From small to big, and back again

Railroads improving as industry reshapes itself once again

David Page | Intern

Published October 1, 1997  | October 1997 issue

Back when Sam Browman used to work for the railroads, he was employed by the Minneapolis and St. Louis R.R., which then became the Chicago Northwestern line, which was later absorbed into Union Pacific.

And he also worked for the Rock Island Railroad, which was taken over by ... and on and on.

"But that was a hundred years ago," says Browman, who is now the marketing director for the Seaway Port Authority of Duluth. If it seems like that long for Browman, it may feel even longer for the railroad industry, which has undergone big changes in recent years, going from an industry with many small rail companies, through a period of mergers that strengthened the position of a few companies at the top, and now swinging back to the formation of new small railroads, known as short lines.

"And I think we will see more and more short lines as time goes on," Browman says. Browman still keeps the pulse of the rail lines in his current position because of the importance of rail delivery for the shipping industry of Duluth.

From short lines to long

Regardless of the length of the line, the rail industry is experiencing relatively good times. From the short lines to regional lines to Class 1 railroads (those with annual revenues in excess of $225.9 million), the rail industry has come a long way since the 1970s, when approximately 20 percent of track belonged to companies going through bankruptcy.

Perhaps the biggest indicator of the health of the railroad industry is the fact that since 1980, when the passage of the Staggers Act partially deregulated the railroad industry, the number of railroads in the United States has doubled to around 550. While this is considerably fewer than the total existing at the turn of the century, it still represents a post-World War II high.

Special charges of $1.2 billion dropped the industrywide rate of return on investments from 9 percent to 7 percent in 1995 (the last year for which official figures are available), operating revenues that year rose 4.8 percent on a record 1.3 trillion revenue-ton miles. Although the 1996 numbers are still being crunched, preliminary reports suggest another record year, according to the Association of American Railroads, the trade association representing railroads in the United States.

Not surprisingly, changes in the industry have been pushed by the reconfiguration of the Class 1 railroads. These larger lines are literally in it for the long haul, concentrating their efforts on a limited number of long corridors, selling off less productive feeder lines, and positioning themselves to compete for the highly profitable unit train (single commodity train) market as well as the potentially lucrative intermodal market (the movement of trailers and containers by rail and a least one other mode of transportation).

This push by the Class 1 railroads has left the smaller track systems for the new short lines. In Minnesota, for example, short lines have more than doubled, from six to 13 since the mid-1980s. Not only do industries along these lines retain access to a railroad, they also get more personal contact with their railroad than from the larger lines, according to Melvin Loesch, rail abandonment and rail bank coordinator for the Minnesota Department of Transportation.

And access to a railroad is important for many small communities, says the Port Authority's Browman, because dependence on trucking alone could be cost prohibitive for businesses like farm implement and fertilizer dealers, or for such industries as wood, paper and agriculture.

The future of short lines looks strong, Browman says, but that doesn't mean that the churning within the industry has ended. The same cycle of recent years may even repeat itself, although on a smaller scale, Browman speculates: Perhaps successful short lines will start to grow by acquisition and merger and the same pattern of growth and spinoff will repeat itself.