11.11.06

UNMAKING THE PENN CENTRAL.

The emergence of a profitable freight railroad network over the past thirty years has been the consequence of deregulation, restructuring, and mergers. Earlier this year, I recommended Main Lines as a useful history of railroading from the passage of the Staggers Act to the contemporary era. Tonight's Book Review No. 39 features The Men Who Loved Trains, a Fortune editor's work on the men, minds, and intrigues that culminated in the sale of Conrail to CSX and Norfolk Southern in 1999.

Before there was Conrail, there was Penn Central, and the book at hand begins with much of the history whose first draft appeared in The Wreck of the Penn Central, including a cameo appearance by Miss Hurst Golden Shifter. Penn Central is a case study in how not to combine two companies (if the business styles are different and the senior managers don't get along, agreeing to merge and hoping for a "we're all in this together" spirit to emerge is wishful in the extreme.) In both Wreck and Men, there is ample evidence that deferring maintenance on the railroad means spending a little less money now in order to spend a lot more money later, at the risk of losing business, and that pursuing risky and currently money-losing ventures in the hopes of offsetting losses in the core business is wishful to the limit. (The comparison to, say, academic administrators deferring maintenance on classroom buildings and neglecting the faculty while pursuing bowl bids is left to the reader as an exercise.)

Conrail, with an infusion of Government money and the freedom to get rid of redundant competing lines (the material on the work of the government analysts who identified "potentially excess" rail capacity in the northeast is quite instructive) was able to put together the railroad Penn Central's operating department desired, with New York Central's Water Level Route handling most of the Chicago-Cleveland-Port of New York and New Jersey traffic, and a Philadelphia-Pittsburgh-Cleveland-Indianapolis-St. Louis route that was Pennsylvania on the ends and New York Central in the middle making the system a large "X" crossing at Cleveland. The Reagan Administration intended to sell Conrail piecemeal to the other eastern railroads, but in those days the emerging eastern carriers were not in a position to put together an offer acceptable to the government. Instead, Conrail was sold on a public offering, and it was able to take advantage of the freedoms under the Staggers Act to become a profitable enterprise. At the same time, however, the western railroads were groping toward an ultimate configuration of two U.S. carriers, with Canadian National and Canadian Pacific operating substantial properties in the central states. That put Conrail in play either as an eastern extension of one of the western systems, or as an additional component of one of the eastern systems. Thus the game began. Merger negotiations are as messy as conference committees of Congress, and principle takes a back seat to self-interest as self-interest dictates. (That railroad mergers were under the jurisdiction of something called the Surface Transportation Board, a new agency that replaced the irrelevant Interstate Commerce Commission to enforce antitrust laws usually left to the Federal Trade Commission and the Justice Department adds to the mess.)

The game ended with Conrail divided among the two big eastern systems, Norfolk Southern and CSX. The holy Conrail X was itself partitioned, with Norfolk Southern getting the Chicago-Cleveland-Pittsburgh-Philadelphia part (their Nickel Plate and Wabash already gave them a Buffalo-Cleveland-St. Louis line) and CSX getting Boston-Buffalo-Cleveland-St. Louis. Norfolk Southern also got the former Erie line from Buffalo to New Jersey via the Southern Tier of New York.

Who won? Look at yesterday's map. Note the thick line of container traffic running Long Beach-Albuquerque-Kansas City-Chicago-Cleveland-Pittsburgh-New Jersey. That's Santa Fe handing off to Norfolk Southern. Union Pacific is in second place in the west: its Salt Lake-Chicago segment is a bit thicker than Burlington Northern's Seattle-St. Paul-Chicago, and CSX is in second place in the east, despite having the advantages of the New York Central's easy crossing of the Alleghanies. (Does it come as any surprise that Union Pacific and CSX are also facing federal lawsuits from Amtrak for delaying passenger trains.) Of all the corporations in the book, CSX comes off looking worst (there's a clique of long-time C&O men who protect their mediocrity by sandbagging anyone better who comes along: again, the generalization to the academy is left to the reader as an exercise) and its chairman, John Snow, now in the Bush administration, appears to be less effective as a railroader than as a politician, and he doesn't draw raves for that role, either.

And when it's all over, what's happened? Of the four members of the Joint Executive Committee (the famous price-fixing pool of the nineteenth century, if you're not into supergames(JSTOR)), the Baltimore and Ohio and New York Central are in CSX and the Pennsylvania and what's left of the Erie are in Norfolk Southern. But in the early 1950s, the first eastern mergers to be considered were of Pennsylvania with Norfolk and Western (later to add the Nickel Plate and Wabash) and of New York Central with Chesapeake & Ohio and Baltimore & Ohio. The original plan became the ultimate plan, with forty years of false starts in between.

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