Marvin Prater

DETERMINANTS OF PROFITABILITY OF GRAIN DEPENDENT SHORT LINE RAILROADS

This paper is the first empirical analysis of U.S. short line railroad profitability using primary cost and revenue data. Models of short line profitability are developed using Earnings Before Interest and Taxes (EBIT) as the profitability measure. The sample includes 34 short lines operating in 17 states in the midwest region of the U.S. for the fiscal years 1986-1995. The models are estimated by OLS regression and explain up to 75% of the variation in short line profitability. Nearly all the explanatory variables have the theoretically expected sign and are statistically significant. The variable DENS (number of carloads per mile of main-line track) is the most important influence on EBIT. However, several other variables are identified as important including management ability to control expenses, type of short line ownership, size and ownership of the short lines network, composition of traffic, and length of haul. The empirical results of the study indicate that a short line operating at the mean values of the explanatory variables is likely to only break even. About 25% of the sample short lines have a high probability of requiring government assistance to continue operating.