A Massachusetts state bureaucrat who often locked horns with Gordon Fay once said Fay was "like a man falling into a cesspool and coming out with a spotless white suit."
Fay jumped into the financial cesspool in 1984 when he successfully bid to form a new railroad from a handful of run-down, rusting branch lines on Cape Cod that the state had bought from Conrail in one final effort to prevent their abandonment. Fay essentially hocked the future of his successful consulting firm in Lexington, Mass., to buy a few used locomotives and equipment, hire some workers and form the Bay Colony Railroad.
A lot of people scoffed at the idea that a freight railroad could survive in an area that was becoming almost exclusively residential, with no big factories and no chance that any will be built to disturb Cape Cod's upscale residents.
But Fay and his staff started turning profits last year -- partly by hauling lumber to fuel the Cape housing boom, and road salt to help the new residents drive in winter. And they joined the ranks of what is becoming one of the transportation phenomena of the decade: the proliferation of new local and regional railroads.
All over the country, entrepreneurs like Fay are buying abandoned or excess lines from the major railroads to form small short lines and larger regional railroads.
In the era of the high-tech service economy, when smokestack America is supposedly dying, an increasing number of business owners are dropping out of the new wave and staking their futures on an old technology.
These upstarts, in grasping for the legacy laid down by Jay Gould, James J. Hill and Commodore Vanderbilt, are also taking tremendous risks. They often throw every penny they have into their new ventures and usually go deeply into debt with major lending institutions, which are suddenly in cutthroat competition to lend them millions.
Hardly a month goes by that one, two or three of these new railroads are not formed. The railroad industry, built over many decades by constant consolidation and merger, suddenly seems to be scattering itself like confetti across the country. Increasingly, the industry may be evolving into a handful of giant cross-country railroads -- the railroading equivalent of interstate highways -- augmented by small or regional lines that are mostly spinoffs of the big ones.
With heavy debt, often with rundown track, facing sometimes hostile national labor unions, these new railroads are at a fragile stage. Many will not survive. But the trend already is having a profound effect on the railroad industry.
Short lines aren't new to railroading. In 1980, the Interstate Commerce Commission listed 282 railroads in the small and medium categories, many of them decades old. What is new is what has happened since 1980, when Congress changed the rules of the game.
The Association of American Railroading estimates that 149 new railroads with 3,119 employes and 11,103 miles of track were formed between 1980 and 1986. And the pace is accelerating; Harvey Levine, the AAR's vice president for economics and finance, pointed out that nine of those railroads were formed in 1980, covering 920 miles of track, while 30 were formed in 1986, covering 3,496 miles.
Short lines are "the pocket of growth" in an otherwise shrinking industry, Levine said.
As the phenomenon progresses, the newly formed railroads tend to be bigger. The average short line is 52 miles, but that is rising as 400- to 900-mile and longer systems are formed. Many people in the industry blanch at the term "short line," and prefer to call them "local" or "regional" railroads.
Many of the new lines are in the Northeast and Midwest, where major Conrail abandonments and the shutdown of the Rock Island provided a large pool of available track.
Until the past few years, the phenomenon would not have been possible. Getting rid of track was a complicated process. In order to sell, railroads had to apply to the ICC and face the wrath of unions and local communities. Even when they received approval, sometimes after years of costly litigation, they had to pay up to six years of benefits to affected employes, still a yearly drain on the railroads of more than $300 million because of past abandonments.
The world changed with the Staggers Rail Act of 1980, which eased the requirements for abandonments.
Then, in what became the key element in the explosive growth, a landmark ICC ruling in 1984 dropped the six-year employe benefits requirement -- if the lines were bought by a nonrailroader. Railroads suddenly had an incentive to sell to entrepreneurs or corporations or governments.
States, cities and corporations jumped into the railroad game with gusto, and a new type of entrepreneur appeared on the scene.
"There's a different breed of cat coming into the business," said Don Byrne, a longtime Washington transportation reporter and founder of a new newsletter, the Short Line Reporter. "He's not looking at it like a railroad. He's looking at it like a business. They don't have some of the stodgy thinking that you have throughout the industry."
Take Jack Haley, for example, the president of the Chicago Central & Pacific, the former Illinois Central Gulf Railroad's Iowa Division from Chicago to Omaha. The Iowa Division was a marginally profitable but declining operation under ICG, but became a reviving railroad under Haley.
Haley, 51, is a man with a mission and an ego as big as one of his locomotives. Most debates on the future of railroading include his name, whether with praise or with criticism. No one is neutral on Jack Haley, especially Haley.
"We have revitalized the industry," he said, with characteristic hyperbole.
Until 1984, Haley's only contact with railroading had been as a young brakeman on the Union Pacific Railroad. Following an Air Force career, which ended with four years as chief pilot of the Special Air Missions Squadron that handles Air Force One and other VIP flights, he bought a house near Dupont Circle in 1978 and went into the real estate business in the District of Columbia.
"I had no thought, no plans" to go into railroading, he said.
But one morning his wife heard a radio talk show on an obscure book called "Starting a Short Line," by Washington attorneys R. Lawrence McCaffrey Jr. and Peter A. Gilbertson. She mentioned the show that night to her husband, who was beginning to grow bored with his real estate business. He was intrigued.
The American Short Line Association was only a couple of blocks from his house, so he walked over and got a copy of the book. After leafing through a few pages of the detailed and scholarly work, he decided he'd rather hire the authors.
"I never read the book, but I made an appointment with Gilbertson," he said.
With Gilbertson's help, Haley shopped around till he found a small branch line for sale in Iowa. He hocked everything and borrowed to the hilt, moved to Iowa and bought his first railroad, the Cedar Valley. Within a short time, his trains were hauling increasing amounts of grain. The line is now best known for an innovation his wife still operates, the Star Clipper dinner train, which features gourmet dining during a leisurely ride through the countryside. It's sold out weeks in advance.
In late 1984, Haley received a call from officials of the ICG. They were impressed with how rapidly he had revived the Cedar Valley, and asked if he would like to become a true railroad man with a real mainline railroad -- with dozens of locomotives and hundreds of employes, competing with the big operations like Burlington Northern and Chicago & North Western in a major Midwest corridor.
If Haley hesitated, it is not recorded. Again, the call went out to Gilbertson.
They threw together a business plan and, with Haley flying his own plane, headed for New York and the money lenders. Haley, deeply in debt already and living in a tiny second-story walkup in tiny Osage, Iowa, needed to arrange up to $75 million in new financing.
"The surprising thing is they didn't throw us out," Gilbertson said.
General Electric Credit Corp., which already had one good experience in helping finance the Gulf & Mississippi, another Illinois Central Gulf spinoff, was impressed with Haley.
"We thought Jack in particular had the right amount of charm and drive to sell the unions," said GE Credit executive Tim Delaney, going to the heart of what it takes to operate a successful new railroad: labor concessions.
It took more than 60 sometimes-heated meetings, but Haley got his labor concessions. "I said, trust me," Haley said. "I'll put more men to work."
On Dec. 24, 1986, he celebrated his first anniversary -- in the black. And true to his word, he had not only hired all the former ICG employes who wanted a job but had called back everyone from the furlough list and was searching for new hires. On that date, he also paid a bonus averaging $500 for each employe.
So far, almost everyone seems to win in this new movement -- except, perhaps, the truckers who were picking up business as the giant railroads declined, and organized labor, which usually is not represented on the new lines.
For shippers, especially small ones, the short line movement means fewer headaches.
Customers who were relatively unimportant to the giant railroads are the lifeblood of the new smaller railroad. Shippers who might never have seen a salesman from the big railroad can suddenly talk to the owner -- by phone, on main street, at church.
Because the new railroads are low-cost operations, with fewer employes and few of the restrictive labor work rules and pay scales of the larger railroads, they usually can cut rates, often drawing business back to the railroad that had been lost to trucks.
James W. McClellan, director of corporate development for Norfolk Southern Corp., who handles line sales for one of the country's most successful large railroads, stressed that service may be more important to shippers than lower costs. Major railroads, he said, can learn some lessons: "If you look at cost alone, you've missed half the picture."
For instance, airline passengers have all lost baggage, he said, but they return to the airline that seems to care about finding it. "We base our decisions on who handles the screwups better. . . . Caring is part of any good consumer business."
For the major railroads, the short line movement has been a godsend. They can sell thousands of miles of excess track, forgoing the pain and political problems of abandonment while making millions of dollars in the process. And then, if the new railroads are successful, the big railroads gain more business in interchange traffic.
"A number of major carriers have indicated they have hundreds, if not thousands of miles that are available," said Thomas Dorsey, general counsel of the American Short Line Association, one of the fastest growing associations in Washington.
In an era of budget restraint, short lines find state funds -- and even a little federal money -- almost easy to come by.
Many states, such as New York, Massachusetts and South Dakota, have active rail-aid programs. And over the past few years, according to AAR estimates, the federal government -- prodded by Congress -- has granted $123 million to 15 new railroads and $465 million to states for rail planning, grants and loans.
But the private lenders have become the surprise story. Impressed by early successes, other money lenders joined GE Credit, including such giants as Westinghouse Credit Corp. and First Bank of Boston. Competition to lend money to new railroads became almost cutthroat.
Many of the smaller new railroads are nonunion, and the new owners of the larger union shops have negotiated contracts that mostly wipe out a century of restrictive work rules. For instance, Haley's Chicago Central pays train crews a day's pay for eight hours of work, not a day for every 108 miles they travel, as do the major railroads.
As a result, the unions fear major railroads are using the largest of the new regionals to bust their unions. Fred Hardin, president of the United Transportation Union, said legislation is being reintroduced this year to reinstate job protection payments and to place a moratorium on line sales. He said the UTU thinks that major railroads, under the guise of the short line movement, are starting sham companies intended mainly to end union representation.
The new entrepreneurs will be keeping a close eye on Congress this year, where they fear an effort to legislatively reimpose the requirement to pay six years of special payments to railroaders who are laid off in sales of branch lines.
Most in the industry say such legislation would kill the regional railroad movement, if not the smaller short lines.
Barring legislation, the phenomenon is likely to continue for several years, awash with private loan money and numerous entrepreneurs.
However, some see problems, largely because so many new railroads begin life deeply in debt and inherit track that has been allowed to deteriorate as the major railroads downgrade service. Fledgling short lines also are subject to economic downturns.
No one knows this better than the employes of 29 new railroads that have failed in the past six years. Some short line entrepreneurs simply do not have the necessary capital, business sense and luck.
A good example is Colene Meyer, who suffered through what might be a classic case of how not to run a short line. She represents both the promise and the danger of getting involved with a short line.
Before railroading popped into her life, Meyer taught school a few years, quit to raise a family, divorced, married a farmer and then became a meter maid in the upper Missouri town of Maryville until they took out the parking meters.
Then, in Alice-in-Wonderland fashion, she became general manager of the new Northern Missouri Railroad. After answering a newspaper ad for a secretarial job, she survived a year of turmoil on the new railroad, learning the arcane rules of railroad accounting and dispatching, to rise from secretary to the top in just a year.
Meyer and her colleagues were in many ways typical: enthusiastic, hard-working people who had a personal stake in the success of their new baby.
But the owners of the Northern Missouri, consultants and businessmen from the Washington area, began operations with only $30,000 in the bank, failed to pay local taxes and bills and developed hostile relations with the local industrial development agency.
Employe-management relations were poor. Relations with shippers were worse; an early railroad manager was angrily ordered never to return to the property of the largest shipper following an altercation.
But the crowning blow was dealt by the unpredictable streams and rivers of northern Missouri. Three bridges washed out, cutting the railroad into pieces, and there was no money for repairs.
"I guess now I'm accepting it," she said. "I've had my cry."