It is racism unless it's towards Kran. The definition of "species" is: "all individuals that are able to interbreed and produce fertile offspring". Since all races in PS except the Kran are able to do so (and frequently do), all Yliaki except Kran are one single species, and thus the terms "race" and "racism" are correct.
But racism is fun - I think it can add colour to an RP
Racism is the cheapest, least creative and least interesting way of creating conflict (even world domination is more creative, if only slightly). This is also why it is so common (both IRL and in RPGs): you don't have to think at all. I agree that racism
can, if done well and backed by the settings, make for some interesting RP. However, in PS it is
not backed by the settings (as has been stated already), nor is it usually done even close to "well".
Add to this that it's a very over(ab)used idea, and really the only benefit it has is that it generates quick conflict (with duelling usually being the ultimate goal), which is in itself highly questionable in terms of both RP and realism.
I don't understand why people equate "lack of racism" to "no conflict at all". There are many more sources of conflict, ranging from economical differences to personal dislike. Also, a conflict is more interesting if it keeps boiling, instead of the hot but swiftly faded flame of a duel (especially if it's merely using the combat system). I suspect that people who require a constant supply of duelling have left their characters too shallow, so that they cannot define the character's reaction to anything but combat.
Xenophobia is a good point. It can be argued to be one of the supportive factors in racism. However, it cannot occur between the races / species in Yliakum due to the very high, almost complete, mixing. Even without interbreeding, Kran are an everyday occurance just like any of the races.
