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PC: The Penn Central and Conrail

(Long message follows, apologies in advance)

ns4610 -AT- bluegrass.net wrote:

CR ruined the entire system. A once 44,000 mile system down to a short line status 11000 miles. Some shortline. Those 2 eastern clowns paid over $10 billion for the Conrail.


For the record, Conrail as we know (knew) it was NOT the first choice of the folks over at USRA.  In fact, there were initially eight options with three receiving serious consideration.  Initially, the three most desirable solutions (in order of importance) were:  

1) The preferred solution, referred to as the "Three System East," that featured the solvent Chessie System (B&O, C&O, Western Maryland) and the Norfolk & Western purchasing several lines from the bankrupt carriers with the remainder (mostly the old New Haven) transferred to the federally owned Conrail.  

2) The second option referred to as MARC/EL, featured the federal government creating two railroads from the bankrupt carriers.  Conrail would operate the Penn Central and Ann Arbor (which incidentally opted out of Conrail) while the Middle Atlantic Rail Corporation (MARC) consisting of the Central Railroad of New Jersey, Lehigh Valley, and Reading plus the Erie Lackawanna would operate the balance of the lines in competition with Conrail.  

3) The third, and initially least favorable alternative, known as "Big Conrail" or Conrail, featured the government sponsored railroad operating all bankrupt carriers except the EL and the Boston & Maine, which, at the time, opted out of the 3R Act.  After the EL trustees decided the railroad could not reorganize on its own, it too joined Conrail.   

The USRA also discussed five other options which failed to gain widespread support.  These included: 

4) Conrail plus neutral terminal companies, which mirrored Big Conrail except the Chessie and N&W received trackage rights to certain key markets and independent terminal railroads operated in New York/New Jersey and Philadelphia to allow shippers access to more than one carrier.  As an aside, this is essentially what happened when NS and CSX divided Conrail.  If you want to read a prophetic book discussing the NS/CSX purchase/fiasco written almost 25 years before it happened, check out  Paul W. MacAvoy and John W. Snow, Railroad Revitalization and Regulatory Reform. (Washington D.C.: American Enterprise Institute for Public Policy Research), 1975.  Yes, that is the same John Snow who served as CEO of CSX and engineered the Conrail purchase. 

5) Conrail East and Conrail West, which created a firewall between the profitable trackage west of Albany, N.Y. and Harrisburg, Pa. and the unprofitable trackage to the east.

6) Conrail north and Conrail south, which unmerged the Penn Central adding the other bankrupt carriers.

7) Confac, which established two separate federal corporations, Confac to rehabilitate physical plant and Conrail to operate the trains.  

Another aside, (On soap box) at a conference I recently attended, a senior VP for traffic at NS discussed the serious problems faced by his railroad.  A shipper's representative in the audience inquired about fixing the service problems to which the VP replied that they could not raise the rates to cover the costs of improving the service.  The traffic rep immediately shot back, "I will pay anything for you to move my product."  What's my point?  As several list members already pointed out, Conrail lifted much trackage and left little room to "grow its business."  Now that business is booming, NS is stuck with inadequate physical plant and no $$$ or time to construct more.  I asked former Conrail CEO James Hagan about the excess capacity issue and he said he ruthlessly lifted track to reduce expenses in a period of declining economic activity (1978-1981).  A program similar to Confac, if implemented today, would allow railroads like NS to have access to excess capacity in short order without the burden of maintaining it during periods of reduced economic activity.  Believe me, I do not advocate some sort of government take over of NS or CSX.  I am sure that some equitable arrangement could be worked out to encourage the railroads to keep at least some excess capacity (10%-20% ?) available for future business needs.  If you have not surmised yet, I believe that excess capacity and the cost of maintaining that capacity without breaking the bank during lean economic times is one of the top three challenges railroads face today.  (Off soap box)    

8) Controlled Transfer, also know as controlled liquidation, where solvent lines purchased viable portions of the bankrupt railroads with the rest being liquidated.

I might add, that all of the proposed solutions were primarily political solutions.  If the PC (or NYC, PRR, and NH) could have, they would have abandoned many of the lines abandoned by Conrail during the 50's and 60's.  A host of complicated political and economic pressures forced them to keep most of the trackage in service.  Conrail, however had two things the PC lacked.  First, it WAS the ultimate political power because it was the government.  Second, it had an almost unlimited supply of funds to "buy off" political opponents.  

With all due respect Jerome and other former PC employees, some of whom might have gotten a raw deal, Conrail took care of the majority of union members.  Title V of the 3R Act required Conrail to hire EVERY employee of the bankrupt carriers (sounds like the PC Luna-Saunders Agreement to me).  Thus, on conveyance day, Conrail inherited 101,000 employees to operate its 17,000 mile system.  Any employee with five or more years of service as of 2 January 1974 (effective date of 3R Act) received protection until age 65.  Employees with less than five years service as of 2 January 1974 received protection equal to the length of employment.  Protected employees could receive a monthly displacement allowance equal to the difference between the employee's pre-restructuring and post-restructuring earnings.  Employees who lost their jobs due to Conrail could collect a separation allowance not to exceed $20,000 calculated by their length of service and salary.  In all, from 1976 to 1988, Conrail spent almost $700,000,000 to fulfill its obligations to organized labor under the 3R Act.

Again, apologies for the length of this message.

Bob Holzweiss 

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