By Roger M. Williams ’56
Most people don’t realize that the railroad industry has seldom, if ever, been in better shape than it is today.A couple of years ago, James Squires ’83, now president of Norfolk Southern, one of the largest and most prosperous railroads in the United States, was taking a course at Harvard Business School. Chatting with an esteemed professor of “strategy,” Squires asked, “What do you think of the railroad business?”
“A dead industry,” the professor replied.
Most of the rest of us would thoughtlessly agree, relying on our fuzzy visions of rusty locomotives, weed-choked tracks, and sleepy, musty stations. The far-flung Amtrak system (save the recently profitable “Northeast Corridor” routes) exists on continual federal life support.
In fact, as at least the strategy professor should have known, the railroad industry ranks among the most prosperous in the country. It has seldom, if ever, beenin better shape than it is now. Says Squires, a bit ruefully, “We have been kind of flying beneath the radar.” That also applies to the other four big, U.S.-based so-called Class I railroads, which are all freight lines, and to an additional two based in Canada but operating in part here. (The Class I designation is based on annual operating revenue, with the government-designated cutoff point now $463 million. Passenger-carrying Amtrak, although bigger in terms of revenues, is unclassified.)
If Norfolk Southern and its running mates are beneath the radar, two little railroads owned by other Amherst grads are well-nigh invisible. But their proprietors don’t mind that at all, because they, like the big boys, are doing just fine. One of these is Farmrail, a western Oklahoma operation started by George Betke ’59; the other, Finger Lakes Railway, in New York State, is partly owned by both Betke and Mike Smith ’68.
A major reason for the robust health of the Class I’s is that back in the 1980s, freed from onerous federal regulations, they began consolidating and ridding themselves of so-called branch lines that had long been a drag on profitability. Many of those lines were sold for scrap. Others went to guys like Betke and Smith, who were driven by railroad nostalgia, a taste for risk or simply a business challenge.
George Betke ’59 (left) and Mike Smith ’68 are in an industry whose success relies on knowing its markets, watching costs and making nice with local politicians.
They joined what is known as the short-line railroad industry. Five hundred fifty-odd “short lines” now operate in 48 states. They range from the laughingly short (one in Texas started with less than a mile of track—and now makes buckets of money) to the relatively huge Genesee & Wyoming, a conglomerate that runs trains throughout central New York State and into Canada. The industry’s average length is about 100 miles; the average number of employees, 10 to 15.
Each short line tends to haul one or a couple of profit-making products to or from one or a couple of good, dependable customers. These railroads rely heavily on knowing their markets, watching costs with a sharp eye and making nice with local governments and the big railroads with which they have to interface. Unlike Squires, sitting atop shareholder-owned Norfolk Southern, their owners need to be entrepreneurs. Says Richard F. Timmons, president of the American Short Line and Regional Railroad Association, “This business involves a lot of risk, personal investment and hope.”
In terms of what they haul, Farmrail and Finger Lakes could hardly be more dissimilar. Under Smith’s day-to-day leadership, the latter has developed a broad and varied customer and commodity base: customers in more than a dozen New York cities and towns, commodities ranging from grain and potatoes to pulp board and propane. Farmrail has followed the opposite business model. “Ten to 15 years ago,” says Betke, “two-thirds of our business was in agricultural products, principally wheat. Now it’s crude oil,” thanks to a discovery in the Anadarko Basin, located primarily in western Oklahoma. The annual total of carloads has been rising steadily, and geologists tell Betke that the basin will fill many more cars before it runs dry. He readily admits, “No one, including me, predicted this oil boom. It’s strictly a function of new technology”—the controversial practice known as fracking. Timmons may well be thinking of that windfall when he observes of his association’s members, “They need to be very alert to changing population trends and to the markets for the commodities they haul. They also need to reinvest a lot in infrastructure and equipment.”
Although dedicated overseers of their properties, a great many short-liners do not live within hailing distance of them, and Betke and Smith fit that pattern. Betke sacrifices the charms of Oklahoma for a house on the coast of Maine that dates partly to 1840 and affords views of soaring eagles and spawning fish. Smith has New Hampshire’s Lake Winnipesaukee close at hand, but ambience alone does not explain his presence there. He dislikes both the business atmosphere and the tax rates where his railroad is located.
The partners present something of a personal contrast, too. Betke, 6-feet-2 and handsome at 75, has an easy manner and a slightly sly sense of humor. His short-line associates esteem his analytical abilities, which come across readily in extended conversation. Smith is shorter and stocky, with an uncommonly firm handshake. He drives an outsized Toyota Tundra as his everyday car, but as a proper executive, he may be observed piloting it, even on hot, muggy days, in a long-sleeved shirt with tie pulled snugly up to his neck.
Railroad owners have probably been as scarce as morticians in the long line of Amherst grads, so you might think two of them in modern times would at least know of each other. But they didn’t until the early 1990s, when Smith began seeking Betke’s advice on and participation in possible short-line acquisitions. For some time, the Amherst connection still remained unknown. Then, when Finger Lakes became a prospect, Smith says, “George came to my office to talk about it and noticed on the wall my diploma and some other Amherst stuff.”
Old school tie aside, a partnership was attractive. Their railroad experience differed considerably, and so did their strengths. Smith had worked for a series of lines, starting as a lowly track-gang member during undergraduate summers. Betke had been a banker, then a Wall Street analyst specializing in railroads. Pairing Smith’s marketing chops with Betke’s financial acumen was a natural step.
As a high school student in Newark, N.J., Betke had applied only to Amherst, drawn by the nationally known “New Curriculum” and, as he puts it, “the forced discipline of taking prescribed subjects in your first two years. That just seemed right to me.” Dismissing his original idea of becoming an architect—“I decided I wasn’t creative enough”—he felt himself “a little adrift, like a country geek,” and ended up majoring in economics. He worked at campus jobs during all four years, and he considers the most valuable part of his education at Amherst “learning to communicate with all sorts of people.” Now, decades later, doing just that with the people who work for him is one of his most satisfying preoccupations, and he has carried it far beyond communication: years ago, Betke made Farmrail the nation’s first employee-owned railroad.
George Betke ’59
Betke’s version of “employee-owned” fashions him as an employee, albeit one who owns a majority of the stock. His decision to parcel out the rest among the workers grew out of a “bad experience” with—and division from—his original Farmrail partner: “I said to myself, ‘The real partners in this company should be the employees.’”
The boss puts money in a trust and apportions shares of it according to a formula based on income level and longevity. Vesting comes after three calendar years of employment. The payouts, Betke says, are based on the independently determined price of Farmrail stock, and they can be juicy: “One of our people retired with six figures from the trust, a very nice addition to his pension from the Railroad Retirement program.”
At his father-in-law’s suggestion, Betke sought and landed his first job in the trust department of a Dallas bank. Then he went to business school and hooked on as an “institutional researcher” at the young Wall Street firm of Donaldson, Lufkin & Jenrette. Five years later he and a colleague set up their own “boutique shop” to handle the same kinds of business. On his own hook, he got involved in his first railroad acquisition, involving a 12-mile, southern Colorado line whose freight cars they rented to a long-distance carrier.
Farmrail began to take shape in the early 1980s, when Betke read that Class I Burlington Northern was shedding a bunch of light-density branch lines that were draining capital from the company. “I looked at a map with 20 properties on it, and we eventually put together a deal involving private lines plus a state-owned one and eventually bundled them into a holding company, Farmrail System Inc.” For “less than six figures,” Betke leased two old locomotives and 35 miles of track. (He now owns three-quarters of his line’s 340-odd miles; the state of Oklahoma owns the rest and leases them to Farmrail). Betke hired a workforce of “about seven people” and proceeded to build a business shipping principally wheat to terminals at either end of what was essentially a vestige of the old and storied Rock Island Line. There the loads connected to larger Western carriers.
Mike Smith’s route to a railroad career was entirely different from Betke’s—and different as well from that of Norfolk Southern’s James Squires. (Squires joined that company as a young attorney and later switched to finance, gaining two crucial pieces of experience for his trip to the top of the corporate ladder.) While other summer-vacationing Amherst undergrads traveled in Europe, worked as camp counselors or took supplementary courses, Smith opted for manual labor—with crews repairing tracks on the Delaware and Hudson. That would have dissipated the railroad dreams of many a young man, but not this one. He had another motivation, too: “I grew up with railroaders in my family.”
Mike Smith ’68
An upstate New Yorker with a public school education, Smith says he is “not sure what got me into Amherst. I played high school football [in supremely retro leather helmets] but wasn’t recruited.” He majored in political science (“As a student, I was right up there with George W. Bush”) and joined Theta Delta Chi. “Our house was known as ‘the Gentleman Jocks,’” he says, adding with a grin, “Our idea of diversity was pledging a couple of linemen.”
When Penn Central offered Smith a postgraduate job as an “operating management” trainee, he snapped it up. “That railroad, which had recently been created in a merger, was a disaster from the start. But I learned a lot there.” While at Penn Central, Smith branched into marketing, and he has stayed with it ever since. He moved to the Boston & Maine, also floundering financially, as assistant to the president, and with that far-from-overwhelming résumé, he became a consultant to the industry.
The result: a 118-mile line that traverses New York’s Finger Lakes area, from which it would take its name to slap on an oval red logo. The purchase involved some intricate financing. Betke stood for a big chunk of it and brought in New York State-based Genessee & Wyoming. Smith plays down his financial contribution: “I pretty much just put up the earnest money. But I also put the deal together.”
Doing that required a lot more than convincing Conrail to sell. It also meant persuading officials in counties and towns in the Finger Lakes region that they should stop imposing the property taxes that were costing Conrail $1.3 million and were a major reason why it wanted to shed the small line. “I visited every one of those places,” Smith recalls, “appeared at countless public hearings and convinced them to let us make [lower] payments in lieu of the taxes. Without that, I told them, the sale would not go through, and the railroad would disappear.” None of the local officials wanted to risk that happening. They accepted the in-lieu-of offer.
What did all that effort yield? Smith replies cheerfully: “What amounted to a ‘dirt railroad.’ Track in such poor shape that freight couldn’t run on it faster than 15 miles an hour.” Dedicated short-liners are undaunted by such conditions, and the Smith-Betke tandem reconditioned Finger Lakes and gradually made it a prosperous enterprise. “Revenues have been steadily building,” Smith says. “We started at $5 million a year, and now we’re over $12 million.” Profits? “We’re solid from that standpoint—but we haven’t taken profits at the expense of reinvestment. Having worked in the larger business world, George and I agree that, in railroading, you invest in your future. In our case, 20 to 25 percent of our annual revenues go back into track maintenance and upgrades. That’s a lot, but it’s what we should be spending.”
To maintain a good balance sheet, Finger Lakes depends substantially on Smith’s marketing skills. “In this business,” he says, “a lot of marketing is common sense. You’re dealing with equipment, service and rates, and you price and balance them according to what’s important to potential clients. For instance, we do a steel haul of about 80 miles, to an interchange with Norfolk Southern. What sold the customer on using us, rather than trucks, was that for the ‘gondola’ cars [low-sided and normally open to the elements] we designed a cover that protects the steel from the weather but lets air move through.”
That satisfied Smith’s marketing principle of keeping local interests foremost in mind. Even more, it satisfied short-liners’ constant desire—and need—to compete successfully with the trucking industry. Referring to the gondola-car covers, he emphasizes that “the customer pays more but prefers us to trucks, because the steel comes to him clean.”
Long-distance trucks have long been the bête noire of the railroads. In ways both subtle and blunt, shortliners of all stripes denounce them at every opportunity. The “Industry Overview” of a 2012 association booklet refers in its second paragraph to “the environmental benefits gained by shifting freight from truck to rail.” It goes on to tick off some of the fixed-cost disadvantages shortlines face with relation to trucks: the deterioration of wood ties, the hassle of clearing snow and brush, and the need to fill in washed-out track beds “even if only a single train operates on the line.”
That list doesn’t even include complaints about air pollution and traffic congestion caused by trucks or the railroaders’ biggest gripe: that trucks run on highways paid for by the public, while trains operate on rails and rail beds their owners install and maintain. Not only that, says Smith with great distaste, but because the federal highway fund can no longer pay for our highways, “the feds dip into general funds to do it.” From one source or another, the feds spend some $40 billion a year on highways, according to statistics from the Congressional Budget Office. And as if the typical long-haul truck doesn’t do enough damage to the roads, Smith points out, “now we’re seeing milk trucks of up to 120,000 pounds tearing ’em up.” Betke sums up the railroaders’ view of trucks: “they take advantage of existing markets; we create them.”
(The trucking industry, of course, presents a robust rebuttal. Truckers argue that although rail transportation is cheaper, it can’t provide the level of service—especially quick delivery— customers demand nowadays. That’s particularly true, contends a spokesman for one of the truckers’ associations, for “value-added, goods-producing industries.” Battling on a seemingly eternal front, the industry insists that trucks do not roll expense-free over roads paid for by taxpayers, but instead pay, through fees and fuel taxes, hefty percentages of highway construction and maintenance.)
More than anything, Betke and Smith, as short-line owners, seem driven by a compulsion to run tight ships.They figure that their margin for error is small and their resources few, and that they must constantly market themselves and adjust adroitly to changing business conditions.
On the matter of costs, the short-line association asserts that “average labor and equipment costs for small railroads are typically much higher than for Class I’s.” Track maintenance is a constant, major drain, and locomotives, even the secondhand and often old ones the short lines habitually buy, are expensive. But the association’s claim about labor cost seems counterintuitive, because the Class I’s remain heavily unionized while few short lines deal with unions. Short-line owners’ anti-union attitudes stem partly from pressure to hold down costs but partly, too, from the fact that the owners tend to be devoted free enterprisers.
For their part, the numerous unions that organize in the railroad industry—or try to—seem to acknowledge that it’s a difficult task, despite more modest wages and benefits among the short lines than the Class I’s. For one thing, says Ron Kaminkow, general secretary of the left-leaning Railroad Workers Industrial Union, “The whole thrust of the short-line industry has been about avoiding unionization. For instance, they don’t want to pay people who are nothing but conductors. I mean a short-line conductor might do that job on the train, then go and help repair the roof on one of the buildings.” In addition, Kaminkow says, “There are guys who just like working for the short lines. It’s predictable and in some ways comfortable. You don’t work at night; you make one trip a day—maybe one a week.”
Both Betke and Smith are outspoken on this issue. “Absolutely not!” declares Betke when asked if any of the Farmrail or Finger Lakes workers belong to unions. “In my opinion, [unions’] presence in the short-line business is evidence of bad management”—meaning bosses who fail to treat their employees well. “The whole staff [of Farmrail] has my telephone number. If they have a problem, they can call me at any time.”
If in the 21st century that seems paternalistic, Betke is unapologetic. He points proudly to Farmrail’s generous employee benefits, which include medical insurance without individual or family premiums, and to the monthly “Farmrail Teammate” newsletters he distributes to help keep worker morale high. Each summer, Betke goes to Oklahoma to attend the employee picnic.
Richard Timmons, the association president, laughingly recalls one of those picnics he attended several years ago: “George had ordered up a huge barbecue grill. The thing came rolling up on a double-axle trailer, big enough to cook six cows at the same time. I imagine you could have fired it up to a thousand degrees. It was one of a kind, believe me.” Betke protests that Timmons is exaggerating, but readily admits to treating the annual picnic as a very important occasion.
To Betke, his efforts, from persistent newsletter through over-the-top grill, come under the heading of boss-to-worker communication. And that reflects a deeper conviction: his antipathy to what he calls the “military command structure” of the Class I roads and their style of “saluting the boss up and down the organizational chart.” Smith seems less driven by a communication imperative but even more committed to operational efficiency. His goal at Finger Lakes is to run trains operated by a single individual—the engineer.
When asked why, as head of a very Oklahoma enterprise, he lives half a continent away, Betke offers no excuses. “I don’t look or act like an Okie,” he says with a grin. “I’ve never lived there.” He visits a few times a year and has graduated from a motel room to an apartment in the town of Clinton. Does he sense resentment on the part of the local folks? “I really don’t. I think they realize that I’m doing my best to build a long-term business.”
When he seeks workers, Betke has the dynamics of the local economy in his favor. In Oklahoma, as he puts it, “railroading is a steady job. Farming goes up and down.” For Farmrail, he prefers Okies off the farm to experienced railroad workers from elsewhere: “They have a better work ethic and more discipline.”
Betke has served on the short-line association board for years, and he and Smith frequently lobby Congress and federal regulatory agencies in behalf of short-liners’ interests. Both men played important roles in one of the short lines’ most important legislative victories: passage in 2004 of a tax credit that freed up money for reinvestment.
Despite that success, Betke professes a weary realism about short-line lobby prospects. He laments the built-in disadvantage they face in competing for political favor against truckers: “There are almost 4 million truck drivers and—taking large and small railroads together—only 200,000 railroad employees.” No matter. He will keep up the good fight from Maine and, when necessary, Washington. Smith will do likewise, with added attention paid to New York State pols in Albany.
They will also take continuous satisfaction from confounding both private and public expectations. Says Betke, “Railroads are battered by regulators, we face intense competition and the public often views us as a nuisance. Despite all that, Mr. Harvard professor, we are very far from dead.”
Roger Williams has been a magazine journalist since graduating from Amherst. He lives in Washington, D.C.
Photos by Christopher Churchill