CEE INGS Twenty-sixth Annual Meeting

Theme: "Markets and Management in an Era of Deregulation"

November 13-15, 1985 Amelia Island Plantation Jacksonville, Florida

Volume XXVI Number 1 1985

TRANSPORTATION RESEARCH FORUM In conjunction with

4CANADIAN TRANSPORTATION RESEARCH FORM 233

Short Line Operations From a Class I Railroad Perspective By James A. Schwinkendorf*

I. INTRODUCTION abandonments by Class I railroads. Many Class I branch lines became uneconomical to operate due to For the past seven years, one of my functions on the limited traffic base and the difficulties of han- The Milwaukee Road has been to act as interface dling small volumes of cars which must be inte- between Milwaukee's Operating Department and the grated with the large volume main line train opera- short line carriers that have recently sprung up in the tions. These problems are worsened by work rule Midwest, largely as a result of abandonments of restrictions and crew consist requirements. since lines of Milwaukee, Chicago and North Western, these lines must compete with profitable lines for Illinois Central Gulf, and rock Island. This paper maintenance dollars, track conditions generally de- describes some of my experiences with the short line teriorate and major rehabilitation ultimately be- carriers and reflects may views of short line opera- comes necessary for long term continued operations. tions. These observations are my own personal Since capital can often bring a greater return else- views and do not necessarily represent those the The where, the Class I determines that these lines should Milwaukee Road Inc. not be continued in operation and applies for aban- donment authority. II. BACKGROUND Short lines view many of the Class I's expense related problems as opportunities. Since many do not employ union labor, it is possible Since the introduction of railroading to the for them to United operate with reduced crews States in the 1830's, Americans have been intrigued at lower wage rates. Unshackled by historic work with the mystique of railroading. In looking through rules, the short line can operate more efficiently. In many the pages of history, we find vast empires created cases, Govern- ment subsidies are available to solve and enormous power amassed by entrepreneurs who the operating cost and track rehabilitation problems. Often, used railroading to achieve their Horatio Algier rise a Gov- ernment Agency buys the line, from poverty to wealth and power beyond most thereby relieving the of short line of capital costs. our imaginations. Many of us might fancy the Since the operation is dream small, the short line has of becoming railroad moguls. With the coming much lower overhead ex- of penses. It is able to more directly the mega-rail systems, the abandonments of rail tailor its operations to the needs of the shipper. Given lines through rationalization, and the social pres- these various efficiencies and a lower cost structure, sures promoting continued rail operations, it is easy the short line to ascertain how can compete with trucking where the Class I carrier the proliferation of short line rail could carriers has come not. In many cases, the short line and the about. The desire to become a rail shippers baron can be achieved, although along the line have a more cooperative in a somewhat relationship, particularly lesser scale, through acquisition and operation if the shippers have in- of a vested in the short line. short line railroad. Newspaper and magazine Since they have made this ac- investment and since the neighborly counts have further glorified the short lines' short line can en- provide closely integrated service !repreneural efforts of rising from the ashes. at a lower cost, the It is shipper favors the short line. important, however, to understand that romantic Despite these oppor- and tunities, however, the short well-meaning efforts must be tested by the line faces a much nar- rules of rower margin between profitability economics and business. Herein lie some inherent and financial di- saster than he usually anticipates. problems that plague many a short line carrier from their burgeoning birth through their rosy-checked youth to their untimely demise. We will now investi- IV. ECONOMIC FACTORS gate some of the economic principles that THAT PLAGUE short line SHORT LINE OPERATIONS operators must face, and balance them against their probability of becoming a successful railroad busi- ness. When beginning to provide his services, the short line is enthused by the rosy prospects of perceived business on his line of railroad and the promise of an III. SHORT LINE PERCEIVED expanded traffic base in the new future. It is rarely OPPORTUNITIES apparent to the short line operator that if potential traffic really existed, the Class I carrier would not Most opportunities to provide short line opera- have abandoned its operations. In many cases, the tions in the Midwest have arisen from the track short line operator finds that he has an abysmally low volume of business and the shippers provide one thousand and one good reasons why the traffic base * Assistant Vice President—Operations Planning, is not increasing. This low level of business activity, The Milwaukee Road, Inc. with its accompanying low level of revenue dollars, 234 TRANSPORTATION RESEARCH FORUM

must be handled on the short line's marginally main- cess of starting a short line, there is little reserve for tained line of railroad. Once a deferred level of inevitable disasters such as derailments, bad maintenance has been allowed to exist for any length weather, or downturns in business. Take, for exam- of time, the real world problems of muddy track, ple, the very cold winters that occur in our upper broken rails, and non-operating locomotives begin midwest. The problem of engines freezing up is to take their toll on the short line carrier's ability to shared by both the short line and the Class I carrier. provide an adequate level of service to his shippers. The Class I carrier typically has facilities and de- Since the traffic of the short line generally moves to vices to thaw out its locomotives and continue oper- a connecting Class I carrier, the short line must ating. In one instance, a short line with three loco- interact with the Class I. He rarely has adequate motives had all of them frozen up due to severe facilities on which to conduct interchange with the weather and had neither the facilities nor the devices Class I carrier, and in order to obtain such facilities, for thawing them out. Thus, while its limited over- must further erode his cash flow by renting or leas- head expenses went on, the short line had no means ing trackage from the Class I carrier for his connec- of generating any revenue income. The response to tion. He must enter into agreements with the Class I this was to stop paying the Class I carrier for bills carrier, and this requires some legal expertise for owed. While this solved the immediate cash outflow which he must also pay. He must be knowledgeable problem of the short line, it left the Class I carrier about rate structures and how his rates interface with holding the bag (which was empty). Lest you think a those of the Class I. This requires agreement as to short line's operating problems occur only in winter, whether there will be joint through rates or they will I have known a carrier who, in the spring of the year, be split on a junction settlement basis. Moreover, the informed the public that due to mushy track, opera- interchange operation between the Class I and the tions would be suspended temporarily. This tempo- short line requires stopping of Class I trains to effect rary suspension occurred roughly three years ago, the transfer of a handful of cars, a situation similar to and operations have yet to be reinstituted. that when the Class I operated the line itself. Thus Of course, weather is not the only hurdle facing a the short line continues to present the Class I with short line. Take, for example, another short line some of the same operating problems that the Class I who, in order to comply with FRA locomotive in- had hoped to resolve through its abandonment of the spection requirements, had to visually inspect the line in order to stop handling this limited volume of underside of his locomotives once a month. Since traffic. the short line had no inspection pit, he instead sawed out ties from the middle of a bridge in order to comply with the inspection requirement (this is the V. SHORT LINE SHORTFALLS same carrier that increased the load-limit restriction on the bridge mentioned previously). While inno- By its very nature, a railroad must be composed of vative and ingenious in nature, these hardly can be multi-faceted disciplines which combine to provide considered as long-term solutions to every day typ- a satisfactory level of service at a reasonable cost ical railroad problems. When a 125 ton locomotive while still insuring a profit for the company. Short is derailed, it takes the same effort and largely the lines are typically lacking in two areas vital to their same costs to rerail it for either a short line or a Class ultimate success, namely, depth of managerial exper- I railroad, something that is largely ignored when tise and capitalization. the short line is estimating its expenses versus reve- It is extremely difficult for a short line to have nues. individuals who are experts in all of the fields re- quired to successfully operate a railroad. Short line operators often pride themselves on their ability to VI. POLITICAL AND SOCIAL ASPECTS get along on a shoestring. This perhaps is not a matter of pride but the only means by which they can With the ever increasing abandonments of branch survive even in the short run. It is not uncommon to lines by the Class I carriers, state and local officials find short line operators who are overwhelmed by have taken up the crusade to preserve rail operations the complexity of the requirements of operating a and protect the local business community served by railroad or who take a naively simple approach to those railroad lines. Generally, it has been the at- complex problems. titude of the political agencies to ensure continued An example of this was a poorly managed short rail operation at any cost (even if those costs are to line who had taken over the operation of a branch be borne by the Class I carrier through non-payment line of a Class I carrier. This branch included a of short line bills). These agencies, in many cases, significant bridge which for years had been load- have used the media to cast the Class I railroad in an limit restricted to 220,000 pounds. The line had unfavorable light as being uncooperative with the been looked at by two other Class I carriers, both of short line carrier. The pressure for continued rail whom refused to buy the line for $1.00 because of operations is unresponsive to the fact that the Class I the potential liability for removing the bridge. The railroads have been plagued, in some cases, by a short line operator inspected the bridge and immedi- series of short line operators who play trains for a ately declared that it should be capable of handling short time, amass large amounts of expenses owing loads with a load limit of 263,000 pounds. I am not to the Class I, and then quietly disappear into the aware that time and rust improve the structural integ- sunset. These are then followed by yet another oper- rity of structures, but according to the short line ator with high hopes and no money. The magnitude operator, a unique set of rules of physics applied in of these failures is not trivial. As of this writing, his case. short lines owe The Milwaukee Road $1.2 million in Often coupled with the problem of managerial interline settlements and overdue trackage rights in- ineptness is a typical under-capitalization. So much come. It is ironic that the Class I seems to incur time, effort, and money goes into the painful pro- continued expenses for branch line operations, SHORT LINE OPERATIONS FROM A CLASS I RAILROAD PERSPECTIVE 235

TABLE 1 SHORT LINES

NAME STATUS Brillion & Forest Junction Railroad Company No longer operating. Cedar Valley Railroad Operating. Central Wisconsin Railroad Company Defunct and bankrupt. Had taken over operations of Chicago, Madison and Northern. Chicago, Madison & Northern Defunct and bankrupt. Railway Company Colorado & Eastern Railway Company Not yet operating in Iowa. Plans to take over operations of Ottumwa Connecting Railroad. Escanaba & Lake Superior Operating. Behind in interline Railway' Company payments to Milwaukee. Keota Washington Defunct and bankrupt. Transportation Company Kewash Railroad, Inc. Was to take over operations of Keota Washington Transportation Company but never commenced operating. Indiana Hi-Rail Corporation Operating. Planned to take over operations at Clark Maritime facility but proposal fell through. Operating. Took over operations between Bureau, Iowa Interstate Railroad, Ltd. Illinois and Council Bluffs, Iowa from Iowa Railroad. Iowa Northern Railway Operating. Iowa Railroad Company No longer operating as a railroad. Bankrupt. M&G Rail Not yet operating. Proposes to operate Clark Maritime port facility at Jeffersonville, Indiana. Marinette, Tomahawk & Operating. A wholly-owned Western Railroad Company subsidiary of Owens-Illinois Company. Minnesota Valley Transportation Company, Operating. In default of Inc. Southwest trackage rights payments to Milwaukee. Northern Missouri Railroad Operating and contemplates new connection with Company Milwaukee Road at Chillicothe, Missouri. Ottumwa Connecting Railroad Defunct and bankrupt. Southeastern Wisconsin Defunct and bankrupt. Transportation Company Wisconsin & Calumet Operating on a temporary Railroad Company basis. Plans to institute operations over most of the lines formerly operated by Central Wisconsin Railroad Company. Wisconsin & Southern Operating but undergoing Railroad Company financial restructuring. Wisconsin & Western Railroad Defunct and bankrupt. Company

whether it operates the line itself or a short line does had contact and their current status. The most per- so. plexing problem is that the series of bankruptcies and terminations of service seem not to deter an ever extending line of potential entrepreneurs who believe VII. THE SHORT LINE RESULT that they can make a short line operation succeed. Their hopes and dreams are bolstered by the local In dealing with short lines over the past seven and state political process, as well as regulatory years, I have observed an all to repetitive process bodies who seem enamored with granting authority that I fear will continue to plague Class I railroads. to operate while leaving the problem of payment of When the short line operator comes in to talk about debts to the bankruptcy courts. There probably are a potential operations, he is enthralled with his hopes number of short line operations that can and should of success, aggravated by the red tape involved in succeed in the long run, but their number is vastly interfacing with a Class I railroad, and downright less than the proliferation that currently exists. Per- insulted when it is suggested that he may not pay his haps as entities in the existing socio-economic struc- bills in the future. While there are indeed some short ture, Class I railroads must continue to bear certain line operators who have set up their operations on a responsibilities of prolonging short line operations. realistic economic base, the majority have fallen by Nonetheless, until such time as short line problems the wayside due to the inability to correctly assess and shortfalls can be evaluated and resolved, the the economic environment in which they must exist. short line will continue to be regarded by the Class I The Table 1 lists the short lines with whom I have railroads as a disaster just waiting to happen.