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S.D. Railroad Back on Right Track : Transport: The San Diego & Imperial Valley took over a white elephant freight line and made it a paying proposition.


In 1984, the San Diego & Arizona Eastern Railroad had a dismal future. Its freight-hauling business was deteriorating, and operating costs were increasing on the line that runs from San Diego County to Imperial Valley.

San Francisco-based Kyle Railroads had made money for a few years after taking over the line from the Southern Pacific in 1978. But, by 1984, the railroad's track was deteriorating and its customer base was shrinking. Kyle, which was losing $150,000 a month, wanted to abandon the problem-plagued railroad.

Despite the gloomy outlook, RailTex, a privately held, San Antonio, Tex.-based company, decided it could operate the line at a profit and without a subsidy, and took over operations from Kyle. Now operated as the San Diego & Imperial Valley railroad, the line "broke even the first month and made money the second month," said Dennis Kling, general manager of the 110-mile short-line railroad.

The dramatic turnaround is the result of basic service improvements, a lower-cost work force and a marketing blitz that has reintroduced the railroad to businesses near the line. Rail traffic is up from just 1,600 freight cars of cargo in 1984 to an estimated 6,000 for 1990. RailTex operates on a section of track that links San Diego with El Cajon and another section that runs from San Diego to San Ysidro. From San Ysidro, the SD&IV runs to Tecate on track owned by a Mexican railroad.

Although declining to discuss specific profit and revenue figures, RailTex founder and chairman Bruce Flohr said the line has remained profitable. The company's 12 railroads will report an estimated $22 million in total revenue for 1990, he said.

The SD&IV is one of an estimated 200 new short-line railroads that have sprung up during the past decade, according to Tom Dorsey, vice president of the Washington-based American Shortline Railroad Assn. Most of those shortlines operate on track that the nation's larger railroads have no interest in operating, choosing instead to concentrate on longer sections of track.

The upsurge in shortlines, which are defined as railroads with $20 million or less in annual revenue and less than 100 miles of track, was driven by the Staggers Rail Act of 1980, which "brought to the railroad industry for the first time a degree of market-oriented economics," Dorsey said. The act forced major railroads to "make each and every segment of their operation capable of paying its own way," Dorsey said.

The railroads responded to the new competitive situation by spinning off branch lines and parts of their operations to smaller operators, Dorsey said.

Shortlines, which have lower operating costs, can wring profits out of tracks that are not economically attractive to major railroads because they can pay lower hourly wages and ease restrictive work rules, Dorsey said.

"Labor unions will argue, but the shortlines have preserved jobs," said Dorsey, who added that some shortlines offer profit-sharing plans that bring employees to parity with union-represented employees at larger railroads.

Unionized crews at the nation's largest railroads earn about $20 an hour, railroad industry sources said, but RailTex's crews receive about $10 an hour plus a profit-sharing plan that reportedly distributed about $5,000 to each RailTex employee last year.

RailTex operates on track that sugar magnate John Spreckels completed in 1919, giving San Diego its first direct link to major railroads in the East. The line extends from San Diego to El Centro, dipping briefly into Mexico between Tijuana and Tecate. In Mexico, the SD&IV operates on track that Spreckels built but subsequently sold to the Mexican government, Kling said.

Spreckels spent $18 million and 13 years to bridge deep valleys and tunnel through rugged mountains in the desert east of San Diego. His success silenced railroad industry critics who referred to the planned line as the "impossible railroad." But the line regularly has been hit hard by winter storms that have washed out sections of track in the desert. Fires have destroyed or severely damaged tunnels and trestles.

Partly because of the dilapidated state of sections of the line, the railroad was operating only the short stretches that link San Diego with El Cajon to the east and San Ysidro on the border when RailTex took over in 1984. The line carried no cargo to or from Mexico.

When RailTex began operating the SD&IV, the railroad had only two locomotives--yet Flohr hired a three-person marketing team to drum up business. Flohr said the railroad's salesmen spent their days knocking on doors and telling customers to "think rail. . . . Many of the people we visited said no one from the railroad had come in and talked to them in the past 10 to 15 years."

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