Shortline profitability

I seem to remember reading somewhere here that some of the Class Ones, like CSX, were selling/leasing some track to local shortlines, because the big roads needed the money (this is the only post I could find through the search, but I recall reading it elsewhere too).
How much profit is there to be made on a shortline RR? I imagine there would have to some in it, or else there wouldn't be shortlines buying/leasing trackage and equipment. At the same time, though, if there's profit to be made, why don't the Class Ones run them themselves? Sure they can get money from selling or leasing the track, but economically speaking, it can't be more money that can be made from running the line, or else shortlines wouldn't be in business.
I also guess there's more overhead involved in a shortline RR operation, since there's no management infrastructure already in place. So, there are most costs for running a section of track as a shortline as opposed to a Class One.
So my question is, why are the Class Ones letting of track for shortlines (or, are they actually, or am I wrong, which is possible?)?

Lines that are marginal for Class I companies are often better and more profitably run by short lines. The major factor is labor costs. Short lines are often non-union, so that work rules are much more flexible and crews less expensive.

Short lines often can serve customers better (more frequently and consistently) because the crew is resident to the branch -- and not coming from a terminal some distance away -- and they often don't have to worry so much about craft separation. Pay rates for crews are usually lower than Class Is as well.

Class Is sell off these lines because of the poor ratio of revenue from the line to what it costs to keep the line maintained over time. Compare the net present value of the line to what they get for it right now. Selling the line doesn't help with the bottom line in the current period because the asset must be written down as it is sold off.

With the line still connected to the Class I's system, they get the revenue for the majority of the movement without the cost of taking care of the customer directly (ie, switching the plant), and without carrying an under-performing asset on the books.

pgengler wrote:I seem to remember reading somewhere here that some of the Class Ones, like CSX, were selling/leasing some track to local shortlines, because the big roads needed the money (this is the only post I could find through the search, but I recall reading it elsewhere too).
How much profit is there to be made on a shortline RR? I imagine there would have to some in it, or else there wouldn't be shortlines buying/leasing trackage and equipment. At the same time, though, if there's profit to be made, why don't the Class Ones run them themselves? Sure they can get money from selling or leasing the track, but economically speaking, it can't be more money that can be made from running the line, or else shortlines wouldn't be in business.
I also guess there's more overhead involved in a shortline RR operation, since there's no management infrastructure already in place. So, there are most costs for running a section of track as a shortline as opposed to a Class One.
So my question is, why are the Class Ones letting of track for shortlines (or, are they actually, or am I wrong, which is possible?)?

Not many shortlines offer the same wages/benefits that the class-1's enjoy. Some shortlines do not pay overtime, less compensation for management. I'm not sure I agree that there's more overhead involved, for the shortline, account of the management infrastructure.

Even low volume shortlines are profitable, and the class ones would not normally turn down any profit. However, the RR company's assets are best utilized when they produce the maximum return.

With the increase in cartage on the RRs, the companies are concentrating on bigger customers that pay better.

In other words, a train for UPS would make more money than a train for Mom and Pop's Candy. So it's better use of assets to serve UPS.

The RR makes money from the lease, they get more profit from their assets (the train and crew) and they still make money from freight coming off the shortline to boot.

It's good business.
-r

Where I am in New York Conrail was the main player in town traffic slowed and died out little by little. Trains went from runing once a week to once every 2 weeks. Conrail put the option to pull up all 118 miles of track or sell the line. The Countys that the line passed threw baught the line and in turn got a short line operator to run the line. These were what has happened from 1995-presant:

Track Speed under Conrail 7-10 mph.. Today track speed is 40mph
Crossing Gates that worked not many.. Today under the new operator all work even back county farm roads have bells, lights, and gates!

Traffic increased slowley from 3 days a week under the new operator to runing almost 7 days a week and as many as 2-4 trains some times as many as 6 run a day!

Industrys that that stoped service under Conrail about 50%.. Today most of them have come back to useing rail service again.

SRS125

Good points about the quality of local service on the shortlines!

Shortline railroads are generally much more customer-friendly that the larger Class 1 railroads, especially toward the small business customers.

Whereas the big railroads didn't care about the customer that may ship a carload a week, the small shortline railroad sees that customer as valuable, and hopes that their service will help grow the business into a larger customer.

ACLfan

Another key benefit that Class 1's derive from shortlines is just simply the ability to aggregate several small shippers into one large "shipper point." A healthy shortline might distribute many single or few car shipments, but operationally to a Class 1 represents one single shipper/reciever online.

In my own family's experience, the ultimate example of this was when the shortline they owned began making its interchange with the Class 1 connection via trackage rights in the Class 1's yard. The shortline crews ran right in with their arriving cars on one track, got the paperwork from the yard office, found out what track their outgoing cars were on, tied on, and left.

octr202 wrote: The shortline crews ran right in with their arriving cars on one track, got the paperwork from the yard office, found out what track their outgoing cars were on, tied on, and left.

WHAT?! You can do that?! What about coffee? What about bitching with your co-workers about how horrible your $100K a year job is? What about getting water and ice? What about checking your seniority on the computer? You mean some crews come to work and ...<i>work</i>?! Man, I'm glad I work for a class one! We don't do that.

-r

I can't speak for all Class-1's; it's been my experience that the "big guys" much prefer unit trains, coal, grain, ore, etc. They're also awfully fond of intermodal trains. It seems as though they've given up on single car-load and industry work in general. IMHO, this is the niche that shortlines/regionals fill and profit from.

jg greenwood wrote:I can't speak for all Class-1's; it's been my experience that the "big guys" much prefer unit trains, coal, grain, ore, etc. They're also awfully fond of intermodal trains. It seems as though they've given up on single car-load and industry work in general. IMHO, this is the niche that shortlines/regionals fill and profit from.

Yes.

-r

intermodal=gobs of cash

There may be a great deal of business (lots of cash changing hands) with intermodal, but it still remains a very low margin business. In order to compete with over-the-road truckers, the rates have to be low. There's a bit more margin in so-called premium services, such as guaranteeing delivery times.

Long-haul unit grain, coal, ore operations have little competition on the highways -- therefore there's a lot more profit for railroads (they can gouge the customers more). As always, it's about maximum revenue for minimum cost.

Shortlines have a niche to fill. Companies like RailAmerica have capitalized on this very successfully.

LCJ wrote:There may be a great deal of business (lots of cash changing hands) with intermodal, but it still remains a very low margin business.

Margin in not the issue, volume is.

-r

razor wrote:

LCJ wrote:There may be a great deal of business (lots of cash changing hands) with intermodal, but it still remains a very low margin business.

Margin in not the issue, volume is.

-r

Margin also has a part in it ... if you're moving all the world's traffic, but not making anything on it, it isn't profitable. However, with a large volume (and low costs), low margins can translate into large profit.

LCJ wrote:There may be a great deal of business (lots of cash changing hands) with intermodal, but it still remains a very low margin business. In order to compete with over-the-road truckers, the rates have to be low. There's a bit more margin in so-called premium services, such as guaranteeing delivery times.

Long-haul unit grain, coal, ore operations have little competition on the highways -- therefore there's a lot more profit for railroads (they can gouge the customers more). As always, it's about maximum revenue for minimum cost.

Shortlines have a niche to fill. Companies like RailAmerica have capitalized on this very successfully.

I was told, by the ole "reputable source," that we (CN) received $175.00/car for the UP coal trains we run to Paducah, KY. These trains are 105-137 cars. I'm no accountant, $18,375-$23,975/train.

razor wrote:Margin in not the issue, volume is.

As in the old joke: we lose money on every unit of business, but we make it up in volume...

For sure, low margin business only makes sense in high volume. Low margins are still an issue not to be ignored. The good thing about intermodal is that it's easier to control terminal costs than with boxcar freight.

Class I railroads often walk away from a percentage of low margin shipping by pricing it out of the market range (here truckers, take it away). Remember that the volume of business takes up valuable capacity, too -- capacity that is better used by higher return business. Capacity has become much more of an issue the days. Ask UP about that.