September 12, 2017

America’s short lines play the long game

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Deregulation of the US rail freight industry in the 1980s heralded a remarkable turnaround for the country’s secondary railways after years of seemingly-terminal decline. American Short Line and Regional Railroad Association president Linda Darr tells Keith Barrow how these vibrant and largely locally-owned businesses are investing in their assets to ensure they remain competitive.

THE passage of the Staggers Rail Act into US federal law in 1980 was a pivotal moment for the country’s freight railways, freeing them from burdensome pricing regulations and legal obligations that had helped to drive the industry to the brink of collapse. Over the next three decades, the major Class 1 railways morphed into stable and profitable businesses, transforming their threadbare systems into the most efficient and well-used rail freight network in the world.

ShortlineBut the rebirth of the Class 1s is only part of the story. The economic freedoms and looser regulation enshrined in the Staggers Act also energised America’s short line and regional railways, giving entrepreneurs the impetus to buy and develop low-density lines, many of which had previously looked certain to close. In effect, Staggers kept much of rural and small-town America connected to the national railway network.

Staggers was followed by a long series of mergers and acquisitions among the major freight railways. The number of Class 1s declined from 56 in 1976 to 13 by 1987 and seven by 2002. Correspondingly, the number of short lines increased by 20% between 1987 and 2015 as Class 1s rid themselves of marginal branch lines, unprofitable regional routes, and even some main lines which had been rendered surplus by mergers.

According to the American Short Line and Regional Railroad Association (ASLRRA), the country’s 603 short line railways provide first and last-mile service for one-in-five wagon movements on the US rail freight network. Short lines have grown from around 13,000km in 1980 to more than 75,000km today, and carry 29% of the country’s rail freight traffic, equivalent to more than 14 million wagon loads a year. They operate in 49 states (providing all rail freight services in five states), employ 20,000 people, and serve 13,000 facilities.

Many short line customers are small businesses that ship only modest volumes, which means the railways must compete aggressively to win business, and provide flexible service to ensure they retain custom.

“A lot of shortline people have a passion for railroading - this isn’t just a business to them, they enjoy it and they really go after it,” explains ASLRRA president Mrs Linda Darr. “This segment of the industry has been on the rise since the 1980s. The opportunity presented itself, our guys are entrepreneurs, they’re nimble, they’re determined and they just got out there and went after the business. They chase every lead and they are very customer focussed. Short Line people are willing to do hands-on work, they live in the communities they serve, and they know their customers. This is also an industry that’s not afraid to try new things. It’s not risk averse, and it’s willing to invest.”

Even by railway standards, the US short line and regional railways are capital-intensive operations. These railways generate annual revenues of $US 4.64bn, and each ploughs an average of 24% of its revenue back into capital investment and maintenance.

Many short lines inherited infrastructure that had suffered years of neglect and deferred maintenance, and while the quality of track and structures has improved markedly under new ownership, tackling the legacy of underinvestment inevitably takes time. The industry has been aided in this task by the Railroad Track Maintenance Track Credit, also known as the 45G credit, a measure introduced by the federal government in 2005. Under the terms of the credit, a short line must invest $US 1 for every $US 0.50 in credit, up to a cap equivalent to $US 2175 per track-km.

This has enabled the short lines to invest more of their own revenue in projects that improve safety and capacity. Since 2005 short line and regional railways have invested $US 4bn in their infrastructure with the aid of 45G. According to the ASLRRA, 3444km of rails were improved and 5.27 million sleepers replaced during 2015, the last full year for which data is available.

However, after several extensions, 45G finally expired in December 2016. Efforts are now being made in Washington DC to make 45G permanent through the Building Rail Access for Customers and the Economy (Brace) Act, which was introduced in March, attracting 226 co-sponsors in the House of Representatives and 51 co-sponsors in the Senate.

The ASLRRA is helping to maintain the momentum behind Brace, but Darr says legislative hurdles remain. “This year there are two key items for the administration - infrastructure and tax reform,” she explains. “Legislators are viewing tax reform as an opportunity for a broad reduction in corporation tax, but you have to balance the budget, so they are looking at removing some tax credits. The 45G tax credit has been popular in both houses on both sides of the aisle, with Republican and Democrat supporters. There has been a lot of support this year, but we need the legislation to make it happen. There has been talk of including it in the infrastructure bill, but it looks like the tax bill will come first.”

Despite the uncertainty over 45G, Darr sees an opportunity in the Trump administration to address a number of regulatory issues, which she sees as a drain on short lines’ resources. The ASLRRA says the industry needs “regulations that are more efficient, more goal oriented, less reliant on a one size fits all mindset, and much more focused on costs and benefits.”

“This administration has a heavy focus on rolling back regulations that don’t have a benefit in terms of jobs,” she says. “In the last few years there have been some hugely burdensome regulations that have challenged the industry, such as the requirement for two-man crews in the cab. It’s ironic that we’re talking about a mandate on crew size in an industry that is small compared with trucking, where they are looking at doing away with drivers altogether, and they’re doing it with the support of federal programmes. This doesn’t make sense when there is nowhere near as much exposure to risk on an enclosed private rail system than there is on a public highway.”

Darr is also urging Capitol Hill to revaluate the rules governing training standards. “This means you can have a short line with 5-10 employees that needs to have 26 separate training programmes,” Darr says. “It seems excessive for each railroad to have to come up with this and have it approved and regularly audited by the government. We hired a company to develop a training programme for one job and it was the size of a telephone directory. Short lines are serious about safety - I don’t see anyone who wants to bring untrained people out onto the track - so I question why we need this tremendous micromanagement.”

Darr says she is frustrated by the government’s slow progress in appointing a new head of the Federal Railroad Administration (FRA). This key regulatory and safety body has been without a permanent leader since Trump’s inauguration in January. Last month senators from New York and New Jersey stalled the appointment of career railwayman and former chief operating officer of Conrail Mr Ronald Battory as FRA administrator amid concerns that the Trump administration might veto funding for the $US 20bn Gateway Program to increase capacity on the Northeast Corridor.

Coal no longer king

Changing traffic patterns are another challenge facing short line and regional railways. For some, the shale oil boom between 2011 and 2015 brought huge increases in volumes almost overnight, and while production has fallen back recently, commodities linked to shale oil extraction such as frack sand remain big business for the short lines. Grain traffic also benefitted from high crop yields in 2015-2016, with 2017 shaping up to be another strong year in this segment.

Long a staple commodity for North American freight railways, coal has witnessed a dramatic decline in recent years falling from 140,000 carloads per week in January 2009 to 70,000 carloads per week in January 2016. “As with the Class 1s, coal was king for the short lines, and when you see the decline, it has had dramatic impacts,” Darr says. “However, this year we have seen exports picking up and things haven’t been as bad as expected. When times are challenging short lines turn to their instincts - they are often able to find new business, such as freight car storage. They are the masters of reaching the low-hanging fruit. The fact that many of them don’t have to worry about shareholders is a tremendous advantage in that sense.”

Darr describes the Class 1s as the “business partners” of the short lines, which interchange with the major freight railways and in many cases have trackage rights to use their infrastructure. A good working relationship is vital to ensure these arrangements remain effective, and representatives of the Class 1s meet regularly with their short line partners to discuss issues and ideas. Darr believes the railways can strengthen their offer to shippers and compete more effectively with road transport by harnessing data to identify operational weaknesses in the overall rail network. “We need to work together to find ways to compete with trucks,” she says. “There’s a discussion going on now on creating a database to help us understand network performance and apply efficiencies where they are needed. We might be able to marry up short line and Class 1 traffic data to create heat maps which will show us where friction is occurring in the network.”

While many short lines remain locally-owned businesses, consolidation has been a trend in recent years, notably through the meteoric rise of Genesee & Wyoming (G&W). From its origins as the Class III Genesee & Wyoming Railroad, which opened in 1899, G&W was one of the true success stories of the Staggers era, acquiring and transforming the fortunes of numerous redundant branch lines across America before expanding its business overseas from the late 1990s onwards.

In 2012 G&W acquired RailAmerica, North America’s second-largest short line operator, in a $US 1.39bn deal which brought more than 40 US and Canadian short lines into the G&W fold. Today G&W operates more than 20,000km of railway in North America serving 41 US states and three Canadian provinces, and the company is listed on the New York Stock Exchange with a market capitalisation of $US 4bn.

“We have 450 members and of those 57% are owned by a holding company, which we define as any railroad with at least four short lines,” Darr explains. “For the most part consolidation has led to professionalisation of the industry while keeping a local presence and a local connection that appeals to shippers. When holdings take over a short line they want to maintain a local presence and they give autonomy to a local general manager but provide support with things like training and lobbying. Resource comes from the holding while keeping a local connection, and that’s a real selling point.”

Like the Class 1s, the Short Lines are grappling with the rollout of Positive Train Control (PTC), a federal requirement for all lines carrying passengers and toxic-by-inhalation freight. The ASLRRA is helping its members to make the transition. “The association has pulled together to form a task force to design a back office that is interoperable between different short lines and the Class 1s,” Darr says. “We have a federal grant to help us with that work and we have two vendors for the programme. Ninety short lines are required to comply with the PTC mandate. I’m an optimist - anyone who has invested in this technology will find a way to make it work to their benefit.”

With traffic in the doldrums, the last few years have been a difficult time for the US freight railways at all levels, but Darr is optimistic that the industry has the resilience to cope with current issues and is heading for better times. “There are worries about the challenge we face in implementing PTC, and caution about the new ownership of CSX and its drive to get much tighter on its operating ratio,” Darr says. “This can leave customers in a bad position - will they be turned away from the railroad? We’re on an upswing, the market is rebounding and there’s an opportunity for regulations to be rolled back. This is a really interesting time for the short lines.”

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