Short Lines Get the Short End

Stranded shippers aren't the only ones griping about the lack of competition between the big railroads. Joining the chorus is a cadre of investors who picked up short routes abandoned by the majors in the 1990s. Many banked on the fact that they could run these little feeder railways more cheaply than the megacarriers could--and many have succeeded. Trouble is, they've been less successful at wrangling competitive terms from the Class I carriers who bring the goods to their final destination.

It's not that the majors don't depend on smaller railways. Today, there are 500 small railroads generating $3.2 billion in business each year, about 10% of the $35 billion rail industry. These regional and short-line carriers generally produce less revenue per mile than the big players, but they provide the life-sustaining service of pumping small loads to the main rail networks.

Consider RailAmerica Inc. (RAIL ) Founded in 1986, the Boca Raton (Fla.) company has exhibited entrepreneurial flair, snatching up small rail operations from the majors, cutting costs, and stealing traffic from truckers. Gary O. Marino, RailAmerica's chairman and CEO, has cobbled together 39 regional and shortline railroads and 11,000 miles of track into a $360 million operation that is growing by 10% per year--five to ten times as fast as the industry as a whole. "We took a chance," Marino says. "But we've done well."

RailAmerica now delivers goods to the doorstep of nearly every major carrier, but that hasn't eased the anticompetitive conditions wielded by Class I railways. Among the most burdensome: Many short lines are required to give all of their business to the large railroad company that sold them the routes in the first place.

For RailAmerica, this can mean passing on unnecessarily steep prices to its customers. Out West, for example, it owns the Central Oregon & Pacific Railroad, which passes within a few miles of two major carriers, but the short-hauler is contracted to deliver its goods to only one--its original owner, Union Pacific Railroad (UNP ). In some cases, this translates into a 5%-25% premium for Central Oregon's customers such as Roseburg Forest Products Co., which uses the line to ship out 10,000 railcar loads of lumber, plywood, particle board, and finished products every year.

While such agreements are common to the short-haulers, there is a movement afoot to end the practice. In 1998, the big and small railroads agreed that, for customers acquired after the branch line passed hands, short-haulers were free to pass on freight wherever they chose. Nice idea, but "it has been a little disappointing in the execution," says Alice C. Saylor, general counsel for the American Short Line & Regional Railroad Assn. operators.

It would be great if the small and large railroads could work in partnership: They need one another. Small carriers, for example, usually end up feeding their new business on to the big guys. If a way isn't found to keep routing options open for small railroads, rural shippers will turn to trucks, or simply go out of business.

By Julie Forster in Chicago

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