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By 1989 Flohr was no stranger to big organizations. He had done a stint as an army officer with the Corps of Engineers in Alaska, and he'd cut his teeth on railroads at Southern Pacific, a giant conglomerate. As a management trainee, he started in 1965 as a train-crew brakeman. One of his first jobs was working in the Los Angeles rail yards, trying to keep people from derailing trains during the Watts riots. By 1971 he was superintendent of Southern Pacific's San Antonio division, a post he held until 1975.
In 1977 he raised $500,000 and launched RailTex. His own stake, $50,000, gave him 50% of the equity, with the rest held by venture capitalists and private investors.
The railcar-leasing business was tough. By 1982 RailTex's revenues had reached $2 million, but because of high interest costs, Flohr's equipment-heavy business still wasn't profitable. That same year a recession hammered the construction sector, which in turn depressed the rock-hauling business and with it the railcar-leasing trade.
But adversity turned out to be a break for Flohr and his 10 employees. Most of them had years of railroad experience, and to ride out the downturn they began doing consulting work for feeder lines. "This was a real eye-opener for us," Flohr says. "We'd always assumed that these little railroads were pretty well run, and they weren't. We realized that we could run them a lot better ourselves."
It was a serendipitous insight, and in 1984 it inspired Flohr to bid on a contract to operate the San Diego & Imperial Valley Railroad, a former Southern Pacific line owned by San Diego's transit board. With 145 miles of track, it ran from San Diego down to Tijuana and across the Baja peninsula, and back up into Arizona and a junction with Southern Pacific.
The existing operator, part of another short-line holding company called Kyle Railways Inc., wanted out of its contract -- the line was unprofitable. According to a consulting report by a Big Six accounting firm, in fact, it would always be a loser.
Flohr dismissed the report -- "I didn't think the consultants understood the industry," he says -- and pressed ahead with the deal. He liked that it required little up-front cash. He didn't have to buy the real estate -- the 100-foot-wide corridor though which railroads usually run.
"All we had to do was come up with a locomotive, and we were covered," he recalls. A new locomotive would cost $1 million or more, but remanufactured 1950s-vintage diesels sold for anywhere from $80,000 to $180,000.
The use of refurbished engines was only one reason Flohr's San Diego railroad made money from the time he took it over. Union issues were another. Kyle's San Diego operation, like about half of all short lines, was unionized. RailTex was and remains a nonunion company. Labor-cost savings are significant. (Unionized trains, for example, run with a crew of three or four people paid about $23 an hour. RailTex engines operate with two people paid roughly $9 to $12 an hour, plus benefits and quarterly profit-sharing bonuses that now average $5,000 a year.)
Moreover, RailTex is free of restrictive union work rules. Under those rules, unchanged for decades, members of various unions -- signalmen, electricians, mechanics -- stick rigidly to their own trades. "It is absolutely unheard of on a class one for the engineer to do anything but drive the train," says Robert G. Lewis, publishing director of Railway Age, a major trade journal. "On some of these new short lines, the train crews can go out and paint stations or work on the track. That's all to the benefit of people like Bruce Flohr."
Flohr wanted all his line workers cross-trained, even to the point of making sales calls. But to get the San Diego railroad operation going, he hired three full-time marketing people. He wanted them to generate business not only from shippers along the line but from those 5 to 10 miles off the track. Trucks could bridge the gap.
That kind of marketing was something many cash-strapped short lines couldn't afford to do, and it paid off handsomely. On the San Diego line traffic increased from 1,600 railcars a year when RailTex took control to 6,000 annually three years later. It hauled everything from lumber and lard to cement and plastics. The success was repeated on Flohr's second line, the Austin & Northwestern Railroad. In 1986, when it went operational, it handled 2,700 cars. Three years later it was moving 9,000 of them.
Flohr's emphasis on marketing is such that RailTex has one salesperson for every 4.3 switch-crew members, possibly the industry's highest ratio. Through the first half of 1992 traffic grew 12% on lines RailTex had operated for more than a year.
Much of that success is based on selectiveness. For RailTex, not just any feeder line will do. Flohr likes to buy railroads with annual revenues of $1 million to $10 million. The bigger the railroad, he feels, the stronger the tendency for workers to specialize. He also strives for geographic diversity, so a regional recession can't hurt the whole company; RailTex properties are scattered from coast to coast and from Canada to New Orleans. Freight diversity, too, is important. Flohr makes sure no more than 20% of the company's total revenues derive from one commodity, be it gravel or grain. That adds another economic hedge. To hunt for acquisitions, 4 of the 30 people at the San Antonio headquarters work full-time on finding and analyzing candidates. Again, that sets RailTex apart. "Most short lines can't afford to do that," says Tom Heckard, a Washington State representative of the Regional Railroads of America. "In a lot of instances, the president of the company could also be the guy driving the train. They operate on the margin. Bruce Flohr has built his company to where he can afford a full-blown acquisitions staff and can purchase lines that are going to be profitable from the get-go."
