Was it a bad dream?

[MP173]

Was I dreaming about the 70's or what?  I could have sworn we had an interesting thread going on about excess capacity and the 1970's.

Or, was it just a 10 year bad dream?

What happened?

ed

[bobwilcox]

It turned into a nightmare.  Hopefully someone took it out and shot it.

[MP173]

I thought it was rather tame, compared to past discussions.  Bob, I know you got upset, but on a scale of 1 to 5 I thought it was about a 3, or at least it was recently.

Something must have popped up late yesterday to have fanned the flames.  Unfortunately, because I found it rather educational. 

ed

[Datafever]

Ed, I will have to agree with you.  While many responses were tinged with undercurrents of personal attacks, there was a lot of good information being presented.

I was reading the forum late yesterday, and I certainly could not point to anything that was egregious on that thread.  Maybe Bergie is just getting fed up with the constant pot shots that are being taken.  Still, I'm not sure why he would delete it instead of just explaining his position and locking it.

[MichaelSol]

I thought it was rather tame, compared to past discussions.  Bob, I know you got upset, but on a scale of 1 to 5 I thought it was about a 3, or at least it was recently.

Something must have popped up late yesterday to have fanned the flames.  Unfortunately, because I found it rather educational. 

ed

For some, their indignation depends only on who is doing the name-calling.

But, Ed, before the conversation was interrupted, I was preparing a comment on the BN figures. Indeed, I had just spent some time formulating that comment when the thread was deleted, completely wasting my time as everything disappeared.

However, the comment was this. The year 1975 was indeed a depression year, and both UP and BN did suffer significant declines in profitability that year compared to 1968. However, my choice of that year was not to pick a bad year for the purpose of exagerating the condition of BN. Indeed, at the time I wasn't thinking in terms of 1975 being a bad year, and for this reason.

I was looking at an exhibit from Forbes magazine, January 1, 1976, p. 142, which happened to offer five year histories of selected earnings for the top thirteen U.S. Class I railroads. The 1975 figures for BN were cited not so much because they happened to represent a bad year, but because that year was just about dead-on with the five year averages. That is, representative of a consistent performance over the first five years of the Burlington Northern merger -- a merger which, if any, should have demonstrated, conclusively, the performance advantages of consolidating parallel lines and traffic.

It was probably the outstanding example of such consolidation of all railroad mergers.

Unfortunately, the net profit margin was only given for 1975, but Return on Equity and Return on Total Capital, Sales Growth, and Earnings per Share were represented for the five year averages ending in 1975. And they were all consistent with the 1975 figures. My extrapolation in that case was considering that there was no reason that net profit margin would be different for any reason.

And here those are:

Five Year average, 1970-1975.

ROE

Southern    9.3%

SCL           7.6%

N&W         6.4%

Santa Fe   6.4%

Union Pacific  6.4%

Southern Pacific  5.7%

IC                5.6

Frisco          4.9

Chessie        4.6

BN              2.3

MILW          def

CRI&P        def

Penn Central def

Even though 1975 carloadings certainly showed it a bad year for BN, relative to UP, the comparison of the the five year sales figures showed something else at work.

Growth, Sales, 1970-1975

Southern 8.3%

SCL 21.1%

N&W  3.5%

Santa Fe   8.7%

Union Pacific 14.3%

Southern Pacific 6.8%

Chessie   5.2%

BN  7.6%

MILW  7.0%

Total Return on Capital, five year average, 1970-1975

Southern 5.6%

SCL  5.5%

N&W 3.9%

Santa Fe  4.5%

Union Pacific 4.8%

Southern Pacific  5.0%

IC   3.0%

Frisco   3.4%

Chessie  3.3%

BN  2.3%

MILW  .3%

CRIP  def

PC def

Earnings per Share (% Change, 1970-1975)

Southern   12.6%

SCL  17.4%

N&W  0.1%

Santa Fe   11.3%

Union Pacific  4.6%

Southern Pacific 2.6%

IC   0.4%

Chessie  -1.0

BN  -0.7%

MILW, RI, PC "D-D"

Forbes reports "Chessie" here as a combined company of C&O, B&O & other related companies. Whether that is considered "merged" or not .....

For all the talk of "dramatic decreases in costs" allegedly resulting from mergers of parallel lines, they just didn't seem to show up for BN -- and that was for the full five year period following merger, as compared with the same five year period for peer railroads.

Indeed, BN was one of only three railroads on the chart which showed a decline in earnngs per share over that time period. Non-merged roads of comparable size showed increases for the five year period, including UP at a 4.6% increase which, as you pointed out, was a road not involved in a merger during the era.

I wanted to make clear my reference to the 1975 data was based on a larger data set of the entire five year period following the Burlington Northern merger, not a selective use of the specific year 1975 as a data anomoly. If there were going to be a "dramatic" reduction in costs and increased profitability resulting from line consolidation, it's difficult to look at anything on that full five year period after the merger to see the result.

And, while sales growth was reasonably average for BN compared to its peers -- underscoring the fact that there was not a data anomoly regarding income -- earnings per share dropped substantially at BN compared to peer railroads which to me supports that idea that while revenue went up, costs went up even faster, not down as the parallel merger theory proposed, nor as theories of economics of scale would command.

So, if merger (and there was a size correlation and an "economics of scale" argument here as well) was such a boon, why is it so hard to find proof of that in merged railroads -- whether via Healy in 1961, DOT in 1968, BN in 1970-1975, or Wilson/Bitzen, 2003?

From an analytical standpoint, the two largest parallel railroad mergers in the United States, creating the two largest railroad entities in the United States, one an Eastern road and one a thoroughly Western road, both found themselves among the bottom five positions in economic performance of the largest thirteen railroads in the United States by 1975 -- neatly bracketing the Rock Island whose financial performance they both much more closely resembled than they did any of their smaller, but unmerged railroad peers, both East and West.

More "red herrings," I guess.

Indeed, a careful look at the results of the BN merger as a "successful" merger -- and I have certainly always considered it very successful -- might offer the question, successful compared to what? As I am looking at it now, neither compared to its predecessors nor its peer roads did it perform as well. Where were the "dramatic reductions in cost"? Where have they ever been?

 

[jeaton]

Michael

You have here made very interesting observations, but the numbers comparing "peers" don't necessarily prove that mergers did not ultimately have the desired result of increased efficiency.

I am sure that you fully realize that railroads are not uniform entities, otherwise as "unmerged" entities they all would have had the same numbers each reporting period. On previous topics, you have made a point, with which I agree, that environmental changes beyond the control of even the best management can have a dramatic effect on the financial results of the railroads.  Obviously, some changes can effect the entire industry, but others may hit one carrier and at the same time have no impact on anybody else.  Shifts in traffic patterns or volumes can be fairly sudden and I am sure you understand that only the very smallest of lines have any chance of making immediate adjustments to rationalize operations and costs to effectively deal with changes.

I will be the first to admit that several of the recent major mergers were totally bungled and resulted in some extraordinarily bad financial results.  However, I would submit that even very smooth mergers such as the BN had to sustain elevated costs for some period to rationalize the new entity.

All that considered though, the biggest problem with your argument is that you can't fix all conditions to make certain that pre and post merger comparisons aren't impacted by extraneous conditions.  The Chicago, Burlington & Quincy, Great Northern, Northern Pacific and SP&S never existed at the same time as the Burlington Northern and therein lies the problem with trying to determine which was better. 

[MichaelSol]

All that considered though, the biggest problem with your argument is that you can't fix all conditions to make certain that pre and post merger comparisons aren't impacted by extraneous conditions. 

The same argument should apply when mergers appear to achieve to be a success. Unfortunately, there seems to be a tendency to apply different standards to such comparisons. Had I suggested that all such mergers were successful, I doubt you would be posting your doubts based on the idea that extraneous events might well explain such successes better than a merger explanation.

Indeed, we saw that process on the earlier thread. I offered the example of the Union Pacific -- covering a forty year span -- and the proposition that all mergers were wildly successful and "dramatically reduced costs" was immediately modified to only include "parallel" mergers -- indeed, that any attempt to argue the effects of non-parallel mergers was a "red herring" because the declarant had decided, upon receiving the evidence, that non-parallel mergers were not the point, or not what he meant. Or something.

But, if the proposition is that parallel mergers (originally, just "mergers" until the proponent decided that the Union Pacific was a "red herring) "dramatically cut costs", then I accepted that restriction on proof, and merely offered the rebuttal that such parallel mergers, likewise, fail to meet the test of their own declared merits by offering the biggest one I could find that didn't go bankrupt -- excluding from consideration the biggest one, that did go bankrupt -- and looking at a full five years of operation on the BN as opposed to the forty year comparison on the Union Pacific, or the nearly ten years on the PC.

You suggest this, too, fails to meet a new standard of proof.

Now, I guess this defense has run out of merger types and time frames to exclude from the proposition, unless we shift to parallel mergers that only occured on Tuesdays, and do not look at data covering five, ten or forty years, but only 2, 12, or 22 years.

Are you proposing yet an additional set of restrictions or conditions -- so as to exclude yet additional evidence to the contrary?

Pretty soon, at this rate, the qualification for proof is going to be limited only to proof that supports the proposition, and none other -- and we are almost there, that the only proof is simply a self-proving declaration without any test at all. 

But, it is the proposition that bears the burden of such proof.

And where is it?

The "biggest problem" with the proposition is the apparent absence of proof shown in at least three broad studies over a nearly fifty year period of time, the bankruptcy of the biggest example, and the struggling record of the BN example, which, remarkably, got worse -- if I am recalling correctly -- over the ten year period post merger than even the five year period.

 

[underworld]

I thought it was rather tame, compared to past discussions.  Bob, I know you got upset, but on a scale of 1 to 5 I thought it was about a 3, or at least it was recently.

Something must have popped up late yesterday to have fanned the flames.  Unfortunately, because I found it rather educational. 

ed

For some, their indignation depends only on who is doing the name-calling.

But, Ed, before the conversation was interrupted, I was preparing a comment on the BN figures. Indeed, I had just spent some time formulating that comment when the thread was deleted, completely wasting my time as everything disappeared.

However, the comment was this. The year 1975 was indeed a depression year, and both UP and BN did suffer significant declines in profitability that year compared to 1968. However, my choice of that year was not to pick a bad year for the purpose of exagerating the condition of BN. Indeed, at the time I wasn't thinking in terms of 1975 being a bad year, and for this reason.

I was looking at an exhibit from Forbes magazine, January 1, 1976, p. 142, which happened to offer five year histories of selected earnings for the top thirteen U.S. Class I railroads. The 1975 figures for BN were cited not so much because they happened to represent a bad year, but because that year was just about dead-on with the five year averages. That is, representative of a consistent performance over the first five years of the Burlington Northern merger -- a merger which, if any, should have demonstrated, conclusively, the performance advantages of consolidating parallel lines and traffic.

It was probably the outstanding example of such consolidation of all railroad mergers.

Unfortunately, the net profit margin was only given for 1975, but Return on Equity and Return on Total Capital, Sales Growth, and Earnings per Share were represented for the five year averages ending in 1975. And they were all consistent with the 1975 figures. My extrapolation in that case was considering that there was no reason that net profit margin would be different for any reason.

And here those are:

Five Year average, 1970-1975.

ROE

Southern    9.3%

SCL           7.6%

N&W         6.4%

Santa Fe   6.4%

Union Pacific  6.4%

Southern Pacific  5.7%

IC                5.6

Frisco          4.9

Chessie        4.6

BN              2.3

MILW          def

CRI&P        def

Penn Central def

Even though 1975 carloadings certainly showed it a bad year for BN, relative to UP, the comparison of the the five year sales figures showed something else at work.

Growth, Sales, 1970-1975

Southern 8.3%

SCL 21.1%

N&W  3.5%

Santa Fe   8.7%

Union Pacific 14.3%

Southern Pacific 6.8%

Chessie   5.2%

BN  7.6%

MILW  7.0%

Total Return on Capital, five year average, 1970-1975

Southern 5.6%

SCL  5.5%

N&W 3.9%

Santa Fe  4.5%

Union Pacific 4.8%

Southern Pacific  5.0%

IC   3.0%

Frisco   3.4%

Chessie  3.3%

BN  2.3%

MILW  .3%

CRIP  def

PC def

Earnings per Share (% Change, 1970-1975)

Southern   12.6%

SCL  17.4%

N&W  0.1%

Santa Fe   11.3%

Union Pacific  4.6%

Southern Pacific 2.6%

IC   0.4%

Chessie  -1.0

BN  -0.7%

MILW, RI, PC "D-D"

Forbes reports "Chessie" here as a combined company of C&O, B&O & other related companies. Whether that is considered "merged" or not .....

For all the talk of "dramatic decreases in costs" allegedly resulting from mergers of parallel lines, they just didn't seem to show up for BN -- and that was for the full five year period following merger, as compared with the same five year period for peer railroads.

Indeed, BN was one of only three railroads on the chart which showed a decline in earnngs per share over that time period. Non-merged roads of comparable size showed increases for the five year period, including UP at a 4.6% increase which, as you pointed out, was a road not involved in a merger during the era.

I wanted to make clear my reference to the 1975 data was based on a larger data set of the entire five year period following the Burlington Northern merger, not a selective use of the specific year 1975 as a data anomoly. If there were going to be a "dramatic" reduction in costs and increased profitability resulting from line consolidation, it's difficult to look at anything on that full five year period after the merger to see the result.

And, while sales growth was reasonably average for BN compared to its peers -- underscoring the fact that there was not a data anomoly regarding income -- earnings per share dropped substantially at BN compared to peer railroads which to me supports that idea that while revenue went up, costs went up even faster, not down as the parallel merger theory proposed, nor as theories of economics of scale would command.

So, if merger (and there was a size correlation and an "economics of scale" argument here as well) was such a boon, why is it so hard to find proof of that in merged railroads -- whether via Healy in 1961, DOT in 1968, BN in 1970-1975, or Wilson/Bitzen, 2003?

From an analytical standpoint, the two largest parallel railroad mergers in the United States, creating the two largest railroad entities in the United States, one an Eastern road and one a thoroughly Western road, both found themselves among the bottom five positions in economic performance of the largest thirteen railroads in the United States by 1975 -- neatly bracketing the Rock Island whose financial performance they both much more closely resembled than they did any of their smaller, but unmerged railroad peers, both East and West.

More "red herrings," I guess.

Indeed, a careful look at the results of the BN merger as a "successful" merger -- and I have certainly always considered it very successful -- might offer the question, successful compared to what? As I am looking at it now, neither compared to its predecessors nor its peer roads did it perform as well. Where were the "dramatic reductions in cost"? Where have they ever been?

 

I'm always amazed at the things I learn as a result of playing with trains!!!

underworld

[MP173]

Michael & Jay:

There is a ton of information here to digest, and I am not sure if I have the ability, resources, or time to do so.  More on that later.

I really dont appreciate the thread getting dumped.  There was quite a bit of information and communication there that I now do not have the ability to review.  I am really biting my tongue here, actually my fingers to state my feelings on this out of respect to the home of the forum, but I do find it interesting that an industry that is based on free speech would...well, let's just leave it at that.  There just was nothing that I saw that warrented that thread being vaporized.  Now, if that gets me in hot water, so be it.

It appears we are in the middle of a good old fashioned winter storm here, so perhaps there will be time to pull the Moody's off the shelf and see what I can dig out.  But, there is only so much the numbers can tell.  As stated earlier, this entire decade was one of a number of low points all cycling together to create "the perfect storm of railroading."

I am not sure I would say this was a parallel merger.  Yes, GN and NP were parallel lines, but the Q made it an end to end.  I am also not sure what labor agreements were in effect at that time that would have kept employees in place.  I will check the employment numbers for the pre-merger carriers vs BN. 

How many common terminals or operations could have been consolidated?  I have no clue.  When was the NP line essentially downgraded?  When did BN start handling the PRB coal?  What was BN doing during this time to prepare for that traffic?  These are just a couple of questions that come to mind now, with many more no doubt to surface.  I just dont feel confident that I will be able to reconstruct the info. 

More later, unless I get sent to the principal's office.

ed

[nanaimo73]

   There was quite a bit of information and communication there that I now do not have the ability to review.  

If you happen to know the day and approximate time you started that thread, perhaps this could find it-

http://www.archive.org/web/web.php

[jeaton]

Michael

Please correct me if I am wrong about this, but I understand your point to be that a merger of railroads does not produced the cost reductions promised by the management of the merged companies.  I believe your contention is the opposite, that a merger of railroads actually causes an increase in costs.  I am not trying to say that you are wrong, rather I am saying that the metrics you are using don't prove the case either way.  In using the financials, all you have demonstrated is that some railroads have had better financial results than others.  You seem to be trying say that any differences are the result the presence or absence of a "merged" condition, and I submit that that you can't ignore all the other factors that effect financial results.  Further, since thay can not exist at the same time, there is no way you make a relavant comparison of the financial performance of the separate entities to the performance of the merged entities unles you can safely assume that the unit cost of materials and labor "last year" is the same as "this year".  That would be a stretch.

Since you seem to have access to a wide array of statistics, why not try some other metrics.  It is widely accepted that ton-miles is a measure of the output of a railroad.  I think some relavant inputs would be man-hours (days or years), locomotive unit or horse power hours and car days.  If you can show that the ratio of the inputs to the outputs increased from the pre-merger year using the totals of the railroads to be merged to the post merger year (or years) of the merged railroad, then I think you may have effectively proved your point.

[MP173]

Jay:

I agree with what you are saying here.  There simply was not a "control" situation for the BN merger.  The closest one could get to a "control" is the existing systems which did not merge, such as UP, ATSF, SOU, NW, etc.  I am not sure how conclusive that comparison would be, as none are in the same geographic market as BN was.

Michael, I am not being an apologist for the BN, nor for mergers.  I understand quite a bit of what you are saying and tend to agree with it, subject to review.

Jay, I have 1972 and 1980 Moody's Transportation Manuals and beginning to assemble some of the data you indicated.  I put together a six year spreadsheet last night for BN for 27 data points.  I woke up this morning with a "need" for a few more.  Your post gives me a couple more.

Now, my decision is do I then go compile similar info for several other railroads and compare?  Quite a bit of work for me. 

I think I will take a look at UP or possibly ATSF (they seem to be more similar to BN) and let you know.

ed

[MichaelSol]

I am not trying to say that you are wrong, rather I am saying that the metrics you are using don't prove the case either way.  In using the financials, all you have demonstrated is that some railroads have had better financial results than others.  You seem to be trying say that any differences are the result the presence or absence of a "merged" condition, and I submit that that you can't ignore all the other factors that effect financial results.  Further, since thay can not exist at the same time, there is no way you make a relavant comparison of the financial performance of the separate entities to the performance of the merged entities unles you can safely assume that the unit cost of materials and labor "last year" is the same as "this year". 

My problem is with the operative double standard. Ken Strawbridge asserted, in no uncertain terms, that there were "dramatic" -- repeat, "dramatic" -- reductions in costs as a result of mergers.

You did not step forward to offer the argument that there were no controls for his observation, that other factors might explain it, nor that he even might be wrong.

I think it is the standard of proof, for which you appear to have diametrically opposed standards for opposing propositions, that I find frustrating.

One stands without objection; the other, in essence, can never be proven for so long as the railroad faces the normal problems that railroads faced, and which "might" offer an alternative explanation, notwithstanding that "merger" was supposed to insulate against exactly such vagaries of existence by the sure fire "dramatic" decrease in costs and provide an advantage ... compared to other railroads or to the status quo.

You would think that, notwithstanding three scholarly studies, over a forty year time period, which examined the industry as a whole for an answer to the merger question, and could find none, that a proponent might find a study, or perform one, that is able to show support for that specific proposition.

Indeed, I get the impression that the three cited studies started out to do just that and failed upon examining the evidence.

Other than simply fabricating and falsifying the conclusions of the most recent study, which one proponent attempted, why is that key study missing from the debate?

Cost analysis is a well-developed science with many analytical tools available. When the tools have been actually been employed -- and Healy, DOT, et.al. can hardly be seen as anti-railroad, nor as incompetent on the issue -- to examine the question, they cannot find the answer you seem to seek.

And those are not the only studies. There are literally thousands of merger studies on U.S. industry in general -- most reaching the same conclusions, that, by and large, mergers fail to achieve their cost-cutting benefits, and fail to strengthen the surviving company.

The better question might be, why would railroads be any different, notwithstanding several existing studies to show that they aren't?

Aside from disregarding the existing studies -- and I am not sure why you would do that other than not liking the answers --what standard of proof would you accept to show that mergers were successful? And what standard of proof would you accept to show that they weren't?

 

[MP173]

I will jump right back in, since Jay and I have similar comments.  A few points here:

1.  Dont get upset because I questioned your thoughts, but not Ken's. 

2.  Do not expect me to have academic studies at my disposal to review.  Further, dont expect me to have the time to read and digest those studies.  Particularly in the time frame that you expect (jump right back in and debate another's view).

3.  I agree with you that mergers in industries do not tend to work.  I have read a summary of that somewhere.  However, one must define what the objectives of the merger are.  To reduce costs?  Or to increase market share?  Those are completely different objectives.  At some point in the previous thread, a comment was made by someone that market share was important.

4.  It is very easy to go back and say a merger failed.  I believe in the long run, the BN merger was a success.  For the five year period, it MIGHT have been a failure.  I am not going to agree to that yet.  There are very interesting trends that developed during that 5 year period.  I have just added to my spreadsheet and came up with 34 data points covering 6 years.  I havent had time to completely analyze the data, but there are very interesting trends which occured to BN during that time.  Now, to compare those trends to other railroads, or to the industry in general will take a bit of time.

5.  I have not had an opportunity to review the Forbes data, nor will I today.  The blizzard has closed the local university, so the library is not accessable today.  The data I compiled is from ICC reports as stated in Moodys.  It is available if anyone wants a copy, just email me.

I will take a look at the data and give my 2 cents worth later.

Gotta go shovel snow.

ed

[Anonymous]

4.  It is very easy to go back and say a merger failed.  I believe in the long run, the BN merger was a success.  For the five year period, it MIGHT have been a failure.  I am not going to agree to that yet.  There are very interesting trends that developed during that 5 year period.  I have just added to my spreadsheet and came up with 34 data points covering 6 years.  I havent had time to completely analyze the data, but there are very interesting trends which occured to BN during that time.  Now, to compare those trends to other railroads, or to the industry in general will take a bit of time.

In terms of public policy, the railroad mergers have been a huge failure.  Cross subsidization of imports via higher rates on captive domestic traffic.  Failure to maintain contractual terms for delivery of coal to our power plants.  Loss of rail service to rural areas.  Loss of secondary lines.  Increased public subsidization of rail related projects.  And always keeping capacity enhancements well below the demand optimum.

[Murphy Siding]

     I'd like to add a different perpsective to this discussion.  I can't see how anybody could difinitively prove that railroad merger did, or didn't *work*.  But then, I don't see that as an issue that needs to be proved or disproved. 

    While it's true, that railroad management said that mergers were needed to improve efficiency,raise profitability, etc, jeaton's idea that it was more about market share seems a little closer to the truth.  What CEO or BOD wants to go to the stockholders and say "We need to merge with a parallel competitor, so we can stop doing business in such a way that neither of us can make the kind of profits you stockholders wish we could."?  Which sales pitch would you want to give to stockholders?

     In a sense, the adage "If you can beat 'em, join 'em", is pretty clear in this case.  The key thing, I think, in railroad mergers is this: Will the new, merged railroad do better financially than the  unmerged roads will do seperately?  This would certainly be just as impossible to prove or disprove as the idea of whether a meger was *good* or not.  What would the first 5 years of BN's financial picture look like in comparison to NP,GN,CBQ, and SPS being seperate, non-merged railroads for another 5 years?  That, is probably the comparison that would mean something in this context.

[wallyworld]

This is a fascinating discussion. I don't want to interject an opinion, but rather a question that arose. It is frustrating to see the previous thread deleted. If operating efficency, economy of scale, increased access to markets did not make a dent in operating ratios on a P&L statement, there seems to be a cause as of yet unidentified as to why this is rather than if it is. Also-is this a case as discussed on another thread where the real unstated impetus for mergers is based on an unstated profit made by a small cabal of management insiders? Sometimes the lengths in the past that rivals have gone to in the oposition of a planned merger are fascinating. The IT multi-ownership as a blocking move against Santa Fe's entry to St Louis and the Santa Fe's dummy corporation as a false front to do an end run around it...perhaps alot of strategic actions for naught based on the fallacy of mergers...increased efficency \ cost reduction as a red herring...interesting...

[MichaelSol]

4.  It is very easy to go back and say a merger failed. 

Not really. It requires key conditions.

One of them is ... failure.

The specific company standards for that, on a case by case basis, are usually found in the pro forma projections created by the companies themselves to justify the merger. They know their strengths, their weaknesses, their territory.

What would be a better source?

I think it is easier just to say it can never be proved because "something" will always offer a pretext for the failure rather than the fact of higher costs and greater inefficiencies.

 

 

[Murphy Siding]

I think it is easier just to say it can never be proved because "something" will always offer a pretext for the failure rather than the fact of higher costs and greater inefficiencies.

     Most companies that failed will be quick to point out that it was always someone else's fault.  That's human nature.  " I could have been a contender...I could have been somebody"

    Higher costs and greater inefficiencies could certainly have been a major factor in the PennCentral failure, but it would be a stretch to say that PRR and NYC would have been just peachy without the merger.  While you can't deny that PC failed, you can't definitively say it was because of the merger.  Therefore, I think it's diffcult to say a merger didn't *work* by looking at financial info in the years before and after a merger.

[greyhounds]

I am not trying to say that you are wrong, rather I am saying that the metrics you are using don't prove the case either way.  In using the financials, all you have demonstrated is that some railroads have had better financial results than others.  You seem to be trying say that any differences are the result the presence or absence of a "merged" condition, and I submit that that you can't ignore all the other factors that effect financial results.  Further, since thay can not exist at the same time, there is no way you make a relavant comparison of the financial performance of the separate entities to the performance of the merged entities unles you can safely assume that the unit cost of materials and labor "last year" is the same as "this year". 

My problem is with the operative double standard. Ken Strawbridge asserted, in no uncertain terms, that there were "dramatic" -- repeat, "dramatic" -- reductions in costs as a result of mergers.

Actually, what I said was that as railroads consolidated through mergers and traffic was consolidated on fewer main lines railroad costs declined dramatically. 

And what I said is true.

[MichaelSol]

Actually, what I said was that as railroads consolidated through mergers and traffic was consolidated on fewer main lines railroad costs declined dramatically. 

And what I said is true.

Having cited a study that said something different, when your false representation of its conclusions was exposed you decided to pretend the study doesn't exist, essentially continuing to misrepresent the study you cited. "Why can't you just accept the results of the university research?"

Having demanded of me an answer to that question -- and I did answer it, by simply pointing out what the study actually said -- you cannot seem to answer it yourself.

This is why I continue to refer to this kind of thinking as an ideological belief system, not subject to rational discussion. You cited a study which you purported to be the final, absolute proof on the topic. Having first misrepresented its conclusions, now you reject them.

Nothing changed in the study. What changed in your attitude about it?

 

[greyhounds]

Actually, what I said was that as railroads consolidated through mergers and traffic was consolidated on fewer main lines railroad costs declined dramatically. 

And what I said is true.

Having cited a study that said something different, when your false representation of its conclusions was exposed you decided to pretend the study doesn't exist, essentially continuing to misrepresent the study you cited. "Why can't you just accept the results of the university research?"

Having demanded of me an answer to that question -- and I did answer it, by simply pointing out what the study actually said -- you cannot seem to answer it yourself.

This is why I continue to refer to this kind of thinking as an ideological belief system, not subject to rational discussion. You cited a study which you purported to be the final, absolute proof on the topic. Having first misrepresented its conclusions, now you reject them.

Nothing changed in the study. What changed in your attitude about it?

 

My attitude about the study hasn't changed.

Here's a quote:  "Following partial deregulation, there have been tremendous increases in productivity and decreases in rates and costs.^{1, 2} For example, as reported by the American Association of Railroads (Railroad Facts), in nominal terms, the average revenue per unit output (ton-miles) has fallen from 2.866 to 1.883 cents, while Berndt et al. (1993), Lee and Baumol (1987), Wilson (1996) and others report tremendous decreases in costs from partial deregulation."

And heres a link: http://www.mountain-plains.org/pubs/html/mpc-03-145/pg1.php

The study does conclude that mergers have produced cost savings.  Why would I disagree with that.

Your accusation that I made false representation of what was actually in the study is just another personal attack that I will ignore.

And from the study's "Conclusion":

"Previous research has suggested that there are cost savings associated with railroad mergers, but these cost savings explain only a small component of cost savings of deregulation (about 10 percent). Our research suggests that mergers are becoming more and more between firms with large market shares, and that corresponding efficiency gains are larger."

 

[MP173]

I think it is easy to say a merger failed.  There are a couple of conditions which will make it easy to do so....bankruptcy or the disposition of the asset is one.  The failure of the company to keep pace with peer industry companies is another.

That is what we seem to be debating, or discussing on this thread.  While I havent had time to digest the data I assembled, the six year (1970 - 1975) timeframe indicates that BN had problems.

I dont know what their pro-forma statements for the merger indicated.  But, the data does show several things:

1.  They were not able to rationalize route miles in that period.  Route miles dropped by 654 in six years.  If that was a key point to proposed success, they failed to reduce redundant mileage.  Now, if that was management fault or that of the governing body, I cannot determine.

2.  Tonnage for the six years basically stayed even.  In other words, there was no growth.  Factor in the dramatic increase in coal tonnage from 1970 to 1975, and what I call "non coal tonnage originated dropped by nearly 10% in six years.  Was that mismanagement or macroeconomic factors at work?  I cannot say.

3.  BN's employee compensation as a percentage of total revenue decreased from 52% to 49% in six years.  In the same period, Union Pacific's dropped from 41% to 38%.  BN obviously had way too many employees, remember this was before the crew size started dropping.  Why didnt the employee compensation drop more?

4.  While tonnage basically was flat over the six years, ton miles increased as average haul increased from 419 miles to 546 miles.

5.  Utilization per car/day also increased from 1533 ton miles per car day to 1892.  However, it was far below UP's 2246 ton miles per day.  Miles per locomotive day decreased from 204 to 199.  UP's dropped from 315 to 274.

6.  Equipment rents (I assume this is per diem charges) increased from $15.6 million in 1970 to $54.9 million in 1975.  Meanwhile UP's was basically a wash, with a credit of .9 million in 1975. Each year had UP with a credit.  Interestingly, BN's percentage of loaded car miles DROPPED from 55% in 1970 to 49% in 1975.  How can less than half of your car miles be loads, unless there was a considerable amount of marshalling cars.

7.  Coal appears to have saved BN from bankruptcy, or at least difficult times.  Coal as a percentage of revenue increased from 5.3% in 1970 to 16.1% in 1975.   I am not sure when PRB coal began being HUGE.  Perhaps part of BN's issue during this era was ramping up for the coal. 

8.  One final factor which I didnt get a handle on was the impact of inflation on the company's results.  Simply didnt have the time to crunch more numbers.  Fuel expenditures as a percentge of revenue increased from 3.6% to 7.05% in the 6 years.  Average revenue per ton mile went from 1.42 cents to 1.70 cents.  UP's went from 1.32 to 1.88.

That's it for now. 

Now, let the discussion continue.

ed

[MichaelSol]

[

The study does conclude that mergers have produced cost savings.  Why would I disagree with that.

1) You said "dramatic savings"

2) The study said this: "A general view of our results suggests that the effects of mergers are idiosyncratic, with both increases and decreases in costs."

 

[Murphy Siding]

[

The study does conclude that mergers have produced cost savings.  Why would I disagree with that.

1) You said "dramatic savings"

2) The study said this: "A general view of our results suggests that the effects of mergers are idiosyncratic, with both increases and decreases in costs."

   Had you considered just ignoring him?

[greyhounds]

[

The study does conclude that mergers have produced cost savings.  Why would I disagree with that.

1) You said "dramatic savings"

2) The study said this: "A general view of our results suggests that the effects of mergers are idiosyncratic, with both increases and decreases in costs."

 

Yes, some mergers did not reduce costs.  But most did and the overall effect was positive.

[billbtrain]

Yes 1970-1979 was tough for the BN.First,none of the designers of the merger had planned for the coal boom that immediately followed the merger.Second,it took 6 to 10 years to fully consolidate the yards and terminal operations(mainly at the Twin Cities,Twin Ports,and Seattle/Auburn/Tacoma).Third,BN had to replace a lot of track materials from deferred maintenance on the CB&Q and NP.Fourth,new power and new cars had to be ordered to cover all the new coal trains(new cars owned by BN until at least the mid 70's when the electric utilities began buying their own in greater quantities).Fifth,replace hundreds of F-units and minority make locomotives.Sixth,remodel old shops and build new facilities.With those points I can see where BN would have had a tough decade.

Did I miss anything?

Have a good one.

Bill B

[Anonymous]

Yes 1970-1979 was tough for the BN.First,none of the designers of the merger had planned for the coal boom that immediately followed the merger.Second,it took 6 to 10 years to fully consolidate the yards and terminal operations(mainly at the Twin Cities,Twin Ports,and Seattle/Auburn/Tacoma).Third,BN had to replace a lot of track materials from deferred maintenance on the CB&Q and NP.Fourth,new power and new cars had to be ordered to cover all the new coal trains(new cars owned by BN until at least the mid 70's when the electric utilities began buying their own in greater quantities).Fifth,replace hundreds of F-units and minority make locomotives.Sixth,remodel old shops and build new facilities.With those points I can see where BN would have had a tough decade.

Did I miss anything?

Have a good one.

Bill B

Wouldn't all this playing-catch-up-with-deferement also have occured without the merger?

'Cept of course the terminal consolidation, and that may not have been a good thing either!

[billbtrain]

Yes 1970-1979 was tough for the BN.First,none of the designers of the merger had planned for the coal boom that immediately followed the merger.Second,it took 6 to 10 years to fully consolidate the yards and terminal operations(mainly at the Twin Cities,Twin Ports,and Seattle/Auburn/Tacoma).Third,BN had to replace a lot of track materials from deferred maintenance on the CB&Q and NP.Fourth,new power and new cars had to be ordered to cover all the new coal trains(new cars owned by BN until at least the mid 70's when the electric utilities began buying their own in greater quantities).Fifth,replace hundreds of F-units and minority make locomotives.Sixth,remodel old shops and build new facilities.With those points I can see where BN would have had a tough decade.

Did I miss anything?

Have a good one.

Bill B

Wouldn't all this playing-catch-up-with-deferement also have occured without the merger?

'Cept of course the terminal consolidation, and that may not have been a good thing either!

Yes,but the predecessor roads,especially the CB&Q,didn't have the resources to 'play catch up' and neither did the BN for that matter.Just look at the years of deferred maintenance of the former GN/NP Twin Cities to Seattle corridor.And,yes,I did forget the Spokane area and 'the funnel' between Sandpoint and Spokane(mainly the connector track between the GN and NP and the Latah Creek bridge.

Have a good one.

Bill B

[gabe]

Michael,

Perhaps I am attacking my confusion over your posts in the wrong manner.  If you could answer two questions, perhaps it would help me with my confusion:

(1)  Are railroads today more successful than as compared to railroads in the late 60s through 80s?  Success being defined as earning a better turn on investment and profitability.

(2)  If the answer to this question is yes, what is responsible for this change?

I guess part of the reason I have so much trouble with your contentions is that I do not know where you stand on these fundamental questions.

Please do not regard this as a personal attack, and respond by stating my absence of citation, the fact that I couldn't manage a HO scale railroad, or something to that effect.  I am not attacking you.  It is just that you are saying the sky is green and I, and apparetnly others, see blue.  I am trying to figure out why you contend it is green.

Gabe