In 1983 WATCO was established Charles R. "Dick" Webb. Born in Independence, Kansas in 1938, Webb died in 2009. A college graduate with a BS in Business Administration, he served in the Kansas Army National nine years while working for the Atchison, Topeka & Santa Fe Railway. Starting at his kitchen table with only eight employees, Dick founded and chaired what would become the Watco Companies, Incorporated. The first operation was an industrial switching operation at a paper mill in DeRidder, Louisiana that is still in existence. Webb then started his first mechanical operation, a rail car repair shop in Coffeyville, Kansas in 1985.
On his passing, Watco employed over 2,000 people in 26 states and operated 3,900 miles of track, 20 short line railroads, 22 industrial switching operations, 14 mechanical shops, 18 mobile mechanical repair locations and 11 trans-load and intermodal locations. Today, the company is even larger.
In the beginning, the Coffeyville mechanical shop had been held captive to the major rail lines. During discussions with the Union Pacific Railroad the opportunity arose to purchase the moribund line running from Nevada, Missouri, to Coffeyville. This 1987 sale was the Union Pacific's first short-line sale and WATCO's first common carrier railroad, which was named the Southeast Kansas Railroad. This railroad ran on a shoestring and was eventually folded into the larger WATCO-owned South Kansas & Oklahoma Railroad. Much of the original Southeast Kansas has been abandoned.
But, for the early years, WATCO's forte' was industrial switching. It was an innovation in the mid-1980s. The Regional Rail Reorganization Act of 1973 (the "3R Act") led to the Consolidated Rail Corporation, or Conrail being formed by the US government in 1976. That law was followed quickly by the Railroad Revitalization and Regulatory Reform Act of 1976, known as the "4R Act.” These two acts deregulated a US rail industry that had been in financial straights for around 45 years. These laws caused US railroads to finally find almost universal financial stability and success. And it also led to something called industrial switching companies.
Before 1983, industries requiring direct rail rail service either performed the work in-house, owning their own locomotives and crews, or owned their own shortline railroads, or they were served directly by other common carrier railroads. Seeing the potential in contracting this work as a private venture, and realizing the 3-R and 4-R Acts had failed to address this niche business, Webb became an inventor of contract industrial switching. This allowed smaller operations to get rid of their expensive rail equipment and under contract WATCO, and later numerous other contract switchers, did all the work for the particular industry or plant.
I went to work from 1992-1994, for WATCO in their industrial switching operations. That is what is now fancifully called 1st-mile-last-mile operations. By this time, WATCO was operating industrial switching in chemical plants, paper mills, ports, and warehouses in Alabama, Georgia, Kansas, Louisiana, Oklahoma, South Carolina, Texas, and Virginia, at least. They had also formed new railroad companies across the Midwest and West.
What I witnessed with WATCO was Class I and union intransigence, and short-line, customer-focused excellence. The first operation that I worked was a Union Camp paper mill in Eastover, South Carolina that initially hired WATCO during a project doubling the size of the plant. Within months of the plant's expansion, production more than tripled. This was in spite of the two Class I’s and their unionized train crews doing all they could to sabotage WATCO’s efforts. They stuffed the plant’s receiving yard with every incoming car, and empty cars enroute to other industries in the area. CSX's Cayce Yard and Norfolk Southern's Andrews Yard in the Columbia area were surely emptier at that time.
This was a concerted effort by the unions to make it impossible for WATCO to get the oldest products into the plant for processing. This affected the final product and also interfered with the paper company’s management of its car fleet. Nevertheless, WATCO succeeded in coming up with a plan to straighten things out and soon had to hire more railroaders to handle the additional traffic from the plant. It also caused the Class I’s to run longer trains from the facility producing more income for the big railroads. Eventually, the unions backed off and accepted that they would no longer work the mill, and that they would just haul cars into and out of the mill's yard. WATCO would do the hard work.
Prattville, Alabama boasted another Union Camp paper plant that was far older and less efficient. WATCO took over from Class I railroad Illinois Central (now part of Canadian National) and within a year the plant received an award for DOUBLING production.
At both plants, the Class I’s charged per car movement. WATCO charged a flat rate per day; car movements were not an issue. This ensured that cars were moved when the customer wanted and needed them to be moved, and the customer didn’t have to worry about possible wrong car moves, or additional switches due to heightened production or an employee error. The industries won with increased production that lowered prices, the Class I's won with increased traffic, and they all won with increased profits.
This sort of success has been born out in hundreds of examples. But, it has also been born out that the Class I’s are less concerned with increased traffic, but are rather more concerned with short-term profits. They are now victims of their overwhelming success since 1976.
Before deregulation railroads were extremely lucky and were considered successful if the were able to produce operating ratios (most simply, the ratio of dollars earned to a dollar spent) in the low-to-mid nineties. As an example, if the XYZ Railroad spent 95 cents to earn a dollar, they were considered successful. Many railroads in that day saw ratios in the 100+ range. Today, the major Class I railroads are considered poorly managed if the operating ratio is in the mid-sixties range! Many of the lines that had 100+ ratios have been sold off to shortlines and regionals and are today quite profitable!
Shortlines and regional railroads, understanding the value of true customer service, are willing to work hard to cultivate customers. Making two or four or 14 cents on the dollar will keep them in business, AND will bring more business to the railroad. Companies like Watco (the current iteration – less caps), Genessee & Wyoming, Gulf & Ohio, Jaguar Transport, and independent lines understand this implicitly. Class I's want large customers who can provide easy-to-move, large-scale traffic with a minimum of labor and employees. They embrace J.B. Hunt, Amazon, Maersk, and coal shippers. And it is why the Class I's have watched their share of freight tonnage fall as a percentage of overall freight haulage in the U.S.
Class I railroads MUST realize that increased productivity, profits, and traffic can only be gotten by enlisting shortlines and regionals to do the grunt work. These smaller companies, far less entrenched and able to adjust more quickly to customer needs, are seeing their tonnage and profits increase. The industry needs to leave the Class I’s to move the trains from Yard A to Yard B, while shortlines take care of the work the big boys don't want. Until then Class I's will continue to lose traffic and profit, and the unions will continue to lose members.
