On April 29, 1881, the Austin and North Western Rail Road Company was incorporated to build a line from Austin to a connection with the Texas and Pacific at Abilene, along with branch lines including one to a point on the Rio Grande. The capital was $3 million, and the general office was at Austin. Members of the first board of directors were J. A. Rhomberg, J. K. Graves, and F. T. Walker, all of Dubuque, Iowa; A. H. W. McNeal of Asealoosa, Iowa; and Dr. M. A. Taylor, Rudolph Bertram, Leander Brown, Francis B. Forster, and W. H. Westfall, all of Austin.
The company was able to construct only 106 miles of track. The initial sixty miles of narrow-gauge track between Austin and Burnet opened in May 1882. However, the line did not prove profitable and was placed in receivership in October 1883, with Rhomberg serving as receiver. It was acquired by W. B. Isham, acting for the bondholders, in 1885, and in 1888 it was reorganized under the original charter as the Austin and Northwestern Railroad Company. The railroad carried all of the granite from Granite Mountain, nearly 16,000 carloads, used to build the state Capitol. Several cars derailed near Brush Creek in Travis County, and granite blocks can still be found in the streambed. The company extended its line to Marble Falls by using the charter of the Granite Mountain and Marble Falls City Railroad to build the 2.35 miles from Granite Mountain.
The railroad was sold to C. W. Holloway in 1890, and came under the control of the Houston and Texas Central (Southern Pacific) the following year. The line was converted to standard gauge during the summer of 1891, and an extension from Fairland in Burnet County to Llano, in Llano County, was completed in June 1892.
The Austin and Northwestern was profitable throughout the latter half of the 1880s and the 1890s; most of its income was generated by the transport of mineral resources. In 1891 the road showed a profit of $26,862. Three years later, in 1894, it grossed $252,002, of which $102,698 was profit. In 1893 a two-mile spur was built to the Bessemer-Oliver Iron Mine. The market failed to develop, however, and the railroad's profits declined; in 1898 the Austin and Northwestern grossed only $151,820, and operating expenses totaled $136,629. The Bessemer-Oliver Iron Mine spur was abandoned in 1902.
In 1901 the state legislature approved the merger of the Austin and Northwestern into the Houston and Texas Central, which occurred on August 22 of that year. As a condition of the merger, a new passenger terminal was constructed at Austin, and the line was extended from Burnet to Lampasas in 1903. The Lampasas line was abandoned in 1951. In 1986 the Southern Pacific, as successor to the Houston and Texas Central, sold the former Austin and Northwestern as well as trackage between Giddings and Austin to the city of Austin and Capitol Metro. Freight service over the line was leased to RailTex, Incorporated, a short-line railroad company based in San Antonio. Operation of the new Austin and Northwestern Railroad began on August 15, 1986. The capital was initially $1,000, but in 1989 it was raised to $100,000. The principal place of business is Austin. The members of the board of directors were Bruce M. Flohr and Robert R. Lende, both of San Antonio; Fred E. Hamlin of Junction City, Oregon; William P. Ludwig, Jr., of Austin; and Ramsey Clinton of Burnet. In 1990 the line reported revenues of less than $5 million; it hauled nonmetal materials, building materials, scrap paper, and beverages.
In May 1996 Longhorn Railway, a subsidiary of the Central of Tennessee Railway and Navigation Company, Inc., out of Nashville, took over the Austin and Northwestern line from RailTex. Capital Metro cancelled Longhorn Railway's contract in March 2000 and eventually awarded an operating contract for the 162-mile rail line to Houston-based Trans Global Solution, Inc., which conducted its Austin-area rail carrier business under the name Austin Area Terminal Railroad. Longhorn Railway, accused of not fulfilling its freight rail operations, won a lawsuit against Capital Metro in December 2001. A jury found that Capital Metro had failed to maintain and make improvements on the tracks.