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.”

The efforts have apparently paid off. About half the SD&IV;’s cars now carry freight headed to or from manufacturing plants along the South Line that stretches from San Diego to San Ysidro or the East Line that links downtown San Diego and El Cajon. The rest is international traffic headed to or from Mexico.

The SD&IV;’s customer list includes a distributor in El Cajon who receives beer from Coors’ Colorado plant. Canadian newsprint manufacturers ship products to several newspapers in San Diego County on the line, and a variety of manufacturers use the line to ship or receive freight.

Since 1986, the line has made dramatic inroads into Mexico, using a stretch of track that runs from Tijuana to Tecate in Mexico. During the past four years, a per-car charge levied on freight trains entering Mexico has generated about $1.5 million for the Mexican government, Kling said.

At Garcia, a town near Tijuana, the SD&IV; loads cement that is carried to a storage facility in National City. The SD&IV; also carries sugar shipped to a Mexican bottling plant by Spreckels Industries, the San Francisco-based company whose founder built the railroad.

The line also transports grain that is hauled into San Diego County from Topeka, Kan., by the Santa Fe Railway. SD&IV; engines haul the grain to a depot near Tecate, where it is stored before being trucked to the interior of Mexico. Similarly, the SD&IV; carries U.S.-grown barley to a brewery in Tecate and propane gas to a wholesaler in Tijuana.

Maquiladora plants on the Mexican border generate a relatively small percentage of the line’s business, Kling said, largely because the section of Mexican track used by the SD&IV; is not close enough to be considered an economical alternative.

In addition to building cargo traffic, RailTex has also boosted productivity by training employees to handle a variety of jobs. SD&IV; office workers, for example, help in the railroad yard, and the company has cut its engine crews from four to two by training employees to handle several jobs, Kling said.

With the exception of the Mexican portion, RailTex operates on track owned by the San Diego Metropolitan Transit Development Board, which acquired the track from Southern Pacific during the 1970s for the popular San Diego Trolley. In 1984, when Kyle wanted to abandon service, federal regulations required that the MTDB, as track owner, find an operator that would continue freight service.

An initial MTDB survey of potential operators generated “modest to non-existent interest,” and a study by a Big Eight accounting firm suggested that the MTDB would need to offer a subsidy to attract an operator.

Despite that prognosis, RailTex has operated the line at a profit since 1984 without a subsidy, Flohr said. Although the SD&IV; has been buffeted in recent months by the nationwide economic slowdown and skyrocketing fuel prices, the railroad has done “a terrific job” of serving customers in San Diego, said MTDB spokesman Jack Limber.

However, the SD&IV;’s success depends in large part on the Santa Fe, which owns the tracks that link San Diego to the rest of the country, because the railroad hauls only cars that are hauled into the county by the Santa Fe. The SD&IV; is thus dependent on the larger line for originating traffic for it in far-off places such as Kansas and Canada.

The SD&IV; could lessen that dependence if it reopens the long-closed section of line between Tecate and El Centro, where the railroad could connect with Southern Pacific tracks, linking it with other major lines in the East. Rail service to and from San Diego County now must travel through Santa Fe hubs in Los Angeles and Riverside counties.

Although the company is using an insurance settlement to repair bridges and tunnels on the deserted section, Flohr said RailTex has yet to decide if service between San Diego and El Centro will resume.

If the line were reopened, the El Centro connection could also make the Port of San Diego more attractive to container ships that off-load their goods onto trains, said William Stonehouse, the port’s director of trade development. Unlike Los Angeles, which “has three transcontinental railroads terminating in their port, we’ve got just one branch line that comes in from L.A.,” he said.

But, even if the El Centro connection is made, “it’s not going to be a high-speed line by any stretch of the imagination” because the track travels through more than a dozen tunnels and gains 4,000 feet of altitude in a relatively short distance, Stonehouse said. “It would be unlike any other railroad line going out of Los Angeles,” he said.