DENVER — There’s a pachyderm of a quandary haunting the executive conference rooms of Class I railroads, and short lines may be the solution.
Carload volumes have been falling since 2008-2009, almost a generation’s worth of declines that began with the global financial crisis and accelerated during the fall of coal and the hollowing out of the American manufacturing base.
The current environment represents nothing less than a service crisis for the largest carriers. It’s a crisis that has been intensified by the impact on and of regulators such as the Surface Transportation Board and Federal Railroad Administration, as well as legislators, said consultant Anthony Hatch in a presentation at the American Short Line and Regional Railroad Association (ASLRRA) conference.
There is a new focus on carload service thanks to comprehensive data on pickup and delivery of individual freight cars, the labor-intensive switching known as “first mile/last mile,” “and it ain’t pretty,” said Hatch, whose trademark salty analysis belies a Harvard degree.
Service failures, he said, are “manna” to the STB, which is concerned with rail market power and rate pricing. “The STB has used common carrier obligations as a lever, such as in the case of Union Pacific/Foster Farms, to focus on weekly switching.”
In that 2022 case, the STB ordered UP (NYSE: UNP) to run trains to a California poultry producer after the shipper filed petitions for emergency service orders when it faced significant disruptions in delivery of feed and other supplies by rail.
The solution to these service issues, Hatch said, is increased use of or even the creation of short lines, which have consistently outpaced Class Is in carloads.
(One attendee agreed, telling FreightWaves, anonymously, how a Class I railroad suddenly withdrew service to a local lumber supplier. The company promptly bought the line and started its own railroad to maintain its connection to the national rail network.)
Hatch emphasized the service aspect of short lines and how their flexible corporate structures make them well suited as the entrepreneurs of railroading.
“Short lines offer tailored, customizable switching services, have better work rules and less severe labor shortages,” he said. “Short lines are also looked upon quite favorably by regulators and legislators.”
Hatch offered as shortline success stories Watco’s acquisition in 2020 of chemical giant Dow’s (NYSE: DOW) North American switching operations, as well as a separate lease agreement with Canadian National Railway (NYSE: CNI) to operate the Dutchtown Southern Railroad in Geismar, Louisiana.
Watco “increased switching to seven from three to five times per week and grew carloads by more than one-third in the first year of operations,” said Hatch. “That’s a win for the customer who gets more switches, a win for Watco with new business and a win for the Class I partner CN, which gets more cars for its long-haul business.”
However, Hatch said that success has raised a contradictory question of why the recent momentum of Class I strategy seemingly is to buy or retake short lines. He pointed to then-Canadian Pacific’s (NYSE: CP) acquisition of the Central Maine & Quebec in 2020; Pan Am’s sale to CSX (NASDAQ: CSX) in 2022 and the 2024 deal that saw BNSF acquire Montana Rail Link.
Hatch said he supports the “feed the beast” strategy on the part of Class Is to extend market reach, such as by CN from 2018-2021.
“However, that should not preclude thoughtful Class I shortline partnerships that solve customer problems,” said Hatch. RailPulse, for instance, is a freight car database owned by a coalition of car builders, lessors, Class Is and short lines.
Nonetheless, Hatch told the session, he has seen no evidence of Class I leadership taking steps toward more such partnerships. But he did acknowledge more meetings and discussions taking place between Class Is and short lines, facilitated by ASLRRA.
This article was updated April 12 to correct the date of the STB’s Foster Farms order, and to clarify Watco’s agreements with Dow and CN.
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Find more articles by Stuart Chirls here.
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