April 2001

New short line realities

drive the
cost side of
the ledger for
all sizes of

Norfolk Southernís Jim McClellan said in a recent industry conference, "In our network evaluation weíve found that 48% of our active stations produce only 1% of our revenues and we have found a huge number of low volume interchange points." This has significant implications for shortlines and regional railroads.

The 229 shortlines and regional railroads listed on the NS map run the gamut from the Alton & Southern to the Pickens. According to published sources, the lot of Ďem carry something like 6 million carloads a year for all interchange partners as well as for their own accounts. Fully 74% of that 6 million carloads involve only the top 20 carriers on that list. The top 80 carriers ranked by annual carloads handle 95% of the total.

Granted, there is some double-counting as most of these cars go on a class 1 someplace and some may also wind up on another shortline. However, for the sake or argument and presenting some orders of magnitude, say that the shortlines in the NS universe contribute to NS revenues in the same proportions as they do the total car count. Some lines interchange virtually all their cars with NS, some just a few. But itís a start and something the class 1s Ė and shortlines Ė may want to examine more closely.

On average North American shortlines and regional connections handle roughly ten percent of all class 1 revenues. NS had $6.2 billion in sales last year so non-class 1 railroads probably handled traffic worth about $620 mm to NS. Applying the larger universe percentages to NS revenues, 50% of NS shortline connections will handle 97% of NS shortline revenues. And therein lies the rub: 50% of NS shortlines could be handling just 3% of shortline revenues.

The bottom 114 NS shortlines ranked by annual carloads do an estimated 157,000 cars a year. If all their business went to NS (most have only one interchange and itís with NS) and all of it were "merchandise" (not coal, intermodal, automotive) that would represent $200 mm in NS revenues (average NS revenue per merchandise car in FY 2000 was $1265) or 3% of the total. Itís an intriguing parallel with the NS revenue per station story, to say the least.

If we were to say that the NS shortline universe is a good cross-section of the North American shortline universe, the implication is that a large percentage of shortlines could very well account for a very small percentage of class 1 revenues. This will not do.

Back in the days when money was cheap, inventories could pile up and nobody would care. Besides, the Interstate highway system was in its infancy and the rails were the dominant intercity freight carriers. There were a couple hundred class 1 carriers and shortlines were mom-and-pop affairs happily trundling a handful of cars a week over a few miles of 70-pound rail laid in the sand. But that was then.

Fast forward to 2001. Weíve got a dozen class 1 or near class 1 systems and regionals as big as some former class 1s. Trucks and the time-value of money have put a premium on smart supply chain management, and smaller shipments are becoming the rule. To stay in the game the rails must run faster, cheaper, and smarter. Mergers and branchline spin-offs have been a major result.

Todayís shortlines absolutely must position themselves with their class 1 connections to maximize contribution and minimize total cost. This does not mean reduced handling charges, but it does mean working smarter and bringing more to the table. For example, several nearly contiguous shortlines under common ownership could combine interchange in one place. Or in a truly scheduled environment some of the smallest roads could opt for less frequent interchange combined with a few days car hire relief.

This is not to say thereís no place for some of the smallest shortlines. As youíll read elsewhere in this special Shortline issue, there are some very small railroads doing very nicely by filling particular niches. Others enhance the freight revenue stream with property leases and off-site switching assignments. However the common thread among all successful shortlines Ė regardless of size Ė it the active commercial relationship with the connecting class 1s.

Perhaps Dave Garin summed it up best in his presentation during last Octoberís BNSF shortline conference. Said he, "There are three things shortlines can bring to the table to attack the truck market. First, capitalize on your knowledge of local businesses. Second, itís all about service, service, service and you can do it best. Third, get aggressive in land and industrial development.

In sum, then, itís true that operating economics drive the cost side of the ledger for both large and small railroads. But looming larger is the reality that the commercial relationship between large and small railroads will determine profitability of the partnership. For shortlines, itís not just running trains any more.


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