Railway Age: Short Line and Regional Marketing Advocate



rancois Hebert, CN's AVP for Corporate Development -- and short line sales -- has told me, "In selecting an operator for a line we wish to transfer the final question is whether five years from now we can say we made the right choice." And CN has obviously made a lot of right choices, judging from the success of its shortline program.

Just how successful the program has been was summed up quite well at the May meeting of the American Shortline and Regional Railroad Associationís Eastern Region held in Montreal. The speaker was Michael Sabia, Canadian Nationalís Chief Financial Officer. And the message was that by paying attention to the basics shortlines and class 1s have a lot to contribute to each otherís bottom line.

At Canadian National,
itís not about
CN vs.
the shortlines.

To begin, a little of our industryís story thus far. Since 1980 railroad productivity is up 170% and the Return on Investment (ROI) has risen 89%. In the US, total class 1 rail miles have diminished at a compound rate of 2.7% a year and at a rate of 4.8% in Canada, with many of these miles winding up in the hands of class 2 and class 3 operators. As a result, class 1s on average have quadrupled their revenues while paring down their operating ratios by an impressive 14% from a dreadful 94% in 1980.

What the class 1s accomplished was to bring total ton miles to an all-time high in 1998 largely due to economies of scale, extensive single-line market reach, world-class information technology, and unsurpassed access to capital. At CN, it was recognized early on that shortlines could do much in support of this fewer miles/more revenue paradigm. CN saw a partnership opportunity, with smaller roads having a rapid-response and decisive market presence geared at once to shipper needs and the ability to beat the trucks at their own game.

And so CN has walked the talk by creating 38 shortlines comprising more than 6,000 miles of railroad operating in every province, and representing more than $150 mm in handling fees, divisions and allowances. Thatís about 160 miles of track and $4 mm in revenues per shortline. Taking it one step further, even at a nominal $250 per car allowance, the average is 16,000 cars per shortline for a healthy 100 cars per mile per year. Moreover, CN keeps $6 for every $1 paid a shortline, meaning these 38 shortlines have generated a cool $billion in business for CN, a quarter of 1998ís total revenues of $4.14 billion.

But, warns Sabia, itís still not all peaches and cream. He noted that shortlines are vulnerable because they lack the access to capital of the big roads. And when one looks closely at the cash flow statements of too many shortlines one sees immediately whatís afoot. In many cases shortline operating cash flow barely covers interest payments. Any banker will tell you an operating cash flow of three times interest is cutting it close and he begins to breathe more easily at six times. Which means itís tough to borrow more when one is already leveraged to the hilt.

Lacking economies of scale hurts the smaller lines, too. Typically shortline operating costs are already at the bare minimum, and the only way to lower the operating ratio is to grow the revenue base. But what is one to do with the odd hundred miles of railroad with only a handful of customers to keep the property going? With no Powder River Basin coal to help out, it can get grim in a hurry.

But as noted above, CN walks the talk and thus does what it can to add back to the shortlinesí limited economy of scale and access to capital. It expands scale by extending the shortlinesí market presence beyond their own rails and by including the small railroads in an aggressive car supply and management program. CN helps reduce shortlinesí capital dollar requirements through joint purchasing agreements to cut the cost of infrastructure supplies and capitalized equipment. "Shortline railroads, "says Sabia, "generate growth," so the 6:1 revenue ratio is surely worth nurturing.

The operative principle here is getting freight business off the highways and onto the rails. At Canadian National, itís not about CN vs. the shortlines. Itís about using the national reach and wider resources available to CN to aid and abet the shortlinesí ability to think outside the box. And the more flexibility the shortline can demonstrate the stronger the partnership.

The woods are full of examples, too. Look at St. Lawrence & Atlanticís new double stack route between Portland (ME) and Montreal, giving Down East shippers access to the entire CN/IC/KCS/TMM route structure Ė the aptly named "NAFTA Railroad." Or the RaiLink plastics transload in Hamilton, Ontario. After selling the DT&I to RailTex, CN went back and helped revitalize an Ohio warehouse complex. And out in the Maritimes CN teamed up with Chemins de Fer du Quebec in a forest products reload center.

It must be stressed at this point that it was never a case of CN vs. the shortline for any new rail-truck facility (unhappily it often seems more the rule than the exception in the lower 48). Rather it has been a function of who can bring what to the common goal of adding value to the transportation product and thus winning the business for both CN and shortline.

So, if you want to go railroading in Canada and participate in Hebertís shortline program, be prepared to be flexible, think out of the box, and add value to the partnership. Then maybe Ė just maybe -- after five years you and Francois can toast yourselves on a job well done. But only if you too can walk the talk.

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