April 2002


HOW IMPORTANT IS THE RIA?


Some shortline acquirers may find it a tempting prospect to try to undo the non-compete agreements they signed with the sellers.

"CN is committed to removing paper barriers where there is clear benefit to the shortline and no harm accrues to CN." Francois Hebert, VP Corporate Development

The Railway Industry Agreement (RIA) provisions regarding paper barriers may well be less important today than was originally believed. Itís appropriate that on this the 4th anniversary of Ex Parte 575, the genesis of the RIA, we step back a moment and look fore and aft.

Ex Parte 575 addressed paper barriers ("contractual obligations incurred when shortlines acquired lines from the larger, connecting carriers") inadequate car supply, and alternative routings. From that emerged the RIA, signed by the ASLRRA and the AAR in September, 1998. There were four "Principles of Agreement"--car supply, interchange standards, paper barriers, and pricing. The last dealt specifically with switch charges, 286,000-pound cars, and rate equalization.

Recall that in 1998 the industry was still recovering from the UP/SP missteps and was closing in on Split Date for Conrailís demise. At the same time Class Iís were still looking to reduce plant size while protecting revenue streams. Thus branchlines were sold off to shortlines with so-called paper barriers.

Typically, a selling Class I (the incumbent) would limit, as a condition of sale, the purchasing short line's ability to route cars to another Class I connection. This was only reasonable where the seller was looking for a way to retain the revenue stream and lessen the branchline capital requirement in the bargain. Yet the RIA language gives the shortline the option to route "new" business over a second connection in some cases.

Four years ago shortlines everywhere were reeling from car supply shortages, missed connections, and continuing share loss to trucks. Sometimes it seemed the only solution was to get to a second railroad connection or to find an alternate supply for empties. The class Iís, fearful for their franchises, did not want that to happen, ergo paper barriers.

Fast forward to 2002. CNís position is that any load originating on a shortline that canít get to its destination via CN direct may be better off routed some other way as long as it doesnít take any money out of CNís pocket. At the same time CN has said it intends to extend trip plans to shortline points. What shortline would want to go out over "Brand X" if they can guarantee transit times over CN?

Still, some shortline acquirers may find it a tempting prospect to try to undo the non-compete agreements they signed with the sellers. Such a course is likely to be viewed by the Class I with about the same enthusiasm McDonaldís might have if a franchisee decided to start selling Whoppers. How long, one might ask, would such a franchisee last? Not very long, one might answer.

"The Railway Industry Agreement waiver process is basically an exception management tool that was, is, and probably always will be rarely used," says Burlington Northern and Santa Fe Assistant Vice President-Short Line Development Jerry Johnson. "Almost all of the few requests BNSF received were approved, although the resulting approvals would probably have occurred independent of the RIA.

"The real story is that the Class I's are cooperating on mutually beneficial interline moves involving short line origins and destinations. Traffic is quietly being accommodated without having to resort to RIA waivers," Johnson concludes.

The agreement between Watco (a midwest shortline operator) and BNSF in Kansas is a case in point. The company used the spirit of the RIA trackage rights provision to move cement from one of its roads to a second road with BNSF trackage rights connecting the two. Or look at the unit train steel move between two RailAmerica lines in Ontario, linking up via rights over CN. The Portland & Western swaps cars with the Central Oregon & Pacific in the UPís Eugene (OR) yard. And so on.

As for the rest of the RIA, pricing becomes a non-issue because railroads large and small are getting better at pricing to the market. Car supply is fixing itself through better car management, reduced cycle times, and empty-car trip planning. All the Class I's have embarked on aggressive programs to forge Interchange Service Agreements (ISAs) with their short lines, spelling out the time and place for interchange and absolutely essential in a scheduled railroad environment.

In my humble opinion, railroad managers of all stripes are much more attuned to economic realities than they were in 1998. As a result, the RIA has morphed from an imposition into a reasoned process. It helps the value/price/service equation work better for shipper, short line, and Class I.

 

 


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