Short Line Railroads: Local Lifelines for Business

by Fred D. Baldwin

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Remember the Frank Capra movie classic It's a Wonderful Life? A character played by Jimmy Stewart learns, with the help of his guardian angel, how much his little town needs him. That old movie is apt to come to mind when you talk with customers of the Ohio Central Railroad System, a network of short line railroads serving much of eastern Ohio. ("Short line" is the term for the smallest of three revenue-based classifications of railroads.) Something the angel tells Stewart's character applies to railroads as well as to individuals: ". . . each man's life touches so many other lives, and when he isn't around he leaves an awful hole."

A railroad affects many other businesses, often in ways that are less than obvious. Over the past several decades a decline in rail service, both passenger and freight, has left quite a few "awful holes" in Appalachia's (and the nation's) transportation infrastructure. Even so, railroads constitute a resource for economic development that many Appalachian communities may be overlooking.

"It's a critical part of economic development, especially for rural communities," says Alice C. Saylor, vice president and general counsel for the American Short Line and Regional Railroad Association (ASLRRA), which represents about 400 of the nation's smaller railroads. "If a line is still in service, it's vitally important to keep it in service for any community that's looking to the future and interested in economic development. A rail option is often critical for siting a new factory or distribution facility.

Rural Appalachia has the advantage of having a substantial and active rail infrastructure in place. There's a one-word explanation: coal. Nationally, coal accounts for 40 to 45 percent of total rail tonnage, and about 40 percent of coal shipments by rail originate in Appalachia. (According to the Association of American Railroads, in 1999 Kentucky ranked 6th in the nation in tonnage hauled within the state by rail; Ohio ranked 7th; Tennessee 11th; West Virginia 12th; and Pennsylvania 16th. Coal accounted for a large percentage of this.)

But this rail infrastructure can be difficult to exploit for economic development, for the simple reason that being located near a track owned and operated by a Class I railroad doesn't necessarily provide a local business with real-world rail access. Class I tracks are like limited-access highways. Getting on them requires switching points, the railroad equivalent of highway interchanges. And Class I railroads can't afford to slow long-distance traffic to handle small loads. That's one reason regional and short line railroads, the railroad equivalent of state and local roads, are important for local development. These small lines carry freight within their own territories but also enable small shippers to connect to Class I tracks to destinations around the country.

With respect to how they operate, Class I and short line railroads are built on different business models. Class I lines are like wholesalers. They excel at hauling huge shipments, and they develop their schedules and rate structures around the needs of their prime customers, who may send or receive freight in 100-car batches. By contrast, short line railroads are like retailers; their customers may ship or receive freight in single carloads.

That's the situation for the Ohio Central Railroad System, whose success illustrates how important short line rail transport can be to a rural area's economy. The Ohio Central is made up of nine small railroads, whose route miles range from as many as 160 to as few as 3. ("Route miles" refers to the length of a railroad's right-of-way, whether the tracks along the route are single, double, or multiple.) Like the movie character played by Jimmy Stewart, the rail service provided by these lines was almost lost to the communities they serve.

"Every mile of track we run," says Michael J. Connor, the Ohio Central's vice president, "was abandoned or about to be abandoned before we bought it. We had to come in and pull a Lazarus with these things."

Over the last several years, thanks to aggressive marketing by Ohio Central management, freight traffic along the lines has come back to life. In 1988, the Ohio Central's first year of operation, its lines hauled 4,253 carloads of freight over 97 route miles. In 2000, they hauled 57,502 carloads over 366 route miles. That is, while route miles nearly quadrupled, freight volume grew by well over 13 times.

A Domino Effect

So what would have happened if the Ohio Central hadn't revitalized those lines?

"We wouldn't be here without the railroad," says Rhoda Sue Crown, CEO of the Coshocton Grain Company, located in Coshocton County, Ohio, in the town of the same name. "In the grain business, the railroad is the life blood." Although Coshocton Grain operates the largest grain elevator between Columbus, Ohio, and Lancaster County, Pennsylvania, it has only 14 employees. If its own modest payroll were the whole story, the company's closing might be viewed as a misfortune for those directly involved, but no more than that. However, many other jobs depend on the elevator's continued existence.

Farming, including grains and soybeans, contributes significantly to Coshocton County's economy. Unlike manufacturers, farmers have only a modest ability to spread out their production over time. Few can afford huge investments in facilities for drying and storing grain. The function of an elevator is to make a reliable local market for bulk produce, one that buffers farmers from the whiplash swings of national commodities markets.

After clicking away at her desk calculator, Crown announces that last year her elevator handled enough corn and soybeans to fill 10,000 semi trucks. Even if Coshocton County farmers could find 10,000 trucks exactly when they needed them to ship grain to elevators in Columbus, about 80 miles away, the shipping costs would be, Crown says, roughly four times that of rail transport. Seeing their already narrow profit margins shrink, some farmers would sell their land, probably for residential development. If enough did that, other agriculture-related businesses, such as feed stores and equipment retailers, would be forced to shut their doors. In short, there'd be an economic domino effect: loss of rail transport would imperil the grain elevator, whose loss would imperil farms, whose loss would imperil other businesses.

Christopher Reese, vice president of Scio Packaging Company in Harrison County, also says that his firm's business depends on railroads. Scio Packaging uses rail to bring in its raw materials: clays and chemicals that come from the American Southwest, Plains states, and Canada. The firm produces powders for customers who need cements with special properties like a fast drying speed, ease of mixing, or extra toughness.

Scio Packaging itself employs about two dozen workers, but its presence as a regional value-added wholesaler helps to make all of eastern Ohio more competitive in attracting industry. Reese says that his firm is often a supplier for large construction projects. "We're intermediaries," he explains. "I deal with companies from as far away as France and Denmark. If they see an opportunity they like, they'll build. They're our customers only for the short term, meaning three to five years. But after that they're still here in Ohio."

Other Ohio Central customers are larger than these two firms, and their importance to the regional economy is obvious. One example is the Coshocton plant of AK Steel, which uses rail to bring in about 90 percent of its raw materials, primarily in the form of heavy steel coils. Connor says that before AK Steel switched to rail, convoys of up to 200 trucks making plant deliveries would tie up traffic for miles. Now a spur from the Ohio Central runs into an AK Steel building, so that freight cars can be unloaded close to the plant's shop floor.

Another example is American Electric Power, a coal-burning electricity plant. Until three years ago, the plant brought in coal by truck; now it relies on rail for about half of its supply. Switching to trains, Connor says, took 430 trucks a day off U.S. Highway 36. Reducing this volume of truck traffic not only offers obvious environmental and aesthetic benefits for residents; it makes the area more attractive to other businesses that rely on trucks for deliveries in or out without undue delays.

Finally, consider Smurfit-Stone Container Corporation's containerboard mill in Coshocton, which manufactures the paper that goes between cardboard box liners—about 900 tons of it a day. Paul Yaw, Smurfit-Stone's purchasing traffic manager, says some of his plant's raw materials (wood chips and recyclable cardboard wastes) come in by train, as does soda ash from Wyoming used in the manufacturing process.

The plant ships out about 40 percent of its product by train, the rest by truck. The choice depends on distance and on the customer's needs (for example, the customer's unloading facilities). Rail ship-ments are not only more economical themselves; Yaw says that having a rail option helps him in negotiating truck rates with truck fleet owners who know that they have rail competition.

Smurfit-Stone's operations are big enough to justify service by Class I railroads, but not big enough to induce the giant railroads to give customized service. For example, Yaw mentions that the Ohio Central provides him cars when needed and arranges to switch loaded and empty cars before 7:00 a.m., which provides more efficient and safer traffic control within the Smurfit-Stone plant.

"They [the Class I railroads] switched on their time, not our time," Yaw says. "The greatest thing you can have is service, and that's what you have from the Ohio Central."

A Viable Option

Connor suggests that railroads "are the Rodney Dangerfields of transportation planning—we get no respect." That is, both individual businesses and economic development planners often underestimate what rail transport has to offer or, worse, completely overlook it as an option. "If we can get a potential customer to look at a blank sheet of paper," Connor says, "we often can work out a way of doing business."

Here are some of the points that Connor makes with potential customers and with state and regional economic development officials.

Where rail service is concerned, bigger is seldom better. A community that happens to be located along the main line of a Class I railroad may actually be in a worse position to exploit its rail resources than one served by a tiny short line. Like airlines, Class I lines have to operate on rigid schedules to which small customers must adapt. Scio Packaging's Reese describes his company's experience with a Class I line as follows: "We had to shut down our plant numerous times because they did things when they wanted to, not when we needed it." By contrast, short line railroads can tailor their services to specific customer needs.

An ability to work out a regular schedule is often more important than distance or shipment size. One of the Ohio Central's customers, AK Steel, ships steel coils by rail between two of its plants only 25 miles apart. "Everybody knows," says Connor, "that railroads are efficient carriers of large loads for long distances. What people don't know is that railroads can be cost-effective and provide fast service over shorter distances."

When a customer needs to connect to a Class I shipper, a short line railroad can help. As with airline fares, rail prices and shipping rules can be complex. "If you want to do business with Union Pacific," says Martin Pohlod, marketing manager for the Ohio Central's southern lines, "they've never heard of you. They're not going to treat you badly, but you're not necessarily going to have all the information to make an informed decision. My brother-in-law says, 'You're a travel agent for freight.' That's pretty close."

"Rail front" property is in short supply. Local economic development planners should keep multi-modal access, including rail, in mind as they assess the development potential of land near rights-of-way. They should not be too quick to encourage uses for "railroad frontage" that would close off a later rail option.

Multi-modal transportation systems can improve the quality of community life. Dale Hartle, development director for Coshocton County and president of the Ohio Regional Development Corporation, comments that over-reliance on truck transport "can exact a heavy cost in community development." The trucks that once hauled coal and steel along roads in Coshocton posed safety and environmental problems and increased road maintenance costs.

Even abandoned railroad rights-of-way and tracks are valuable resources. Because of the capital costs of acquiring land and laying tracks, a community or state should discourage scrapping rails or selling off old rights-of-way for non-rail uses. Many of the 500 or so short line and regional railroads in the nation are operating on track that at one time or another was considered worthless—and was indeed unprofitable for the kind of long-haul business handled by Class I railroads. As Connor asks rhetorically: "Would you rip up an interstate because somebody said you were doing too few cars a day?"

For communities with abandoned track, the ASLRRA's Saylor suggests conversations with rail specialists in state departments of transportation. Every state transportation office, she says, has someone with expertise on rail development issues and knowledge of any available resources. There may be a short line or regional railroad nearby hoping to put another piece into place.

Railroads require substantial capital investment. A sore point with all railroad people is that, because ordinary citizens use highways, the political support is much stronger for highway infrastructure investments than for rail. And railroads are expected to maintain grade crossings, bridges, and other infrastructure that receive public funds when automotive vehicles are involved. Yet a region may benefit substantially from track upgrades, the rehabilitation of an old rail line, or the rail equivalent of an access road for an industrial park. "Planners need to appreciate," says Saylor, "the role of rail in a balanced, multi-modal transportation policy."

Finally, the last point bears repeating because it underlies all the others: Railroads require substantial capital investment. The huge investment in right-of-way and tracks required to connect shippers across miles and miles of open country means that Class I lines have to specialize in long hauls; that has implications for how they operate. Short lines struggle to maintain their infrastructure. They can be flexible with respect to service but less so with respect to investment. Once planners understand that a short line railroad isn't just a miniature version of a Class I line, they can plan effectively.

Moreover, the rigidity of rail infrastructure and its capital requirements have a positive side. Once a short line railroad's owners have invested in an area, it's not easy for them to walk away. If one of their industrial customers closes a plant or moves, short line railroads will be hustling as hard as anyone to attract a replacement. "We tend to be in long-term relationships," Connor sums up. "Our tracks have to be here. We're very committed to these communities because we're not going to leave. We live and die with the local economy."

The Long and Short of It Three of the four railroad names familiar to generations of MonopolyTM fans—the Reading, the Pennsylvania, and the B&O—are history. But the fourth, Short Line, is very much alive. That's because short line is a category, not a company. It's the smallest of three size classes of American railroads defined by the U.S. Department of Transportation's Surface Transportation Board, based on annual revenue. The following definitions use 2001 revenue limits. Class I railroads are interstate giants, with operating revenues of at least $262 million, and typically much more. In 1998 they owned and operated a rail car fleet with the carrying capacity of about three million trucks. Today there are seven of these railroads. Class II carriers have operating revenues of at least $21 million but less than $262 million. Often called "regional" railroads, there are currently 36 of them. Class III includes the short line or "local" railroads. They have operating revenues of under $21 million. Around 500 in number, most of these small railroads have come into existence since 1980, when Congress passed a law (known as the Staggers Rail Act) streamlining the process by which railroads could eliminate unprofitable services. As large railroads began to abandon track that served small, out-of-the-way customers, short line entrepreneurs began to fill that market niche. Today short line and regional railroads provide the only freight rail service available to many rural areas of Appalachia and the nation.

Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.