How the CEO of a short-line railroad company responded to the challenges which accompany rapid growth.
RailTex Service Co. was at a crossroads; the right decision, and the right leadership, would mean astonishing growth. Could founder Bruce Flohr keep learning on the job? Or, as happens to so many entrepreneurs, had his company already left him behind?
For Bruce Flohr, the moment of doubt came in 1989. His 12-year-old RailTex Service Co. stood on the brink of a growth phase so spectacular that it would alter the very nature of the business. And he had to wonder, as most company builders eventually do: Can I take my business to the next stage, or is it leaving me behind?
At the time, RailTex occupied a comfortable niche in the railroad industry. It bought open-top freight cars and leased them to quarry operators to haul rock, sand, and gravel for construction sites. By 1989 it had fielded a fleet of 630 railcars worth $11 million. Flohr had a profitable enterprise doing roughly $8 million a year.
But a second division of RailTex was gaining speed. The division operated short-line railroads, also known as "feeder" lines. RailTex had stepped into the world of short lines in 1984, but by 1989 it owned or leased nine of them around the country. They were doing well. As a group, in fact, they were outearning the railcar-leasing business. And that was the rub.
"We were getting lots of pressure from our leasing people to buy more railcars," Flohr recalls. "But we also wanted to buy more railroads. So we had two factions within the company, both making demands for limited capital. The question was, Do we keep growing the two divisions with high capital demands on both sides, or do we phase one out?"
What clinched the decision for Flohr and his team at RailTex's San Antonio headquarters was a fast-moving revolution in the short-line arena. Fundamental changes in railroad law in 1980 allowed the big railroads -- the class ones -- to slim down to a core system. Over the years, they had built hundreds of feeder lines to pull in freight from off-track factories and farms. By and large, however, the feeders were marginal or losing operations; they required too much management effort for too little payoff. To maximize profitability, the class ones were selling those branches to companies like RailTex, which could provide better local service at substantially lower cost than the big railroads could.
By 1989 it was clear that approach was a good deal for the class ones and the small operators alike. Now the floodgates were swinging open. CSX Transportation was fast shedding its short lines. Union Pacific and Southern Pacific were starting to unload their extensive feeder networks. Conrail, Burlington Northern, and others would follow. There were some 500 feeder lines in the United States, and Flohr foresaw hundreds of them coming onto the market.
He wanted a bigger piece of what he already knew was a lucrative business, and he believed RailTex was well positioned to take it. His nine short lines were growing robustly, and that track record was as important to the class ones with railroads to sell as the price a bidder offered. "RailTex's operators are very effective marketers," says Warren Wilson, senior manager of rail-line planning for Union Pacific, which had sold the first of five branch lines to RailTex in 1989. "We spin these lines off, but we certainly want to continue handling the traffic that comes off them. The whole theory is that the local short-line operator can grow the traffic and thereby provide more business for the main-line carrier. And overall, RailTex does a very good job of building traffic."
Wilson also liked the "go team" Flohr had created. Whenever RailTex launches a railroad, it assembles top people from throughout its system to get the new line up and running. They operate it for several weeks while the permanent crew is being hired and trained. "Other people have tried this, but RailTex is unique in having a formal go team, and they've done it so often they have it down to a science," Wilson says. "That makes for quick start-ups."
Executives at CSX, which had sold three short lines to RailTex in 1987, were equally impressed with the go team. "RailTex has always persuaded existing customers to stick with rail, and it's been proactive in building more business," says John Meeks, CSX's manager of feeder-line development.
With RailTex earning such a good name in the tight-knit railroad community, Flohr was confident he could land "more than our fair share" of the new acquisitions. Thus, he decided to sell all his railcars and bet his entire company on the short-line business. "It was like throwing out the baby with the bathwater, because we took our original line of business and dumped the whole thing," he recalls.
With the proceeds of the 1989 sale of the railcars to Chrysler Corp., Flohr paid down some debt and kept $7 million as seed capital for his next round of acquisitions, which came fast and furious. In 1990, for instance, he added 5 more feeder lines to his stable, for a total of 14. In 1991 he bought 2 others, and last year he purchased 4 more, including a 70-mile route in Ontario, acquired from Canadian National, the first privatization of any track in Canada.
RailTex revenues, meanwhile, surged from $16.5 million in 1989 to $38 million in 1992. With more than 1,700 miles of track and some 100 locomotives, assets were approaching $80 million. The company was becoming something of a short-line juggernaut.
As that boom got under way, Flohr kept recalling a chilling discussion at a Stanford University executive course about the stages of corporate evolution. All the evidence, it seemed, pointed to the existence of some natural limit to the usefulness of entrepreneurial leadership. A founder could take a company just so far up the growth curve; only professional managers, went the theory, could push it to the top.
"That really stuck in my mind," he says. "Growing so rapidly forced me to look inward, to see if I was the right person to remain as leader of the company. And if I wasn't, I wanted to be the first to recognize it and be willing to step aside." Still in his early fifties, Flohr decided he would hang on to the controls. And so with RailTex entering a steeper and entirely new phase of growth, he resolved to do everything he could to keep his creation from outgrowing him.
