As soon as the Bristol & Exeter Railway obtained its Act of Parliament proposals were put forward to build a railway between Exeter and Plymouth. Brunel was engaged in 1836 to survey the country and he eventually recommended a coastal route between Exeter and Teignmouth, then turning inland to Newton Abbot and through the hills of south Dartmoor via Totnes, Ivybridge and Plymton to Plymouth. An alternative, more northerly route (eventually completed in 1874 by the London & South Western Railway) joining Exeter and Plymouth via Crediton, Okehampton and Tavistock was surveyed but rejected.
Difficulty in finding subscribers to the scheme delayed the proposal, and it was not until 1843, and after the Great Western Railway (GWR), Bristol & Exeter Railway (B&ER) and Bristol & Gloucester Railway had each undertaken to subscribe generously to the project, that the South Devon Railway obtained its Act of Parliament and began construction. In addition to the main line, a branch between Newton and Torquay (Torre) was also authorised.
The history of the South Devon Railway would be unremarkable except for its disastrous adoption of the Atmospheric System of propulsion. In 1839, Messrs. Samunda Brothers had patented a method of propulsion that avoided using steam locomotives. Stationary engines were placed every 2 to 3 miles (3 to 5 kms) along the line which sucked air along a 15 inch (36cm) diameter pipe laid between the tracks. The top of the pipe had a continuous flap through which a piston inside the pipe was attached to the coach above. The system was first tried on the West London Railway in 1840 and was the subject of much debate between engineers of the day. Brunel recommended the system to the South Devon Railway directors, calculating the initial installation costs would be recovered by not needing locomotives and by reducing the engineering works on the route. The Atmospheric System was calculated to be more powerful than a locomotive, so the gradients and curves on the route could follow the contours of the land more closely, reducing the amount of engineering work.
The railway opened from Exeter in stages from 1846, with trains initially operated by locomotives. The Atmospheric System was not ready until September 1847, by which time the railway had opened as far as Totnes. The Atmospheric System was used between Exeter and Newton until September 1848 when it was finally abandoned as unworkable. The operating costs were twice that of locomotives and equipment breakdowns were regular, nearly bankrupting the South Devon Railway. The GWR was asked to provide locomotives until 1856, whereafter the railway entered into an agreement with a contractor to supply and operate locomotives. It was not until 1866 that the South Devon Railway operated its own locomotives (at a much reduced cost compared to both previous agreements).
The branch line from Newton to Torquay was opened in December 1848, and the main line opened to Plymouth in April 1849. Branches were later built to Tavistock (1859), which was extended to Launceston in 1865, from Torquay to Kingswear (opened in stages between 1859 and 1864), Moretonhampstead (1866) and Ashburton (1872). Additionally, the South Devon Railway jointly (with the GWR and B&ER) controlled the Cornwall Railway, which extended the line westwards between Plymouth and Truro in 1859.
After its disastrous start, the South Devon Railway was never a prosperous railway and the opening of a competing route between Exeter and Plymouth by the London & South Western Railway in 1874 prompted the South Devon Railway to seek a merger with the Great Western Railway, which was achieved in February 1876.