How the Panama Canal Railway Became Incredibly Profitable, and Why the Canal Expansion Will Only Help • Story and Photos by Peter A

THE BIGGEST LITTLE RAILROAD ON EARTH How the Panama Canal Railway became incredibly profitable, and why the canal expansion will only help • Story and photos by Peter A. Hansen

Partners in trade: The Port of Balboa and the Panama Canal Railway are adjacent to each other on the Pacific side of the canal. The Miraflores Locks are visible in the distance at upper right. Inset: Mogul-type locomotives were the principal freight and passenger power from the days of the canal’s construction until the end of steam. Here, 2-6-0 No. 662 leaves Panama City in June 1930. Steam-era image: James H. Harrison collection

© 2013 Kalmbach Publishing Co. This materialwww.TrainsMag.com may not be reproduced 29in any form without permission from the publisher. www.TrainsMag.com Caribbean Sea Atlantic Intermodal Terminal PANAMA Colón Maintenance facility Map area CANAL

Panama RAILWAY Gatún Locks (3 locks) Monte Lirio causeway Route realigned Monte Lirio siding Lake e Madden 1999 k a L n ú t a G FORMER CANAL PANAMA

Isla Barro ZONE (1903-1979) r e Colorado iv R Gamboa siding s e r g a h

C

Culebra Cut 1.3% grade Paraíso Miraflores Pedro Miguel Locks Tunnel N (1 lock) Original (pre-canal) railroad Miraflores Locks Present (post-canal) railroad (2 locks) Abandoned in 1999 Pacific Corozal Intermodal 0 Scale 15 miles Terminal Panama City © 2014 Kalmbach Publishing Co., TRAINS: Rick Johnson and Robert Wegner Balboa La Boca 400 Profile 200 Feet 0 Gulf of Panama 0 5 10 15 20 25 30 35 40 45 miles

Trucks are perpetually in motion, constantly cycling containers between the docks and pires, but he did have occasion to meet a lot sage. It was not without its rigors, however. ception. This “other PRR” was only 47 ditch. (The canal isn’t entirely a ditch: man- down as president and CEO of the Santa Fe the intermodal terminal on the Pacific side. of people in the Latin American business The jungle was dense, the weather was miles long, but once opened it charged $5 made Lake Gatún accounts for about half Railway three years earlier. Haverty and F40 No. 1863 has just arrived with a train. community. Some of them were pitching a steamy when it wasn’t teeming with rain, for a one-way passage across the Isthmus, its length, though the 9-mile Culebra Cut Lanigan had known each other for years. concept called the Alpha-Omega project, and frequently fatal tropical diseases were and that was for people who walked. It cost was a truly gargantuan work of excavation.) Each in his own way, they were important ome 3.5 million years ago, during which would have created a rail line be- an ever-present threat. $10 to ride in second class, an astounding The railroad remained active during the players in the intermodal revolution, and the Pliocene Epoch, an isthmus tween Atlantic and Pacific ports in South- Most of the people who got rich from $25 in first class, and ten cents a pound for days of U.S. control, since it was the prima- the new Panama Canal Railway would be rose up from the sea to separate ern Mexico. Similar projects were envi- the gold rush weren’t the argonauts them- baggage. (A dollar in 1855 had about the ry means of transporting goods and pas- all about intermodalism. the Atlantic and Pacific oceans. sioned in Nicaragua and Costa Rica, but selves; they were the people who provided same spending power as $30 today.) Atlan- sengers within the Canal Zone. Carload “Had it not been for Benedetti and Lani- The implications of this accident of Benedetti thought they all required too goods and services that the gold-seekers tic-bound traffic was just as profitable, freight is not a part of the modern rail- gan twisting my arm,” Haverty recalls good- geology went unremarked until much capital to be feasible. needed. The Panama Railroad and its since the railroad was the principal means road’s business model, but most industrial naturedly, “I never would have gone to Pan- 1513, when Spanish explorer Vas- And then he found the Panama Rail- founder, William H. Aspinwall, were no ex- of shipping gold to the eastern U.S. The buildings in the former Canal Zone have ama.” But the Mi-Jack men didn’t know coS Nuñez de Balboa stood atop a hill in road. Mi-Jack was part-owner of a small railroad’s expenses were commensurately remnants of their old spur tracks. railroading like Haverty did, and they need- Panama and became the first European to container port in Cristóbal, a part of Colón high, however: Its initial construction cost ed him to provide a reality check. The rail- glimpse the Pacific. In the ensuing centu- on Panama’s Atlantic coast, and Benedetti was $8 million, and Panama’s jungle and ‘I don’t have room for you on Tuesday’ road was so dilapidated that it took 4 hours ries, the Spanish dreamed of a canal, the met government officials who were inter- rivers were forever threatening to swallow “Dario is not only the father of the rail- for Haverty and Benedetti to ride from Bal- French tried to build one and failed, and fi- ested in privatizing the railroad. The line the tracks. Still, investors loved the railroad. road,” says Tom Kenna, Panama Canal boa to Colón, perched on the pilot deck of a nally the Americans succeeded. All of them had fallen into disuse and ruin, but the im- It recouped its initial investment within Railway’s president and director general, locomotive. Still, Haverty saw potential. He were on to something: There is money to be portant thing was that the right-of-way for seven years, the stock paid dividends as “he’s the most patient human being I’ve was so impressed that he took the idea to his made in uniting the world’s two great a land bridge already existed. Like flecks of high as 44 percent in the early days, and at ever met.” That trait would serve Benedetti board of directors at Kansas City Southern oceans. But the most reliably profitable way gold in the muck of a stream, it would need $295, its shares were once the most highly well as he methodically went about reviv- Railway shortly after he became its president to do so may be with trains instead of ships. to be cleaned up, but the riches were there. priced on the New York Stock Exchange. ing the railroad. If conjuring empires wasn’t and CEO in 1995. That’s how the Panama Enter Dario Benedetti. In the 1990s, he The analogy is an apt one, because the The Panama Railroad was the first a part of his job description, neither was Canal Railway became a partnership be- had become one more in a long line of Panama Railroad was a child of the Califor- transcontinental railroad, but the world building railroads. But he did know two tween KCS and Mi-Jack. dreamers. He was an international sales nia gold rush, completed in 1855. In the moved on when that other transcontinen- people who could pull it off, provided he The business model was unique in all manager with Mi-Jack Products, an Illi- mid-19th century, there was no easy way to tal, the Union Pacific-Central Pacific, was could get them interested. The first was his the world. Think of a giant “X,” with ships nois-based manufacturer of rubber-tire get to California from the eastern U.S. The completed in 1869. Panama’s railroad was boss, Mike Lanigan, founder and CEO of converging from Atlantic and Pacific, north gantry cranes that are used in ports and in- ’49ers either went overland, or by sea Cargo Operations Manager Jose Williams revived when the canal builders showed up, Mi-Jack. The second was Mike Haverty, and south, with the crux at Panama. A ship termodal terminals the world over. Strictly around Cape Horn, or across the Isthmus, monitors the movements of drays between since it was the only feasible way to carry who was running his own transportation originating in Hong Kong might carry con- speaking, it wasn’t his job to conjure em- which generally afforded the fastest pas- the intermodal terminal and the port. off the spoil from excavation of the big investment firm in 1994 after stepping tainers bound for several destinations in

30 Trains JANUARY 2014 www.TrainsMag.com 31 the Atlantic basin. At some point, that ship ship, and it took them a full day longer to vessel discharge. And that’s just Maersk. Panama Canal Railway to better suggest will dock, and its containers will be par- get to New York. The minute that started to Meantime, you have APL saying, ‘Wait a where it ran within the country. celed out among ships going to the various work, we knew we had something.” minute, I gotta have some of that.’ And Later skeptics would include the ocean Atlantic ports. Maersk Lines, for example, The cost advantages to the ocean ship- then you have MSC, Evergreen, and so on shipping companies, the same customers has an Atlantic transshipment center at pers can be eye-popping, both in terms of — to the point that the railroad is actually the fledgling Panama Canal Railway was Kingston, Jamaica. Why not unload the capital expense and operating cost. Again, picking who they’re going to have: ‘I don’t targeting. Kenna, who came to the railroad ship from Hong Kong on the Pacific side of Starling offers an example: “Let’s say you’re have room for you on Tuesday…’” from ocean carrier Hapag-Lloyd, admits the canal and use the railroad to get con- an ocean carrier, and you want to sail from that he didn’t get it at first. “In my world, tainers to the Atlantic? The railroad hauls Hong Kong every Friday. It’ll take eight Field of dreams the rule of thumb was that it didn’t make the containers “in-bond,” meaning that vessels to provide every-Friday service It’s remarkable that Benedetti, Haverty, sense to put a container on a train for less they’re sealed in transit and don’t have to across the Pacific and into the Caribbean. and Lanigan all saw the potential immedi- than 500 miles.” Other shipping firms were undergo customs inspection, and the Now, if Maersk does its transshipment in ately, because over the next several years, puzzled, too. “They thought the railroad Colón free trade zone at the railroad’s At- Panama instead of at Kingston, they can do almost everyone else was either skeptical or would never get off the ground,” Haverty lantic terminal means that the containers it with seven vessels instead of eight. [Each didn’t grasp the model. First came the Pan- recalls. “We saw some economies of scale can go to another ship duty-free. From a vessel costs about $30 million.] So they’ve amanian government, which was prepared that the ocean carriers didn’t see at first be- customs standpoint, the railroad functions saved the capital expense of an entire ship. to grant a concession, but without terminal cause rail didn’t fit their traditional business exactly as the canal does: It’s as though the “With only seven vessels, they save 104 properties on either end. The terminals model for Panama. Service and economics containers never left the ship. transits a year — one a week in each direc- were indispensable to the business model, ultimately prevailed.” Why would an ocean carrier want to do tion — and a transit costs about $300,000. and the two Mikes didn’t want the railroad One shipping guy who did get it was this? Two reasons: speed and cost avoid- So now they have another $30 million or so without them, but the land had already Starling. He was a vice president in Hong The morning commuter train simmers at the new Panama City passenger terminal. The ance. “We can load a train in an hour and a to play with. Then I ask the question, what been given to port operator Hutchison Kong with container line APL when Bene- train has an F40 on each end, precluding the need to turn the consist at each end. half, and it’s on the other side 75 minutes does it cost to discharge the vessel on the Whampoa, Ltd. An arduous 18-month ne- detti came to town with Panama Canal later,” says Kansas City Southern President Pacific side and move the containers across gotiation ensued, involving the govern- Railway’s global dog-and-pony show. Star- Jack are 50/50 partners.) It was a gutsy in- ery morning, greeting the commuters by and CEO Dave Starling. “The minute it’s by rail? About $27 million. So now they’ve ment, the port operator, and the Mi-Jack- ling was facing a job relocation he didn’t vestment, especially considering the skepti- name, and they return the greeting. Most of out our gate on the other side, it’s at the saved $33 million. [$30 million on the Kansas City Southern team. Benedetti particularly want to make, and when cism of the ocean carriers. It comes as no them live in Panama City and work in the port because we’re contiguous to the ports eighth ship, and $3 million on Panamanian philosophically describes the period as “an Benedetti made his pitch, Starling began surprise when Lanigan says, “It was pretty Colón free trade zone, and they’re among at both of our terminals.” Starling gives a transit.] The service is actually faster than if educational process, convincing Hutchison thinking about more than just being a cus- scary, and there were a lot of sleepless the country’s movers and shakers. The train real-life example: “A vessel comes up from they used Kingston for transshipment, plus Whampoa and the highest levels of the tomer. He had spent 13 years in operations nights. We invested over $100 million consists of six cars, mostly of Budd origin, Chile with produce on it. It gets to our Pa- there’s no market in Kingston. When the Panamanian government that this was in with Frisco and Burlington Northern and without a single customer. But Mike but also including an ex-Southern Pacific cific terminal in the morning, and it’s on a railroad brings it into the Atlantic side of their interests.” Finally, they saw the light, 10 years with APL, with a stint at Mi-Jack Haverty’s expertise confirmed everything “terrace dome” car, which SP had converted ship on the Atlantic side bound for New the canal, there’s a $30 billion-a-year free and the investors received a 50-year con- in between. He knew railroading, contain- we thought we had. It was a field of from a Pullman tavern-lounge in 1955. The York that afternoon. Another carrier was trade zone. So they started doing that, and cession to operate the line, with terminals er shipping, terminal operations, and both dreams: If you build it, they will come.” train is frequently chartered for shore ex- transiting the canal without taking it off the it just exploded. You’re talking about a full- included. The property was renamed the Mikes: “a perfect fit,” in Haverty’s words. cursions by cruise lines, making one or “It was June 1999,” Starling recalls, “and What’s good for the canal is good more round trips between its morning and Gamboa siding, near the midpoint of the the railroad hadn’t started yet. I was in- for the railroad evening commuter assignments. It’s proba- railroad, was lengthened in early 2012. trigued because it was an opportunity to “Whenever people talk about Dave bly the plushest commuter train anywhere. Here, track workers connect two segments build a new railroad. You don’t get to do Starling, they mention the Kenna’s connections often of continuous welded rail while a ballast that very often.” rail experience, the terminal come in handy. “There’s no train waits. And build it, he did. Starling became experience,” Kenna observes. Association of American Rail- Panama Canal Railway’s president, and in “That’s nothing. His real tal- roads here: We are the rail- the following two years, the railroad was re- ent is people. I had 15 years road industry. Unauthorized invented. “We removed the rail, the ties, ev- in shipping, happy as a bee, incursions happen every sin- erything,” he recalls, “and started over. We but somehow he charmed me gle day because the country did 18 inches of sub-ballast, 22 feet wide into coming to the railroad.” has no railroad mentality. across the whole system, rolled and com- Kenna, too, had indis- There was one place where we pacted. You could drive across it at 70 mph pensable qualities. He knew had a crossing with gates and before we put the ties on top of it.” The re- shipping, of course, but he everything. All of a sudden — building is even more impressive consider- also holds dual citizenship in big project! — they start ing that everything had to be imported. the U.S. and Panama, where building a roundabout. Right “There’s no rail material in Panama,” Star- he has spent most of his life. over the crossing, and com- ling continues, “so everything to build the He knows the culture and he Tom Kenna pletely forgetting the railroad! railroad had to come by ship, even the bal- knows the nation’s govern- I go to the authorities and say, last, which came from Nova Scotia.” Con- ment and business leaders. In a small ‘You can’t do this,’ and they say, ‘Why not?’” tinuously welded 136-pound rail was laid country like Panama, where it often mat- The concession agreement does include on concrete ties, a necessity in light of the ters who you know, Starling needed a man terms that guarantee the right-of-way, but moist climate. Now, after 12 years of opera- like Kenna as his second-in-command. To- from a practical standpoint, Kenna has to tion, the rail has been ground exactly once. gether, they worked 14-hour days for more tread lightly. “We’re guests here.” The initial cost was $35 million (with an- than two years, rebuilding and selling the The incursions are both blessing and other $75 million for rolling stock and ter- railroad. “It was a crazy time — more a curse, because many of them stem from minals), but the railroad was built to last for lifestyle than a job,” Kenna says, “and we Panama’s booming economy, and ultimate- the entire 50-year concession. spent more time with the railroad than we ly, that’s good for the railroad. Kenna de- The financing came from KCS and Mi- did with our wives.” scribes the results of the U.S. exit from Pan- Jack in equal 45 percent shares, with 10 The pace is a little saner now that the ama in 2000: “We were living very percent support from the International Fi- Panama Canal Railway has matured, but complacently off the American bases, but nance Corp. (The finance corporation was Kenna’s enthusiasm is undiminished. He’s when the U.S. left, Panama had to find a bought out in 2006, and now KCS and Mi- at the Balboa passenger station almost ev- way to survive. We went out and started

www.TrainsMag.com 33 We high-rail from one end of the rail- received a new prime mover, which was road to the other, and Hooper recounts the lifted into place by a Mi-Jack crane. Daniel adventures and challenges of railroading in Chanis supervised the job. He ran his own the jungle, like the time he ran over a huge machine shop and did contract work for boa constrictor on the tracks. There was no the Panama Canal Railway until the rail- way it could have survived getting run over road offered to buy his firm and take his by four flanged wheels, so Hooper stopped employees onto the payroll. He now reports his high-railer and got down to remove the to Colin Corrigan, an American who has snake, only to find it slithering off the tracks lived most of his life in the Canal Zone and under its own power. Another high-rail stayed put when his fellow “Zonians” went truck wasn’t so fortunate: It hit a crocodile home. Corrigan retired from a career with and went flying into the ditch. The jungle is the canal and became the railroad’s chief brimming with life, and critters are always mechanical officer. on the right-of-way, though they usually Their job is mission-critical because this scatter when confronted by locomotives. At is a scheduled railroad that has to be kept another location, Hooper removes a large moving. Every 60 to 90 minutes, around turtle from the tracks: It was probably the clock, a train leaves one terminal, dropped there by waterfowl, who know it bound for the other. (There are two sidings can crack its shell on the rails. along the route.) The railroad is a conveyor The Paoli local out of Philadelphia was never like this. Panama’s elite ride the commuter At Paraíso (Paradise), he radios the dis- belt, and just like coal trains or commuter The morning commuter train leaves Balboa, bound for Colón, with engineer Omar train, and it’s also booked by cruise lines, so refinement is the order of the day. patcher for permission to stop. There’s a operations, the idea is to keep the trains Sanchez at the throttle. Note the positive train control monitor atop the control stand. pineapple juice vendor parked in a grassy shuttling back and forth. In 2012, the rail- marketing ourselves. Now, Caterpillar, Dell young New York doctor who was sent to a strip between the tracks and a parallel road hauled 400,000 containers, all of them Computer, and Procter & Gamble all have remote Alaskan village in order to repay his roadway, and Hooper wants his guest to in Gunderson “Twin Stack” cars, 100 boxes significant operations here.” Today, “bus- education. Everyone in town was a little partake of a tropical pleasure. It’s cold and to a train. These cars are now rare in the tling” doesn’t begin to describe the glitz, the quirky and decidedly un-New York, mak- uncommonly delicious. U.S., but their bulkheads are an advantage construction dust, and the chaos of Panama ing for a classic fish-out-of-water story. The Panama Canal Railway is like that, a for the railroad since they make it impossi- City, a center of international trade and fi- Meet Steve Hooper, the Panama Canal small railroad with a homespun quality to ble to open the containers in transit, thus nance, and home to about a million people. Railway’s Fleischman. A native of Vancou- it. But it runs like a big railroad, from its ensuring in-bond transport. Inevitably, the conversation turns to the ver, British Columbia, he spent 21 happy maintenance standards to its operational “Whereas larger railroads would face biggest single driver of the Panamanian years with Canadian Pacific, serving all over discipline, and even to its positive train greater challenges in getting a train from economy — the canal — and the likely effect his native land in almost every operating control system, which was adopted in 2006. point A to point B, our challenges are at the of its current expansion on the railroad. As capacity from carman to yardmaster to road Of necessity, the railroad has learned to terminals,” Hooper says. Every freight train early as the 1930s, the U.S. recognized a foreman. Hooper is a recreational sailor, be self-sufficient. With a payroll of about has the same consist, and there aren’t any need for wider and deeper locks and chan- and he spends his vacations serving on the 200, all but three of whom are Panamanian, connecting railroads, so getting a train over nels to accommodate bigger ships; indeed, crews of sailing vessels. He visited Panama the railroad does all of its own mainte- the road is a comparatively simple exercise. an expansion project was actually under way in 2004, rode the railroad for fun, and was nance. One of the road’s F40 locomotives, In contrast, Hooper adds, “We live or die until World War II caused resources to be so intrigued that he later contacted the rail- bought secondhand from Amtrak, has just by the terminals. When they’re running diverted. The current canal improvements, road to learn more about it. In 2008, he be- well, everything else falls into place.” slated for completion in 2015, will accom- came the Panama Canal Railway’s director What if they’re not running well? That’s modate ships with roughly three times the of operations. He packed his bags, found a when the railroad does a cut-and-run. capacity of current vessels in TEUs, contain- place to live, closed the door behind him, “Let’s say a crane broke down at the port,” er ship lingo for 20-foot equivalent units, a and asked, “What have I gotten myself into? Hooper explains. “The ship is supposed to standard measurement of capacity. I don’t even speak the language.” But he has execute 400 moves during its berthing win- Rivers of commerce: the Panama Canal Railway and the famous Panama Canal. Two “None of our business today has any- an irrepressible taste for adventure, and dow: 200 boxes on and 200 off. If the crane ships enter the locks at Pedro Miguel, the first step down in the trek to the Pacific. thing to do with the canal’s limitations,” now it’s hard to imagine him anywhere else. breaks down, what do they do? They have Kenna says. “These larger ships will bring He embraces Panama with all its foibles. to make their transit, because [the Canal prime development land as part of its con- could be forgiven for thinking that the more cargo, which will necessitate more Seeing a vendor alongside the road, he stops Authority] will charge a big penalty if they cession, the potential of which is still most- place was just made yesterday. transshipment in order to maintain full utili- and rolls down the window of his truck. miss it.” So the ship leaves the boxes be- ly untapped. “We spent several years build- Turn around, though, and you’ll see the zation of the ships; otherwise, they kill their The vendor knows what he wants, and in hind, and the railroad takes them to the ing the railroad,” Kenna says, “but now railroad and the canal both running economies of scale.” Haverty echoes the Spanish, he tells Hooper that he’ll have it in other side. “But generally, it’s first-in, first- you’ll really see real estate taking off.” through it, forces of nature in themselves theme: “The business plan was always based five minutes. “¿Cinco minutos de Panamá, o out. We’re offering the same high standard Future capital improvements will be fi- with their unending and mesmerizing riv- on repositioning containers from one side to cinco minutos normales?” Hooper asks and of service to everybody,” Hooper says mat- nanced out of cash flow, not from debt, and ers of commerce. The country has cast a the other, and to and from the free trade they both laugh. ter-of-factly. the Panama Canal Railway can well afford spell on visitors for 500 years, and that in- zone in Colón. The more business the canal He drives his high-rail truck to a grade to do so. Top line revenue for 2012 was $65 cludes the people who came in search of does, the more (the Panama Canal Railway) crossing and climbs down to position the Results and reveries million, and the railroad paid healthy divi- riches. If it’s possible to be a romantic and does.” Starling cites yet another factor: “The flanged wheels on the rails. “Don’t touch The Panama Canal Railway is profitable dends to the two owners. Just as startling, a hard-headed railroader at the same time, canal has to recoup its cost of capital for the that,” he says, pointing to a plastic bag on by any standard, due not only to the effi- the railroad’s operating ratio hovers in the the folks at Panama Canal Railway have expansion. So they just keep raising their the ground. “There’s a dead chicken in it.” ciency of its operations, but also to its pric- low 40-percent range, a figure that North mastered the art. 2 rates, and every time they do that, the transit A writer with a healthy sense of curiosity ing power. The company is the only rail- American railroads can only dream of. becomes more painful.” can’t help asking how he knows that. “Be- road in town, and as long as it represents a Indeed, there’s a dreamlike quality to so PETER A HANSEN is editor of the Railway cause there was another one here last week. savings compared with the canal, it’ll have much of Panama. It’s maddening and & Locomotive Historical Society’s Railroad Southern exposure A voodoo lady lives in that shack over all the traffic it can handle. The picture charming, ugly and beautiful, backward History publication and is a frequent Television viewers may remember a there. A dead chicken, stuffed into a plastic Steve Hooper rescues a turtle: Good for the promises to get even better, not only be- and modern, all at the same time. Standing Trains contributor. His subjects have often 1990s series called “Northern Exposure,” bag and left on the tracks, exorcises evil reptile, good for the railroad. In a few cause of the canal expansion, but also be- in the jungle, amid the monkeys and the been historical, but he says that covering a which revolved around Joel Fleischman, a spirits.” Oh. seconds, the turtle will be in Lake Gatún. cause the Panama Canal Railway received huge blue morpho butterflies, a person contemporary railroad is fascinating work.

34 Trains JANUARY 2014 www.TrainsMag.com 35