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 CANADIAN TRANSPORTATION 4 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. Short lines view many of the Class I's expense II. BACKGROUND related problems as opportunities. Since many do not employ union labor, it is possible for them to Since the introduction of railroading to the United operate with reduced crews at lower wage rates. States in the 1830's, Americans have been intrigued Unshackled by historic work rules, the short line can with the mystique of railroading. In looking through operate more efficiently. In many cases, Govern- the pages of history, we find vast empires created ment subsidies are available to solve the operating and enormous power amassed by entrepreneurs who cost and track rehabilitation problems. Often, a Gov- used railroading to achieve their Horatio Algier rise ernment Agency buys the line, thereby relieving the from poverty to wealth and power beyond most of short line of capital costs. Since the operation is our imaginations. Many of us might fancy the dream small, the short line has much lower overhead ex- of becoming railroad moguls. With the coming of penses. It is able to more directly tailor its operations the mega-rail systems, the abandonments of rail to the needs of the shipper. Given these various lines through rationalization, and the social pres- efficiencies and a lower cost structure, the short line sures promoting continued rail operations, it is easy can compete with trucking where the Class I carrier to ascertain how the proliferation of short line rail could not. In many cases, the short line and the carriers has come about. The desire to become a rail shippers along the line have a more cooperative baron can be achieved, although in a somewhat relationship, particularly if the shippers have in- lesser scale, through acquisition and operation of a vested in the short line. Since they have made this short line railroad. Newspaper and magazine ac- investment and since the neighborly short line can counts have further glorified the short lines' en- provide closely integrated service at a lower cost, the !repreneural efforts of rising from the ashes. It is shipper favors the short line. Despite these oppor- important, however, to understand that romantic and tunities, however, the short line faces a much nar- well-meaning efforts must be tested by the rules of rower margin between profitability and financial di- economics and business. Herein lie some inherent 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 THAT PLAGUE gate some of the economic principles that short line SHORT LINE OPERATIONS operators must face, and balance them against their probability of becoming a successful railroad busi- When beginning to provide his services, the short ness. line is enthused by the rosy prospects of perceived business on his line of railroad and the promise of an traffic base in the new future. It is rarely III. LINE PERCEIVED expanded SHORT apparent to the short line operator that if potential OPPORTUNITIES traffic really existed, the Class I carrier would not have abandoned its operations. In many cases, the Most opportunities to provide short line opera- short line operator finds that he has an abysmally tions Midwest have arisen from the track in the 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.