Relationships between major rail carriers and large shippers have been bumpy to say the least. And while there have been signs that these relationships are being repaired through increased communication and flexibility on both sides, 2002 could lead the parties to a crossroads where things either continue to roll in the right direction or go off track once again.

For the last few years, shippers have cited mergers and carrier consolidation as reasons for significant drops in rail service levels. The captive shipper issue has also been a source of bad feeling between the two sides. For their part, carriers say industry consolidation was inevitable and will minimize interchange issues and mean fewer contracts for shippers to manage.

Market watchers feel the rift could have been closed much further than it was in 2001, but major shipper-backed legislative efforts were put on the back burner while Congress zeroed in on Sept. 11 and related economic legislation.

The railroad industry's era of mass consolidation has, by most accounts, come to an end, but it left a serious scar. In 1980, there were roughly 45-50 class one railroad carriers in the U.S. Today there are six.

"In the past 20 years there have been a lot of mergers, many of which are in the public interest because there were just too many railroads and too much track," says Edward Rastatter, director of rail policy at the National Industrial Transportation League. "So shippers can more easily merge and rationalize their plans and equipment to get rid of excess cost."

Many shippers say the end to mergers has ended an ugly period of declining service levels and increasing occurrences of captive shipper status. But the same shippers say there is still much ground for the rail industry to make up when compared to other transportation modes. The downward spiral has ceased, they say, but the climb back has yet to begin.

Joe Resendes is the North American logistics operations manager at chemicals giant DuPont of Wilmington, Del. and is responsible for DuPont's domestic truck, rail, marine, and air shipping. As one of the nation's largest shippers, DuPont moves close to $200 million in rail freight, mostly in North America, 50% of which is classified as hazardous material. Resendes says DuPont would like to do more of its shipping by rail, but levels of service following the mergers and industry shifts in the mid-1990s, including the breakup of Conrail, still leave doubts.

"After the mergers and the Conrail breakup, service levels in the railroad industry really dropped," says Resendes. "Some of that has died down in the past several months and we're seeing some consistency in service now. The railroads are becoming more consistent around average transit times, but average travel times are still one to two days longer than they were prior to the Conrail split. They need to improve on the variability. If the average time is seven days, then all of the trips should be close to seven days instead of one trip in five days and another in 15. That reliability helps us plan our fleet size and inventory levels."

The Department of Transportation (DOT) is playing a role in trying to keep rail service levels consistent in the rapidly evolving railroad industry. DOT's Surface Transportation Board (STB) has issued two Conrail Merger Oversight Proceedings, monitoring the levels of service seen in the post-breakup companies. The most recent report found that railroads involved "have resolved the service problems resulting from implementation of the merger, that there continue to be no competitive or market power problems stemming from it." The STB's oversight of the Conrail breakup will continue for three more years.

In December 2001, the STB also asked the Association of American Railroads (AAR) to take a lead in addressing complaints about additional charges for interchange between railroads. The issue came to a head when some smaller railroads were attempting to charge Union Pacific (UP) for delays in accepting interchange, while UP says those charges, which may affect shipper cost in the long-term, cannot be implemented without agreement from both railroads or authorization by the STB. Tom White, a spokesperson for the AAR, says increased consolidation of the rail industry has helped the interchange issue, as fewer carriers mean fewer exchanges. And use of interchange service agreements is more clearly defining what each railroad is expected to do at interchange points, smoothing the process and minimizing delays. A project in the Chicago area encourages exchanges to take place outside the congested downtown area on lesser-used tracks, which is helping to relieve congestion.

White says railroads are hearing fewer complaints today about service than they were a year ago. "A lot of shippers will say things are better than they were a year ago. That doesn't mean we are where we want to be, but it means we have made considerable progress. As the mergers have been digested and money has been invested in the system, improvements in service have been noted."

One of the largest rail shippers in the U.S. is UPS, which ships more than 800,000 trailer units by rail annually. UPS is now moving more and more of its nonexpress shipping to rail carriers, but it wasn't always that way. Mike Martini, vice president of corporate transportation at UPS says service suffered in the post-merger era and is now on the mend. Martini says that service levels fell so low in the wake of the Conrail dissolution that UPS moved nearly half of its rail shipping to trucks. But now, rail service levels are more reliable, Martini says.

DuPont's Resendes says one issue that is not improving is the captive shipper problem. He says 75-80% of what DuPont ships by rail is served by only one railroad, leaving DuPont captive to the rates that carriers set, as moving much of its hazardous materials to other modes is not a viable option. "We estimate that the rates are anywhere from 15-30% higher in these cases than if there were competition," Resendes says. "We work with our Washington people and are very active with the American Chemistry Council, the Alliance for Rail Competition, NITL , and various other groups to bring about regulatory or legislative change to increase competition in the rail industry."

Another factor that may contribute to improved rail service levels is the drop in traffic during the second half of 2001. While the drop in shipping may not help revenues for rail carriers, some analysts feel it gives them extra breathing room to devote more resources to addressing service concerns and developing things like online tracking capabilities. Many shippers say the rail industry is far behind other transportation modes in these areas, forcing some large shippers to develop their own tracking systems for rail while in other modes the service is provided by carriers.

"We have a network of people in our businesses that track and trace rail cars daily," Resendes says. "In any other mode, the carrier would be doing that for you. Railroads tend to be very complacent about existing business. They are very much focused on generating new business and don't spend enough time maintaining what they have. Tracking and tracing is a good example of that," he adds.