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A profile of short line railroad success.

According to Levine et al., the number of short line railroads declined from 1009 in 1916 to only 238 in 1970.(1) However, several events occurred in the 1970s and 1980s that helped trigger explosive growth of the industry. The bankruptcies of the Milwaukee Road and the Rock Island created opportunities for short line development since parts of these two Class I railroads offered opportunities for profitable operation. Federal transportation policy also stimulated short line formation. The 3-R Act of 1973, the 4-R Act of 1976, and the Local Rail Service Assistance Act of 1978 all included provisions for operating subsidies and rehabilitation for light density branchlines. The Staggers Rail Act of 1980 and the Motor Carrier Act of 1980 greatly increased the degree of competition within the rail industry and between railroads and motor carriers. In the new competitive environment, Class I railroads adopted a cost reduction strategy to maintain profitability. The sale or lease of branchlines to short line operators is part of that cost reduction strategy.(2)

As Table 1 indicates, 44 short lines with 2,526 miles of rail line were created in the 1970-79 interval. However, this growth was dwarfed by the explosive growth of the 1980-89 period, during which 226 short lines were created, accounting for 21,028 miles of rail line. During the 1970-92 period, a total of 329 short lines were created, operating 30,214 miles of road. During the 1980s, the peak year of short line creation was 1987, when 46 short lines were formed and 6,674 miles of rail line were transferred to short line operation. The least activity occurred the following year, when only five short lines were created with only 104 miles of rail line. The decline was partly due to legal challenges raised by rail labor unions who argued that a railroad had a duty to bargain the effect of a short line sale with its employees. The issue reached the Supreme Court in the Pittsburgh and Lake Erie Railroad v. Railroad Labor Executives' Association case, in which the court held that labor protection is not required in short line sales.(3) Although uncertainty remains concerning short line sales and labor protection, 89 short lines were created in the 1989-92 period, accounting for 9,257 miles of rail track.

As Class I railroad mileage continues to decline, state legislators, rural communities, and shipper groups may ask the states for assistance in establishing short lines. Thus state transportation policy makers need to know the determinants of a profitable short line railroad in order to evaluate the question of state assistance for rail short lines.

Relatively few studies have investigated the determinants of short line railroad success or failure.(4) Collectively these studies have identified the following determinants of short line railroad success:

Adequate traffic density

Experienced management

Reasonable purchase price for the track

Adequate track quality

Access to more than one connecting rail carrier

Adequate capital

State or local government assistance

Flexibility in use of labor

Cooperation of connecting Class I rail carriers

Intensity of motor carrier competition

In a similar vein, the same studies have collectively identified the following causes of short line railroad failure:

Inadequate traffic

Dependence on a single shipper or industry

Poor balance of originated and terminated freight

Inability to obtain adequate insurance

Economic downturns

Inexperienced management

High indebtedness

Lack of access to capital
Table 1. Creation of Short Line Railroads, 1970-1992

Year Number of Short Lines Created Miles of Road(*)

1970 1 2
1971 2 53
1972 3 66
1973 4 414
1974 1 14
1975 1 242
1976 8 183
1977 8 900
1978 8 368
1979 8 284
1980 12 1,578
1981 10 587
1982 24 1,470
1983 15 341
1984 26 1,506
1985 27 2,620
1986 31 3,551
1987 46 6,674
1988 5 104
1989 30(**) 2,597
1990 30(**) 3,759
1991 16(**) 1,202
1992 13(**) 1,699

Total, 1970-79 44 2,526
Total, 1980-89 226 21,028
Total, 1970-92 329 30,214

* Does not include short line mileage attributable to expansion of existing
short lines.
** Number of lines created in these years and still operating in 1993. There
may be some short lines created in these years that ceased operation or were
absorbed by other railroads prior to 1993.

Source: (1970-88) Levine et al., Statistics of Regional and Local Railroads,
Association of American Railroads, pp.49, 51 (1988). (1989-92) Compiled from
data in Association of American Railroads, Profiles of U.S. Railroads, 1993
edition.


This article confirms the importance of some of the above determinants of short line success/failure but also extends the area of inquiry to include important determinants not identified in other studies.

The major objective of this article is to identify a profile of a successful (i.e., profitable) short line railroad. This leads to two specific objectives: to conduct personal interviews with executives of short line railroads, shippers located on short lines, and public officials to obtain their views regarding the determinants of short line railroad profitability; and to classify the determinants of short line profitability by category.

AREA SHIPPERS AND SHORT LINE RAILROADS

The objectives are achieved through personal interviews of executives of thirteen Iowa and Kansas line-haul short line railroads and the shippers located on these railroads. There are 309 shippers in the study and each of these was interviewed by the research team between February 1992 and September 1993. Of the total sample of 309 shippers, 125 are located on Iowa short lines and 184 are Kansas shippers. The shipper sample is composed of 199 grain shippers and 110 non-grain shippers. The distribution of shippers by short line railroad is as follows:
Iowa Railroads:

Chicago, Central & Pacific Railroad 43
Iowa Interstate Railroad, Ltd. 32
Cedar Rapids & Iowa City Railway 20
Iowa Northern Railway 16
Cedar River Railroad Company 8
Keokuk Junction Railway 6

Kansas Railroads:

Kyle Railroad 60
Central Kansas Railway 45
Kansas Southwestern Railway 27
South Kansas & Oklahoma Railroad 17
Garden City Western Railway 14
Northeast Kansas & Missouri Railroad 11
Southeast Kansas Railroad Co. 10
Table 2. Iowa Short Line Railroads

Short Line Railroad Former Class I Employment Mileage First Year
 Railroad of
Operation

Chicago, Central & Illinois Central 465 780 1985
Pacific Railroad

Iowa Interstate Rock Island 190 567 1984
Railroad, Ltd.

Iowa Northern Railway Rock Island 38 143 1984
Co.

Cedar Rapids & Iowa None 76 52 1904
City Railway

Keokuk Junction Santa Fe 21 127(*) 1981
Railway

Cedar River Illinois Central 8 124 1992
Railroad(**)

* 90 miles consists of trackage rights on the Toledo, Peoria & Western Railway
from La Harpe, Illinois to Peoria, Illinois.
** The Cedar River Railroad was formerly the Cedar Valley Railroad. In 1991,
the Cedar River Railroad was acquired by the Chicago, Central & Pacific
Railroad.


Table 2 displays some of the characteristics of the Iowa sample short line railroads. The Iowa sample contains two regional railroads and four line-haul short lines. As a group, the six Iowa short lines have 798 employees, with the two regional railroads accounting for 82 percent of the total. The two regional railroads also account for 75 percent of the 1,793 miles of track operated by the six Iowa short lines.

Table 3 contains the general characteristics of the Kansas short lines. The sample contains two regional railroads and five line-haul short lines. With the exception of the Kyle Railroad, either the Santa Fe or the Union Pacific System is the predecessor Class I railroad for the Kansas short lines. As a group, the seven railroads have 256 employees, with the two regional railroads accounting for 65 percent of the total. The two regionals also have 65 percent of the 2,546 track miles operated by the Kansas short line railroads.

Most of the thirteen short lines in the sample are heavily dependent on grain traffic. Grain is the most important commodity for four of the six Iowa short lines and four of the seven Kansas railroads.

KEYS TO PROFITABILITY: VIEWS OF SHORT LINE RAILROAD EXECUTIVES

With the exception of one railroad, personal interviews were conducted with the top executive officers of each of the thirteen Iowa and Kansas short lines in the study. In these interviews, the executives stressed the importance of adequate traffic density for profitable operation of a short line. According to the executives, adequate traffic density could be achieved in several ways. One alternative is through a highly diversified traffic base of different commodities. Another possibility is through a traffic base of relatively few commodities which have high and stable traffic levels. A third alternative is a traffic base composed of a few major commodities whose traffic cycles offset each other, resulting in traffic density stability on an annual basis. The executives said that excessive reliance on seasonal traffic, such as grain, has a negative effect on profitability.
Table 3. Kansas Short Line Railroads

Short Line Railroad Former Class I Employment Mileage First Year
 Railroad of
Operation

Central Kansas Railway Santa Fe 59 882 1993

Kyle Railroad Rock Island 108 778 1982(*)

Kansas Southwestern Union Pacific 29 302 1991
Railway System

South Kansas & Santa Fe 24 286 1990
Oklahoma Railroad

Southeast Kansas Union Pacific 25 140 1987
Railroad Co. System

Northeast Kansas & Union Pacific 7 113 1990
Missouri System

Garden City Western Santa Fe 4 45
1916(**) Railway

* Kyle Railroad began operating former Rock Island Railroad lines in 1982
under lease from the Mid States Port Authority. In 1991, it began leasing 347
miles from Union Pacific System.
** The Garden City Western Railway began in 1916 and purchased the Garden City
Northern from Santa Fe Railroad in 1989.


The executives heavily emphasized the contribution to profitability of a skilled, innovative labor force that has prior experience in the rail industry. The management team must have prior experience in railroad operations and marketing and be able to balance cost control with a level of track maintenance that will facilitate good service to shippers.

According to the short line executives, the relationship of the short line to Class I railroads is a key determinant of profitability. One aspect of this is friendly connections to more than one Class I railroad. Multiple connections increase shipper access to additional markets or inbound freight origins, which increases short line traffic density. Connections to more than one Class I railroad also gives the short line access to more rail cars and the ability to supply more rail service. Multiple Class I railroad connections tend to increase the bargaining power of the short line with regard to negotiating favorable revenue splits on joint movements, lower switching charges, and reduced car hire fees.

The short line executives emphasized the need to secure certain commitments from Class I railroads at the time of purchase or lease when the short line is in a good bargaining position. These commitments include guaranteed access to Class I overhead traffic, provision of an adequate number of Class I rail cars, and the right of the short line to establish its own prices for local traffic. These commitments are vital to profitability since Class I overhead is a large part of the traffic base of many short lines, the short line loses business to alternative modes without adequate car supply, and the short line need the ability to set prices that will attract traffic to the railroad.

Since short lines are dependent on Class I railroads to originate their inbound traffic and deliver their outbound commodities, the short line executives stressed the importance of developing a good relationship with connecting Class I railroads. This helps the short line attach more traffic and increases profits. In a similar vein, the executives said that short line operators should never purchase or lease a line from a Class I railroad that is not interested in a long-term feeder relationship that benefits both railroads. A Class I railroad that is interested only in a one-time cash infusion is less likely to cooperate on matters that are vital to short line profitability, such as rail car supply, fair revenue splits on joint movements, overhead traffic, and market access.

The short line executives emphasized the significance of several financial matters for the long run profitability of the railroad. They stressed the importance of not paying too much for the line if it is purchased from another railroad. The purchase price should be geared to conservative estimates of traffic and revenue. If the short line management is too optimistic, the actual cash flow will not be sufficient to service the debt, ultimately resulting in insolvency.

The executives said that the short line must begin operations with the appropriate capitalization. This will allow management to acquire the correct number and type of locomotives and immediately address track quality problems associated with the deferred maintenance by the previous owner. If the short line accomplishes this, it will be able to offer high quality service that will attract traffic. If the short line is under-financed, it will inevitably produce cash flow and service quality problems that ultimately lead to failure.

The short line executives are somewhat divided on the benefits of owning the line as opposed to leasing. The proponents of leasing emphasize the absence of higher levels of indebtedness associated with ownership. However, the critics of leasing state that it results in too much control of the short line by the Class I railroad that is leasing the line. Often the lease agreement makes it very difficult for the short line to aggressively expand its business through connections to other Class I railroads. Also, the leasing Class I railroad may require the short line to adopt the Class I's price, which may be uncompetitive, and fail to capitalize on the lower cost structure of the short line.

Short line executives agree that state financial assistance is important to the survival and expansion of the short line railroad industry.(5) In the absence of state guarantees, lenders are reluctant to loan money to short lines for the purpose of rehabilitating track. If the railroad is unable to repay the loan, the lender's only recourse is to attempt to sell an illiquid asset. The salvage value of the rail track is rarely equal to the rehabilitation loan. Also, since short line railroads are usually small businesses and inherently risky, lenders are not likely to extend credit in the absence of state guarantees.

Since state guarantees shift the risk of nonpayment from the lender to the state, the state must rigorously evaluate the business plans of loan applicants and develop a methodology for determining if the applicant has a reasonable opportunity to succeed. The state should also make its credit guarantee contingent on the applicant providing rail service, as opposed to acquiring the tracks and then selling them for salvage value.

In detailed questionnaires, executives of short line railroads were asked to prioritize several potential ingredients for a profitable short line railroad. From the choices displayed in Table 4, each of the executives expressed their views by ranking the three most important determinants of short line profitability in order of importance (i.e., first, second, and third most important).

Table 4 indicates that the short line executives as a group ranked adequate traffic levels as the most important determinant of short line profitability. Other determinants receiving support as important profitability determinants include reasonable purchase price and experienced management.

The short line executives also offered some observations on the reasons for short line failure. Some of these cannot be controlled by the short line, such as the loss of a major shipper who either goes out of business, relocates, or begins using other transportation carriers; and disasters such as floods that destroy many bridges and track miles. Another example is the loss of Class I overhead traffic.

The executives also detailed reasons for failure that can be controlled by the short line. The one most frequently cited is an ill-conceived TABULAR DATA OMITTED business plan which overestimates revenue and understates costs. As a result, the short line pays too much for the line, and the principal and interest payments cannot be paid from the available cash flow. The executives noted that profitable short lines can become unprofitable if they fail to reinvest that cash flow of the railroad from the first several years of profitability in track maintenance and rehabilitation. The executives said the freight-carrying short lines can become unprofitable if they try to operate passenger or tourist trains. which nearly always lose money.

KEYS TO PROFITABILITY: VIEWS OF THE SHORT LINE RAILROAD SHIPPERS

In personal interviews, shippers located on Iowa and Kansas line-haul short lines expressed their opinions regarding the major variables influencing short line profitability. Many of the factors suggested by the shippers mirror those that emerged from interviews with the short line railroad executives. However, the shippers had many original ideas as well.

Like the short line executives, the shippers stressed the importance of adequate traffic density for short line profitability. According to most shippers, adequate traffic density can best be achieved through a high, stable, non-seasonal traffic base that minimizes excess capacity on an annual basis. The shippers also emphasized that potential short line operators should conduct a very careful analysis of potential traffic before acquiring a line. This would include obtaining answers to questions such as:

1. Who is the competition and what are their strengths and weaknesses?

2. How much and what types of traffic can be diverted from motor carriers to the short line?

3. How much and what types of traffic can be diverted from the short line to motor carriers?

The shippers emphasized the importance of high quality management to the financial success of short lines. The top officers of the short line should have extensive experience in the operating departments of other railroads. However, the marketing department should be composed of people who have extensive knowledge of and experience in the commodity markets of the firms on the short line. This will help the marketing department understand the transportation problems of shippers and devise solutions to those problems. The shippers also noted that the offices of the chief executives of the railroad should be close to the location of the shippers, not in a remote location such as Chicago. Proximity facilitates the understanding of shipper needs and leads to more traffic and higher profitability.

The shippers stressed the importance of track quality to the success of the short line. The railroad should invest the capital necessary to achieve the desired track quality as soon as possible after acquisition of the line. Only by doing this will the short line be able to provide the level of service that will attract more traffic from the shippers on the line as well as additional overhead traffic.

According to the shippers, the long run profitability of short line railroads depends heavily on their relationship to Class I railroads. Before leasing or purchasing a line from a Class I railroad, potential short line operators need to obtain certain guarantees from the Class I railroad while the short line is in a relatively strong bargaining position. These guarantees are critical to the survival of short lines and include rail car supply, overhead traffic, and fair revenue splits on joint movements. Shippers on several Kansas short lines were interviewed in the late winter and spring of 1992. A severe rail car shortage occurred during that period and many Kansas shippers complained that their short line was unable to provide service because of lack of access to Class I rail cars.

The shippers emphasized that short line profitability requires friendly connections to more than one Class I railroad. Multiple connections mean access to more markets and rail cars, which leads to higher traffic levels and profits. However, the existence of multiple Class I railroad connections doesn't guarantee this result. The short line and the Class I railroad need to work together to develop a competitive joint rate the will benefit both railroads. Several shippers indicated that they are denied access to markets because the high switching charges or joint rates levied by Class I railroads cause their short line to be uncompetitive.

Given the above points, many shippers have concluded that short line profitability requires the cooperation of Class I railroads. Regardless of the quality of short line service and willingness to innovate, short lines that connect to uncooperative Class I railroads will not survive. Uncooperative Class I railroads can deny market access through switching charges or joint rates, fail to supply equipment, divert overhead traffic to other carriers, demand unfair revenue splits on joint movements, and require excessively high car hire fees. In contrast, a Class I railroad can almost assure short line profitability by cooperating on the above matters. Short lines have to build a good business relationship with their connecting Class I railroads because they deliver their traffic to markets as well as supply the short line with overhead traffic and rail cars.

The shippers mentioned several financial variables that relate to the long run profitability of short line railroads. Like the short line railroad executives, the shippers mentioned the importance of not paying too much for the line. The purchase price should reflect conservative estimates of traffic, revenue, and expense so that actual cash flow is sufficient to pay interest and principal. Also as suggested by the railroad executives, the shippers emphasized the need for the short line to be properly capitalized at the beginning of operations. This will permit the railroad to invest the appropriate funds in track rehabilitation and equipment. Failure to do this leads to substandard service, loss of traffic to other carriers, and ultimately to insolvency.

Many of the Iowa shippers said that long run short line profitability is predicated on shipper traffic volume guarantees and equity investment in the short line. This gives the shippers a direct financial interest in the survival of the short line and triggers a mutually beneficial sequence of decisions. If all the shippers are pledged to support the short line, then all are assured of rail service in the long run. Thus, they will be more likely to continue to invest in their facilities on the short line, which will further increase the traffic density and profitability of the railroad.

The shippers had several comments on the relationship of state policies to short line economic viability. They said that state financial assistance is important for the survival of short lines, many of which are chronically underfinanced. They also said the state could form a low-cost short line insurance plan to insure against catastrophic events that destroy short line assets. The shippers noted that the long run profitability of a short line depends on the growth and profitability of the finns located on the line. Thus, states can assist short lines with favorable business climate and aggressive recruitment of new firms.

KEYS TO PROFITABILITY: VIEWS OF IOWA DEPARTMENT OF TRANSPORTATION OFFICIALS

To achieve the objectives of the study, the authors also interviewed administrators of the Iowa short line assistance programs. The state of Iowa is one of the leaders in innovative short line assistance programs. In 1974, the Iowa legislature created the Iowa Rail Assistance Program, which has a track rehabilitation component and an economic development program. The track rehabilitation program provides state funds to rehabilitate rail branchlines with less than five million gross ton miles per year and to improve main lines, switching yards, and rail sidings. The economic development component is intended to assist the creation of new jobs or the retention of jobs that may be lost to other states. State funds can be used to construct a new rail spur or siding required by a firm or to rehabilitate an existing siding or spur for increased or renewed rail use. Approved projects of either component of the Iowa Rail Assistance Program may receive grants, loans, or a combination of both for up to 80 percent of the project's cost.

The state of Iowa has another short line assistance program, the Iowa Railroad Finance Authority (IRFA), funded by an interest free loan from the state. IRFA may participate in the acquisition, rehabilitation, construction, refinancing, extension, replacement, repair, or leasing of any railway facility, except railroad cars.

The two Iowa railroad assistance programs have preserved rail service on 2,300 miles of the Iowa railroad network. Administrators of these programs at the Iowa Department of Transportation (IDOT) have many years of experience in evaluating requests by short line railroads for state financial assistance. Thus, they have developed several criteria for a profitable short line project that minimizes the risk of loss of state funds. Many of these criteria coincide with those suggested by short line railroad executives and shippers.

IDOT officials affirm the need for state financial assistance for short line railroads. The benefits and costs of each proposal for state funding are estimated and only those projects with the most favorable benefit-cost ratios are funded. IDOT officials indicate that even though the rail projects are an economically efficient use of resources (benefits [is greater than] costs), most, if not all, of the projects would never occur if they had to rely entirely on private financing. This is because banks are unwilling to lend money for track rehabilitation (without a state guarantee) because short line operation is risky and the loan collateral is an illiquid asset. Thus, short lines need a lender willing to make long-term loans at low interest rates, a function the state provides.

The business plans of potential short lines must be based on realistic estimates of traffic, revenue, operating expense, and track maintenance expense. The plans have to consider actual and potential competition, deferred track maintenance by the previous owner, and the difficulty of retrieving business lost to other carriers. Too much optimism is a prescription for continuing financial difficulties that are associated with poor service and inadequate traffic density.

State-financed short line projects require equity investment by both the shippers and the railroad. This is very important since all parties associated with the short line have a financial interest in the success of the railroad. The shippers will use the railroad and reinvest money in their facilities on the line. The management of the railroad will be motivated to provide the shippers with superior service at competitive prices.

IDOT officials stressed that short line railroads need to be appropriately capitalized at the start of operations. This will allow the railroad to obtain the appropriate types and amounts of equipment and immediately attend to deferred track maintenance. If this isn't done soon after acquisition, the railroad will be unable to attract overhead traffic or sufficient business from the shippers on their rail line to operate profitably. Thus, each short line receiving state assistance is contractually obligated to invest a minimum of $6 to $10 thousand per mile of track annually in track maintenance.

IDOT officials emphasized that the management team of the short line must have substantial railroading experience. The team should include people who have extensive experience in railroad operations, engineering, marketing, and finance.

According to IDOT officials, short line profitability is predicated on multiple connections to Class I railroads. The larger the number of "friendly" connections, the better the market access of the short line. Since short lines are heavily dependent on Class I railroads for rail cars and market access, they must negotiate terms with connecting Class I railroads that are essential to the short line's survival. Prior to acquisition or leasing, the short line must negotiate reasonable switching charges and joint rates to assure market access, a guaranteed supply of rail cars, fair revenue splits on joint movements, the right to establish their own local rates, and access to Class I railroad overhead traffic. In other words, a feeder relationship needs to be developed that benefits both railroads.

IDOT officials emphasized that short line railroad profitability requires a diversified traffic base. Dependence on a single large shipper or industry directly links the survival of the short line to the fortunes of a single shipper or industry. Also, short line profitability will be enhanced by a traffic base that includes some higher valued commodities that generate higher railroad revenue.

IDOT officials stressed the need to help new short line railroads move up the "learning curve" faster. This could be done by state provision of a list of railroad equipment suppliers, retired railroad executives, short line railroad consulting firms, and providers of railroad engineering services.

CONCLUSION

Based on the input of short line railroad executives, shippers located on short lines, and IDOT officials, the following profile of a profitable short line railroad can be specified (no particular priority is implied):

Traffic Components

1. Adequate traffic density.

2. Stable, non-seasonal traffic to minimize capacity.

3. Diversified traffic base to avoid the risk of market downturns in individual industries.

4. Traffic base includes some high-valued products that will generate higher rail revenue per carload.

Management and Labor Components

1. Motivated, skilled, flexible employees and management with extensive prior experience in the rail industry.

2. Management team should include people skilled in railroad operations, marketing, and finance.

3. Marketing department should include people with a good understanding of the markets of the firms on the rail line.

4. Management of the short line should have its home office located close to the shippers on the rail line.

5. Good management control of railroad costs.

Relationship to Class I Railroads

1. Multiple connections to different Class I railroads.

2. Guaranteed access to Class I overhead traffic and rail cars.

3. Reasonable switching charges and joint rates with Class I railroads to maximize market access and inbound freight sources for the short line's shippers.

4. Short line sets local rates for movements on its own system.

5. Develop a feeder relationship with Class I railroads that benefits both railroads.

Financial Components

1. Equity investment by both the shippers and the railroad.

2. Realistic business plan based on conservative estimates of short line traffic, revenue, and expenses coupled with rigorous analysis of the strengths and weaknesses of actual and potential competitors.

3. Purchase price of the line should be based on conservative estimates of expected traffic, revenue, deferred maintenance expense, and operating expense. Paying a reasonable price for the line insures that principal and interest payments can be serviced by actual cash flow.

4. Short line should be appropriately capitalized at the beginning of its operation, permitting the railroad to make needed investments in equipment and track quality.

5. To rehabilitate track, short lines need long-term loans at low interest rates that can be accomplished through loans or grants from the state or state guarantees of bank loans.

Track Quality Component

1. Short line needs to invest in track quality as soon after line acquisition as possible so that it can provide high quality service and attract traffic.

State Assistance Components

1. Provide financial assistance to short line railroads.

2. Furnish short lines with information regarding sources of engineering services, economic consulting services, railroad equipment suppliers, and retired railroad executives willing to give management advice.

3. Promote economic development through provision of an entrepreneurial business climate and aggressive recruitment of new business firms.

4. State-financed insurance plan to protect short line assets from catastrophic events.

To be profitable in the long run, short lines do not need to have all the components in the profile. Weaknesses in some areas can be offset by unusual strengths in other areas. However, a profitable short line probably needs to have a majority of the components in each of the major areas of the profile.

ENDNOTES

1 Harvey A. Levine et al, Small Railroads, (Washington, D.C.: Association of American Railroads, 1982).

2 The Association of American Railroads (AAR) has developed the following definitions for the short line and regional railroad industry:

Regional Railroad -- A non-Class I line-haul railroad which operates 350 or more miles of road, and/or which earns revenues of at least $40 million.

Local Railroad -- A railroad which is neither a Class I nor regional railroad. and which is primarily engaged in providing line-haul service.

Switching and Terminal Railroad -- A non-Class I railroad primarily engaged in providing switching service in a terminal area. or which receives a switching charge from a line-haul carrier.

In this article "short line" includes regional, local, and switching and terminal railroads. The term "line-haul short line" includes only regional and local railroads. It should be noted that other federal government agencies have adopted different definitions for short line and regional railroads. The Interstate Commerce Commission (ICC) and the Federal Railroad Administration (FRA) define a short line railroad as a line-haul railroad which operates fewer than 250 miles of track, while a regional railroad is a line-haul railroad that operates 250 miles or more of track.

3 W.E. Thoms, Frank J. Dooley, and Denver D. Tolliver, "Rail Spinoffs, Labor Standoffs and the P&LE," Transportation Law Journal, Vol. 28, No. 1, 1989, pp. 57-83.

4 See the following studies: Nancy D. Sidhu, A. Chaney, and John F. Due, "Cost Functions of Class II Railroads and the Viability of Light Density Railway Lines." Quarterly Review of Economics and Business, Vol. 27, Autumn 1977, pp. 7-24. John F. Due, "New Railroad Companies Formed to take Over Abandoned or Spun-off Lines," Transportation Journal, Fall 1984, pp. 30-50. John F. Due, "Abandonment of Rail Lines and the Smaller Railroad Alternative." The Logistics and Transportation Review, Vol. 23, No. 1, March 1987, pp. 109-34. Eric K. Wolfe, "The Downside Risk: An Analysis of Local and Regional Railroad Service Failures," Journal of the Transportation Research Forum, Vol. 29. No. 1, 1988, pp. 124-37. Eric K Wolfe, "Financial and Demographic Conditions Associated with Local and Regional Railroad Service Failures," Transportation Quarterly, Vol. 43, No 1, January 1989, pp. 3-28. Eric K. Wolfe, "Long Run Financial and Demographic Differences Between Failed and Successful Local and Regional Railroads," Transportation Journal, Vol. 28, No.3, 1989, pp. 13-23. "Deferred Maintenance and Delayed Capital Improvements on Class II and Class III Railroads: A Report to Congress," U.S. Department of Transportation, Federal Railroad Administration, Washington, D.C., 1989. Frank J. Dooley, "Economies of Size and Density for Short Line Railroads," MPC Report No. 91-2, Upper Great Plains Transportation Institute, North Dakota State University, Fargo, N.D., 1991. Victor E. Eusebio et al., "Rail Branch Lines at Risk: An Application of the Exponential Survival Model on Kansas Duration Data," Journal of the Transportation Research Forum, Vol. 33, No. 1, 1993, pp. 86-96. Curtis M. Grimm and H.J. Sapienza, "Determinants of Shortline Railroad Performance," Transportation Journal, Spring 1993, pp. 5-13. Frederick J. Beier and James Cross, "Shortline-Client Relationships: Can Local Carriers Be More Than Small Railroads?" Transportation Journal, Winter 1993, pp. 5-14.

5 For a good discussion of the financing needs of short line railroads and their ability to secure commercial loans, see "Small Railroad Investment Goals and Financial Options," U.S. Department of Transportation, Federal Railroad Administration, Washington, D.C., January 1993.

Mr. Babcock is professor of economics, Kansas State University, Manhattan, Kansas 66506; Mr. Prater is research associate, Economics Department, Kansas State University; and Mr. Morrill is research associate, Economics Department, Kansas State University.
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Author:Babcock, Michael W.; Prater, Marvin; Morrill, John
Publication:Transportation Journal
Date:Sep 22, 1994
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