500 new locomotives this year. This is evident in the financial release of GE Transportation Systems which had 234 locomotives delivered in the second quarter, up 82% year-on-year. But such orders involve lag time.

“You can’t call GE Transportation Systems in Erie, Pennsylvania and say I need a bunch of locomotives right away,” said Gary Sease, a spokesman for CSX.

The problem extends to and - and is exacerbated by - the woes of the broader freight industry.

Truckers facing their own difficulties

“One thing people have