Railroads: Strength Through Union

Only eleven airlines fly the 285,000 miles of U.S. trunk routes, and seven American steamship lines dock in U.S. ports. By contrast, nearly 100 railroads —the greatest conglomeration anywhere in the world—compete unevenly over 214,000 miles of Class I track, both among themselves and with a growing number of trucks, buses, automobiles and barges. The result is massive inefficiency and chronic headaches for the U.S. railroad industry, which has failed to keep pace with the vast changes in public transportation.

One answer to the railroads’ problems is the merger. Since 1959, the Interstate Commerce Commission has authorized 18 railroad mergers involving 34 lines, is now considering another nine requests. Last week, in the biggest and most significant such case to date, two ICC examiners recommended joining the Pennsylvania Railroad, the nation’s largest, and the New York Central, its third largest. The recommendation, which came after 14 months of hearings in 18 cities and testimony from 450 witnesses, must be approved by the full eleven-member ICC board; the odds are in favor of approval.

Altered Circumstances. The new road, whose name would be the Pennsylvania New York Central Transportation Co., would be the greatest new corporation on the U.S. business scene since U.S. Steel was formed 64 years ago. Penn-Central would become the 16th largest U.S. corporation and the world’s largest transportation company: It would include 19,475 miles of road stretching from Virginia to Canada and west to St. Louis; initially, at least, it would also have 109,000 employees and 182 subsidiaries that do everything from mining coal to making freight cars. Yet even the Justice Department, which alone has opposed the merger for the usual antitrust reasons, is prepared to accede to it now. One reason: after deciding to make his run for the U.S. Senate, former Attorney General Robert F. Kennedy took one look at the railroad problem in New York, left behind at Justice a memo urging approval of the merger because “conditions have changed dramatically.”

The plain fact is that the 13 struggling Eastern railroads can no longer survive without consolidation. Recognizing this, the ICC has already allowed the merger of the Chesapeake & Ohio with the Baltimore & Ohio, the Norfolk & Western with the Wabash and Nickel Plate. Even the bankrupt New Haven has found a partner. Two days after last week’s Penn-Central finding, in accordance with the examiners’ recommendation, the two roads agreed to take over the New Haven’s red-ink freight business for $140 million in stock, bonds and cash. They want no part of its commuter business, which lost $11.5 million last year on 25,000 daily passengers to New York and Boston. In approving the proposed sale, the ICC examiners hinted that New York, Connecticut, Rhode Island and Massachusetts should find some way to subsidize commuter service.

Misleading Totals. The Penn-Central merger announcement came at a curious time: almost simultaneously, both roads issued bullish annual reports. Pennsy Chairman Stuart T. Saunders, 55, glowed over his road’s best performance in eight years: earnings doubled, revenues reached a record $907 million and the road resumed paying quarterly dividends after a seven-year lapse. Central President Alfred Perlman, 62, was hardly less content; the Central’s earnings of $35.5 million on its $733 million in revenues were 21 times those of 1963, largely because the Central has cut its debt by $256 million since 1957 and thus shaved its interest and service charges by $7,000,000. Nonetheless, single-year totals can be misleading, as the ICC examiners took pains to make clear. They found that over the last decade the Pennsy’s return on invested capital had been a meager 1.28% and the Central’s 1.84%—against 10.5% for mining and 7% for metal producers. The railroads’ combined operating losses for the same period: $18 million.

Beset by rising competition, both the Pennsy and the Central have managed to keep going largely through their non-operating income. The Central still owns much of the land above its right of way along Manhattan’s Park Avenue, controls such hotels as the Roosevelt, the Biltmore and the Barclay, and regularly receives ground rentals from the Waldorf-Astoria and the Commodore.

Last year it earned $16.8 million from these sources. Though the Pennsy owns no hotels, its 31.3% interest in the Norfolk & Western brought it $16.7 million in dividends last year. It has agreed, however, to sell off these holdings.

Salesman to Labor. The Pennsylvania’s Stuart Saunders would become chief executive of the new road, and its hopeful future rests on his astute management. A onetime railroad lawyer (Harvard Law ’34), Saunders restored the Norfolk & Western to health as its president, was brought over to parent Pennsy in 1963. He has traveled up to 5,000 miles a week by plane and private railroad car, personally calling on coal and grain shippers to push the idea of “unitized” trains to haul their shipments faster and more cheaply.

Still, he was convinced that a Central merger was his only solution, and he has effectively turned his salesmanship on labor. With the 23 unions that will represent 98% of Penn-Central’s employees, he has worked out a plan to cut the merged lines’ labor force by 8,000 over an eight-year period, agreed to a $78 million severance payment and relocation expenses. This would erase most of the initial savings from consolidating services and facilities, but after that, Penn-Central would save $81 million every year.

The Pennsy and Central are so sure that they will win ICC approval within a year or so that they have already begun to carry out major joint projects. Along with scheduling layoffs, they have altered 1,514 diesel locomotives so that those of each line will be able to couple electrically with those of the other. They have plans under way to alter freight yards, lay necessary connecting tracks and mesh services at major passenger stations. Few of the plans involve improvements in service for hapless passengers. The only solution there, as far as most railroadmen are concerned, is to take them off the trains altogether.