Regional and Short Line Railroads in the United States

Regional and Short Line Railroads in the United States Since the Staggers Act of 1980, the number of nonclass I freight railroads has grown by about 260%, and there are now 574 nonclass I freight hauling railroads in the United States. While nonclass I rail holding companies (companies owning multiple nonclass I freight railroads) existed prior to Staggers, the existence of such holding companies proliferated post-Staggers, particularly in the 1990s. Today 341 (59%) of the nonclass I freight railroads and 64.5% of the nonclass I mileage are owned/controlled by 81 holding companies. The buying and sell- ing activity in this market is very active. This article documents this growth and notes the participants in this dynamic industry. In addition, the changing ownership of individually owned nonclass I freight railroads is also documented and problems faced by nonclass I freight railroads are discussed. by W. Bruce Allen, Michael Sussman, and Drew Miller he US currently has seven class I freight regionals 20,978 miles, the locals 21,512 railroads1 (including the two major miles, and the terminal and switching com- Canadian carriers (Canadian National panies 7,425.4 T Prior to the Staggers Rail Act of 1980, and Canadian Pacific) and their three affili- ates (CN’s Illinois Central; Wisconsin Cen- there were about 220 regional and short line tral; and CP’s Soo Line). These railroads railroads.5 Since Staggers, the number of account for approximately 71% of the US class I carriers has shrunk due to mergers rail route mileage, 91% of the freight rev- and definitional changes,6 while the number enue, and 89% of rail employment.2 Accord- of regionals and short lines has grown by ing to the Association of American Rail- about 260%. The Staggers Act encouraged road’s (AAR) Profiles of US Railroads, there the sales of lines that previously would have were 561for-hire, common carrier, freight been abandoned to regionals and short lines hauling railroads operating in the US in and provided an expedited procedure, much 2000.3 Subsequent additions and deletions to easier than the previous abandonment pro- that list found by the authors bring that cedures, in which entities that would retain number to 581 in early 2002 (although it the rail usage of the line were given prefer- must be stressed that the number of railroads ence in the transactions regarding that line. changes frequently through births, deaths, The mergers of the class I carriers also creat- and mergers). ed redundant trunk lines that were pur- The remainder of the rail activity is under- chased by the regional carriers. taken by regional and short line railroads. Class I carriers have become more focused The latest listing by the AAR gives 35 region- on a wholesale type of business—running al railroads and 517 local and terminal and high speed unit and intermodal trains longer switching carriers. Including trackage rights, distances. With expensive labor, the retail the class I operates 122,186 miles, the business to smaller customers requiring time Transportation Quarterly, Vol. 56, No.4, Fall 2002 (77–113). ©2002 Eno Transportation Foundation, Inc., Washington, DC. 77 TRANSPORTATION QUARTERLY / FALL 2002 intensive switching and slow speed opera- (2) The liquidation of the Rock Island Rail- tions was deemed less profitable by the class road and the partial liquidation of the I carriers. Milwaukee Railroad. This scenario provided a business opportunity for the regionals and short lines. With (3) The availability of Federal funds for assis- less expensive labor, less capital intensive tance to new railroads. operations (because of the nonhigh-speed (4) The availability of state (or regional, operations allowing for less investment in local) government funds for acquisition track and motive power), and more manage- and subsidy of new railroads. In some ment attention to the customer (the remote cases, states retain ownership of the from class I headquarters/district office, fixed infrastructure and a private rail- branch line becomes the main line of the road company provides the transporta- regional/short line), short lines could poten- tion; in other cases, the state loans the tially operate a profitable business on lines money for acquisition to the acquiring where class I carriers lost money. railroad; in some cases, the government The situation has proven complementary both owns and operates the line. In the to both parties. Since very little traffic both 1971-1984 period, government authori- originates and terminates on the same short ties owned 51% of the new railroads line, the short line originated traffic travels on established during that time frame.10 class I carriers. Likewise, some traffic originated on a class I terminates on a short line. Levine et al. point out that the 3R Act of However, the traffic does not have to pick up 1973, the 4R Act of 1976, and the Local Rail or be delivered from/to the original shipper/ Service Assistance Act of 1978 all allowed receiver as previously but only picked up/ for operational subsidies for rail branch lines delivered from/to the short line. The labor and that the 4R Act had provisions that intensive retailing is done by the short line.7 made rail abandonment easier.11 Class I carriers have substituted cheap labor Prior to Staggers, Due notes that 56 new (the short line) for expensive labor and have railroads were started in the period 1971- saved capital, too. Short lines benefit since 1979.12 they make a profit from this service. Cus- tomers on the short line benefit because they ‘Ma and Pa’ Owners receive rail service (they have revealed it to be better than the alternatives—since they could Who are the entrepreneurs who have entered always use the alternatives/move/go out of (and exited) the regional and short line mar- business), which would most likely have been ket since 1980 causing it to more than dou- abandoned prior to Staggers.8 ble? Prior to 1980, there were a number of Ma and Pa owners in the business. These are owners of single railroads operating as a for- Start-Up Credit profit business—but many times with an While the Staggers Act is attributed much of inherent love of railroading added (and with- the credit for the start-up of regional and out that love, the capital probably would short line railroads, Due9 points to several have been invested elsewhere). Certain other reasons: industries, e.g., steel, paper, aluminum, ex- tractive raw materials, etc., invested in rail- (1) Conrail’s formation in 1976, where over roads as part of vertical integration in their one-third of the lines of the predecessor industries. Cities, counties, states, and port railroads, were not included in Conrail. authorities owned railroads as part of their 78 US REGIONAL / SHORT LINE RAILROADS industrial development strategies. Termi- face Transportation Board regarding rail nal/switching companies were jointly owned mergers.16 by class I carriers (or a city/port authority) to Table 2 shows the regional railroads in the provide unbiased railroad access to all cus- US. The railroads follow the pattern outlined tomers and interchange among railroads in above. The majority were formed since Stag- a metropolitan area. Shippers on a line to be gers, i.e., post-1980, using redundant trunk abandoned sometime purchased the line. lines of merged class I carriers (although the In addition, some entrepreneurs formed merger may have occurred prior to or after companies, e.g., Pinsly, Emons, Cagy, R.J. Staggers—the former proved difficult to Corman, to operate multiple and spatially abandon under the old abandonment proce- separated railroads. In general, however, the dures). Two are owned by government—the image of the industry was one of Ma and Pa Alaska Railroad, owned by the state, and the operations.13 Texas Pacifico Transportation Co., owned by All of the above exist as owners today and the South Orient (TX) Rural Rail District. certainly new Ma and Pa operators as well Several are owned by class I carriers, i.e., the as governments and industries have entered Chicago, Central and Pacific (by Canadian the market. But by far the leading fuel of the National), The Texas-Mexican Railway growth since 1980 has been the entry of hold- (49% by Kansas City Southern), the Gate- ing companies that own multiple railroads. way Western Railroad (by Kansas City These railroads are formed by entrepreneurs Southern). Others are owned by industries— who view the industry as one of many possi- Utah Rail (by Mueller Industries) and the ble places to put their capital and make Elgin, Joliet, and Eastern (US Steel). The money and by ex-class I railroaders who see Iowa Interstate is 80% owned by shippers on the same monetary possibilities and left class the line (Heartland Corp.). Some of the rest I to take advantage of the opportunity (or are independent and founded prior to Stag- were downsized as class I carriers merged). gers, e.g., Florida East Coast (1912), Provi- Of the approximately 48,000 nonclass I miles dence and Worcester (1973), Tuscola and today, about 31,000 are controlled by or are Saginaw Bay (1977), while others are inde- affiliated with entities that control two or pendent and formed after Staggers, e.g., more US railroads (including class I, govern- Dakota, Minnesota and Eastern (1986), Pad- ment, and nonrail industry control of some ucah and Louisville (1986), and Wisconsin regional and short lines). Eighty-one entities and Southern (1988). But at least 16 of these control 341 of the approximately 574 region- carriers are part of the holding companies al and short line carriers.14 The evolution of formed after Staggers.

Load more