The Great Railroad Revolution (61 page)

It was the failure of the biggest merger in corporate history up to that date that would finally trigger a response from government. In 1965, rumors of talks between two of the biggest railroad companies, the Pennsylvania and the New York Central, began to appear in the press, suggesting a measure of desperation on the part of both managements about the state of these behemoths' finances. They were prepared to bury their rivalry to save their railroads and in the process created the biggest railroad company America had ever seen, with more than twenty thousand route miles, the
equivalent of the whole British network at its peak. After fraught negotiations and the meek acquiescence by Stuart Saunders, the chairman of the Pennsy, to various conditions imposed by President Johnson, the merger went through in February 1968. It started disastrously and got worse. The legacy forced on Saunders included not only taking on the ailing and loss-making New Haven Railroad as part of the deal, but also agreeing to union demands that there would be no redundancies and, remarkably, that the joint company would rehire five thousand previously laid-off workers, even though there were not necessarily any jobs for them.

As if that was not bad enough, the two companies proved to be simply incompatible. Despite years of ICC hearings into the merger, and endless negotiations, no one seemed to have thought through the practicalities: “It was a shotgun marriage that should never have happened.”
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The two companies were very different beasts. Whereas the Pennsy made its money from hauling raw materials such as steel, ore, and coal, the Central primarily concentrated on carrying merchandise and components to midwestern factories and car plants. The Pennsy focused on bulk, and delays to its services were less important than for the Central, whose customers were dependent on regular supplies. Even the computer systems were incompatible—one used punched tapes to input information (this was the 1960s!), the other punch cards—and therefore the two railroads could not communicate with each other. As on all railroads, most freight had to be channeled through at least one and often more classification yards, where railcars were sorted into trains for particular destinations. Within days of the merger, the yards were in chaos, as many trains had no waybills—the paperwork showing their provenance and destination—because of the computer failures and therefore were lost in the system. Clerks who had no knowledge of the layout of the other railroad simply sent out cars to a station they thought might be close to the destination. A shortage of serviceable locomotives added to the delays, and the poor management of staff often meant that crews were left hanging around doing nothing. Perishable goods predictably perished in the yards, and factories were left with shortages of parts. Eli Lilly, the pharmaceutical firm, reported that a car with frozen animal glands had arrived twenty-seven days late for the three-hundred-mile journey between its plants in Iowa and Indianapolis, and the contents had
thawed, creating a stinking mess. In another case a hundred-car coal train was “lost” for ten days outside Syracuse, New York. Journeys that used to take a day now sometimes ran to five. The customers were in an uproar, bombarding the company for information but getting none. Indeed, little was done to appease them, and local trucking firms soon benefited from their custom. Worse, the top three executives—Saunders; Alfred Perelman, his counterpart on the Central; and the finance director, David Bevan— spent more time plotting against each other than running the company.

Possibly because he realized that the railroad business could not make any money, Saunders embarked on a massive round of acquisitions, resulting in the Penn Central owning an extraordinary 186 subsidiaries.
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Moreover, he ran the company on the basis of what was kindly described as “creative accountancy” but was really outright fraud. He consistently over-valued assets and undervalued liabilities and boosted profits through paper deals to convince Wall Street that the company was profitable. It was in fact losing $1 million per day and started borrowing money at 10 percent interest, when even in the good times it was earning 5 percent: “Never, in recent times, had the books of a large corporation been so thoroughly cooked.”
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It could not last and it didn't. By the summer of 1970, the Penn Central executives halted their squabbling for just long enough to establish that they were reaching a point when there was not enough cash to pay the ninety-four thousand employees. Less than thirty months after the merger, on Sunday, July 26, 1970, the directors decided there was no alternative but to file for bankruptcy. It was the biggest corporate bankruptcy in Wall Street history until Enron thirty years later.

The press had a field day. Why, for example, did the Penn Central own five New York hotels and have a 25 percent stake in the New York Rangers ice hockey team? Or indeed, why did it own a charter airline company, Executive Jet Aviation, through a complex ownership structure made necessary by the fact it was illegal for a railroad to be involved in aviation? And best of all, what exactly went on during those “dates” for top executives that took place in parked sleeper cars in a remote part of New York's Penn Station, and who paid for them? It was all good fun, but it missed the central point. The lurid press coverage rather overshadowed the basic story that the railroads were not viable in the climate in which they were forced
to operate, according to the authors of a book published soon after the collapse: “Here was the record-sized merger bringing together two badly disorganized, unprofitable companies in a discredited industry regulated by an unsympathetic federal agency, denounced by public and politicians for its poor performance record, and hemmed in by powerful unions clinging to archaic work rules.” Furthermore, they added, there was “management blundering, corporate disloyalty, executive suite bickering, board-room slumbering, tight money, a national recession, inflation—and an unusually severe winter.”
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In effect, they concluded, even had the company been better managed and conditions for railroads been better, there was little anyone could have done to save the merged railroad. Bankruptcy, of course, did not mean the trains stopped running, and, as we will see below, a temporary public-sector solution was found to rescue the eastern railroads.

Meanwhile, other railroads, too, were falling down like flies hit by a spray of insecticide. The Jersey Central and the Boston & Maine had already gone bankrupt before the Penn Central collapsed. The Lehigh Valley declared bankruptcy two days after the Penn Central, and another major eastern railroad, the Reading, followed suit fifteen months later. Then came Hurricane Agnes in June 1972, which wrecked the economics of several more railroads.

First, though, the crisis in the passenger rail industry that had been brought to a head by the collapse of the Penn Central had put the government under pressure to find a solution, as it could not simply allow passenger rail to die. Rather ironically, given Americans' previous well-established hostility toward the railroad companies, in 1969 and 1970 the public clamor to keep the trains running had become louder and louder. It was in small-town America, where people did not have access to an airport but saw their passenger train clanking through every day, even though most never ventured onto it, that the pressure was most strongly expressed. The local congressman (or-woman) whose livelihood depended on their votes was easy to get on their side, and a momentum built up to save the train. Whereas these politicians might have been skeptical of the value of passenger rail services in the past, they realized that losing their hometown service was not going to look good at election time. Clearly, with the pace of closures accelerating and the Interstate Commerce Commission powerless
on the sidelines in the face of these market forces, the end of all intercity passenger services appeared only a matter of time. America might not have liked the railroad companies, but they did like train travel, or at least the thought that it was available to them. A solution had to be found to prevent the death of a once great industry. And it could not be a private-sector one. The railroads, keen on concentrating on freight, would have none of it. They wanted out of the passenger rail business.

There was only one way of saving passenger rail services, and that was government intervention. Out of the ashes of a once flourishing industry emerged Amtrak, that fantastic anomaly of modern American history, a nationally owned rail company. The federal government had, in fact, already become involved in subsidizing passenger services. After Lyndon Johnson, probably the last president who was a genuine enthusiast for rail, was reelected in 1964, he persuaded Congress to subsidize the Northeast Corridor Project, serving the major East Coast cities with new electric Metroliner trains on the New York–Washington route operated by the Pennsylvania and New Haven Railroads. The ultimate aim had been to create a 125-mph high-speed line between the two cities, but the merger of the three railroads and the subsequent collapse of the Penn Central meant that aspiration remains unfulfilled. Nevertheless, the Metroliners were a great success, tempting passengers out of cars and planes. The experiment was to prove important in the creation of Amtrak, since it showed that federally supported passenger rail could be successful.

Nevertheless, it was a difficult birth. There were fierce negotiations behind the scenes involving the railroads, Congress, the federal government, and the states. The plan to create Amtrak—
Am
erican
tr
ain tr
ack
, which was initially going to be called by the awful name Railpax
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—was first announced by the White House, now in the hands of the Republican Richard Nixon, in January 1970. Despite backroom deals involving considerable horse trading over what routes would be saved and which abandoned, in public there was
not much debate, with the plan passing through both houses of Congress relatively easily. Although Nixon might have been tempted to veto such a bill, since creating a government monopoly business did not accord with his political instincts, the prospect that he might have to nationalize some of the big freight railroads ensured he signed it. The bill creating Amtrak was passed in the autumn of 1970, with the company due to come into being on May 1, 1971. When in the run-up to the starting date Amtrak's president, Roger Lewis, a former chief executive of a defense contractor with no railroad experience, announced that 110 of the 259 intercity routes covered by passenger services would be cut, there was a predictable outcry, and various last-minute attempts were made both in Congress and through the courts to derail the process. They all failed, however, and America gained its first-ever national rail service operating in all but a couple of the mainland states. Amtrak's network was “just a skeleton of a skeleton,” as so many services had already been closed down by the private railroads with the permission of the Interstate Commerce Commission, and Amtrak was not even in a position to run all the promised routes on day one. Twenty railroads, all but six of those eligible, agreed to provide services for Amtrak. To join, they had to make a payment equivalent to a year's expected loss on passenger services and provide the rolling stock and other equipment necessary to run services. If that sounds onerous, there was a strong negative incentive to join because to refuse meant agreeing to continue to run their existing passenger trains for another four years. Since these services were invariably loss making, throwing in their lot with Amtrak seemed the least-worst option. The railroads would supply crews to operate the trains, but the on-board staff, such as catering staff and porters, were to be Amtrak employees. It was, as George Douglas puts it, “a typically American compromise—the kind of thing that makes no one totally happy.”
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Amtrak was given an annual subsidy of just $40 million and a loan of $100 million to start with and then expected to become self-sufficient within five years. It was a Band-Aid solution that was not supposed to last, but in fact Amtrak has survived to this day, thanks to political support from some quarters and the reluctance of the federal government to allow rail passenger services to disappear. Amtrak was founded on a lie, a big lie, and has suffered ever since. Ostensibly, it was created as a “for-profit” company that might
need a bit of a leg up initially with subsidy, but was then expected to stand on its own two feet. The stark truth is that for the United States to retain a passenger rail service, Amtrak or its successors would have to remain a publicly funded and subsidized company permanently, and even to recognize that reality is unpalatable for many American politicians. Jim McClellan, the key official in the railroad division of the Department of Transportation, admitted that promoting Amtrak as a conventional profit-seeking company was a great deception yet absolutely necessary to win over the politicians to the idea: “We did not put all our cards on the table. We bent the truth. That's politics.”
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In fact, profitability was always a pipe dream, as it is with most passenger railroads across the world, but the notion that getting into the black was always around the corner, let alone remotely feasible, would stymie the development of America's passenger rail service. Profitability was, after all, never a requirement for the road network.