Why did Penn Central fail?

[Anonymous]

This thread keeps getting better and better, I'll wait to print it

[Anonymous]

OK. Good stuff. But why did they merge if they hated working with one another? How did they agree to that.

[Anonymous]

thank you for the encapsulation of the set up for the strangling of the railroads.
like you it has been a long thirty years, but just a quick unresearched rememberance of the economy of the 1970's:
nixon pulls usa off of the gold standard, imposes wage and price controls, fed chairman burns floods the system with fiat currency sparking an inflation which ran at 20% for some months, regulators were unable to do anything about the price of oil beyond putting traffic cops at the lines forming around gas stations. jimmy carter came
into office with a little known exprofessor as a staffer , alfred kahn, who successfully undertook the deregulation of the airline industry beginning a course of action which has done a great deal to roll back the regulatory layering which covered much of the economy of the 1950's, 60's and 70's. next came paul, volcker, ronald regan, and overseas margaret thatcher.
like yourself i am not a crowd psychology expert, but i believe that the deregulatory revolution in the usa and the world was caused by ideas brought forward during the disaster that was the 1970's. acedemics such as milton friedman, thomas sowell, whose free market ideas were able to replace the bankrupt fiscal theories of keynes and the futile micromanagement of galbraith's wage and price control board. basically, i believe that the economy was able to survive because men of sound acedemic underpinning were able to have policy makers experiment with their ideas because the market place had severely refuted the ideas of earlier theorists by undergoing a meltdown. once this deregulatory wave was underway the thinking behind stagger's act
was able to find an audience in legislatures and boardrooms and a voice in the universities and press.

[espeefoamer]

Would the SPSF (as both roads exsisted in 1986) have been a success?If this merger had been approved,who would UP or BN have merged with?Would KCS have been involved in a merger?

[Anonymous]

brief recap:
http://www.buyandhold.com/bh/en/education/history/2001/the_collapse_of_penn_central.html

[MP173]

Mark:

You misread my statement. I indicated the UP-CNW was an end to end merger. UP, as I recall had some problems in digesting that small meal.

I did not indicate that UP's takeover of SP was end to end.

Regarding the "disaster" comment. I sat in the office of a customer that shipped via all major railroads. The plant shutdowns/slowdowns that resulted from the UP to deliver product was a "disaster" for him. Unfortunately the product shipped could not be shipped economically by other methods of transportation...one of those commodities we discussed a few weeks ago in which a swing of a penny a bushel can move product.

I found that Richard Sander's works, particularly Volume 1 was an excellent summation of what was happening in the rail industry at 1970.

I tend to agree that PRR or NYC would not have survived. Just cant see how. All you have to do is look at a 1966 Official Guide. The benefits of their routes were offset by all of those branch lines and passenger trains.

I am not really sure what SP's problems were, other than their Pacific Northwest - Midwest route essentially went south nearly 1000 miles before turning east.

Also, regarding Conrail...correct me if I am wrong, but werent the tax laws changed at that time that allowed the capitalization of track improvements, rather than expensing on the income statement?
ed

[Paul Milenkovic]

Bear with me for getting a bit off topic, but . . .

What was the bill of particulars that the railroads were charged with prior to regulation by the ICC? 1) long haul/short haul -- that some short hauls cost more that long hauls, 2) different customers paying different amounts of the same service, and 3) rebates to preferred customers. Oh, and predatory pricing practices to bar competition.

What do airlines do? A friend told my that Memphis to Minneapolis costs twice as much as Memphis to Madison, Wisconsin, stopping in Minneapolis. Some travellers try to buy the Madison trip and get off the plane in Minneapolis, but airlines track this sort of thing and rap you on the hand with a ruler. The short haul is not only more expensive per mile, it is more expensive in absolute terms by a large amount. Rebates? Ever heard of Frequent Flyer miles? Ever heard of the murmerings that Frequent Flyer awards should be taxed? About corporate travel departments trying to make rules to claim employees Frequent Flyer miles and airline attempts to fight that? Oh, and how about the times you got stuck with full fare and you are sitting in front of a row of sneezing kids who you know are paying one third the fare. Or how booking an airline ticket is more like a Middle Eastern souk than purchasing a product from a Fortune 500 corporation.

Or how the major carriers have beat off competition by fare manipulations rather than any reforms of their services and operations, and how every major air carrier is facing bankruptcy right now? Or how every dollar in profit of the airline industry since the Wright Brothers has been payed out in losses since 9-11?

People said that when the passenger train went downhill that the airlines would follow.

Don't know if I want to reregulate air fares and bring back the CAB, but the airline industry is already on bailout money and I don't know how much of their facilities is paid for through user fees and how much comes out of municipal taxes. It is not really the pure libertarian situation.

[kevarc]

The KCS did make an offer for SP, but it was extremely low and never got off the ground. I wonder if Haeverty (sp) ever kicks himself for not making a more serious offer? All it takes to really understand SP's problem was look at their traffic flow. They had a huge streatch of track through West Texas, New Mexico, and Arizona that was basically a bridge line, there was and still isn't, much online originaing or terminating traffic in that area. Yes, they originated traffic in Louisiana, and Texas, and the West Coast, but not a lot between. I had freinds and relatives that worked for the SP here in Louisiana. They were overjoyed to find a non-SP unit. They wanted them in the lead. The reason was that they worked and the cab was usually clean and comfortable. They quit putting money into any type of maintenence. Power regularlly failed on the road. The roadbed was a nightmare. I remember watching trains go down the Sunset route bouncing and swaying. I always thought it was a miracle that they didn't have a major derailment. They used to run trains out of Little rock with yard engines on them, just so they could get thing somewhat moving.

I think their are a lot of parallels in what happened to SP and PC. Management vaporlocked and didn't react in a way that may have saved themselfs (though I don't think anything could have saved PC). They were both rescued the same way - money, lots of it. PC's came in the form of Conrail and Federal money and the SP's came from UP and their deep pockets. Though I think, for bang for the buck, CR got the better deal. My reasons for saying this was that the Federal money was used to bail the system out and rationalize the system. UP seems just to keep throwing money at a problem until it goes away. That is why they have a continuing problem in Houston. They really need to sit down and do a complete study of the area and come up with a long term plan before they throw money at it. It is a fact that when they took the SP over, they did not listen to the SP folks on what you could and could not do in the area and the place locked up. If you look at their current problems, they still haven't learned their lesson in the area. Their problems are not only crew and engine shortages, it is their attitude that they know better and do not want to listen to folks who know the area.

[MP173]

I think it is obvious, and perhaps already stated on this and other threads, that the thing that "saved" the railroading industry, was the death (harsh wording intended) of the Penn Central. One could probably include the Rock and perhaps the CMSTP &P in that, but really, it was the PC that was in the critical spot.

Think of it. Boston to Washington, New York/Boston/Washington to Chicago and St. Louis and LOTS of points in between. General Motors, Bethlehem Steel, US Steel, and countless other companies, industries and JOBS were dependent on Penn Central. And it was right in the backyard of Washington DC.

It took awhile, but the railroad industry was able to fix some of it's problems. Sometimes, it went too far and became just a little too anerexic (what the hell was CSX thinking of cutting out the B&O St. Louis line?), but for the most part the industry became healthy because of the issues at PC.

I dont know if railroads can attract the capital necessary to plan for the growth that will result in the future. Ironically, the infrastrucure was there, then it went away, and soon it will be needed again. This isnt a game of Monopoly where you have play money and assets you can easily move. This is real life business. As for me, I choose to invest very little of my money in railroads. The returns just are not there, except for CN. Too many alternative investments out there that return real money.

Perhaps companies like RailAmerica will be able to patch together a system of shortlines that someday can be "supersized". Doubt it tho...where would the money come from.

At least we have well engineered trails to ride our bikes on. I remember reading something years ago about the concept of "railbanking" in which ROW's are simply tucked in and put to sleep for awhile, until needed. Too bad that wasnt done.

All this reflection is after watching yet another UP/CN 17,500 ton coal train stall on Mount Valpo, effectively shutting down a mainline for over 2.5 hours. BTW, it took three trains to get that monster over the big Indiana hill. Power from 752 (the coal train), CN 271's couldnt budge it, and finally CN 250's power from behind.

Good drama, but ...

sorry for getting off topic, but somehow, I think it all fits together.

ed

[daveklepper]

I agree also. But that does not change the simple fact that when you make big changes on a railroad, like a merger, or a major rerout because of abandonment of one of two parallel routes, or a yard relocation, the operations must be planned in detail.

I'll bet the Pennsylvania Railroad spent more man hours in planning the move that closed Broad Street Station, Philadelphia, than the combined effort of the NYC and PRR on planning operations of the merged system and how the transition was to be effected.

[Anonymous]

Penn Central's failure was an unmitigated disaster for the U.S. railroads any way you slice it, and the benefits of the Acts cited pale against the damage done. They were salvage efforts to clean up the wreck. Just to pick a couple of years (not at all random), 1970 and 1983, from the AAR's "Railroad Facts": Tons originated by railroads in the "East" declined virtually 25%! (And this includes the railroads of the southern U.S. True eastern roads had losses in the 30 to 40 % range.) Over the same period, industrial production INCREASED by a third. Loss of market share by the railroads was monumental.

Argue "rust belt" and "truck competition" all you wish. Penn Central's flawed management contributed more to both than Japan and the interstates combined.

(I picked 1970 because the book I had at hand didn't have 1968. The great diversion was well underway by 1970. I picked 1983 because it was available, Conrail was privatised and I thought use of the 1982 recession year, had it been available, would have made the stats almost unbelievable.)

[bobwilcox]

I worked with my fellow product managers at CR on joint line deals during CR's entire lifetime. They were a very sharp and focused bunch of people that pretty much lead the rest of the industry into the brave new world of dereg. At the end, when these people were cashing in their very rich performance based 401-k's, I asked one of them what happened. He said the base of traffic, in his case petrochemicals, just keeped dropping year after year. I feel if they could not turn it around no one could.

[Anonymous]

QUOTE: Originally posted by M.W. Hemphill

Ed: You said: "I think it is obvious, and perhaps already stated on this and other threads, that the thing that "saved" the railroading industry, was the death (harsh wording intended) of the Penn Central."

My response. Complete agreement. Deregulation was a series of responses to PC and Conrail -- 3R Act, 4R Act, Staggers, ICC Sunset act. Rock Island and Milwaukee had neither the population and industrial base, nor were they the only rail game in town.

My response: Same here, Mark. And, if you look at the colossal management blunders hounding the airline industry (ignore 9/11--the setup for the current meltdown was in place long before that happened) you can readily conclude that, vis-a-vis PC, those who ignore history are indeed doomed to repeat it.

One point I (as a business owner) think needs to be emphasized some here is that all of these schemes, including the ICC environment that preceded ithe PC collapse, had at their cores accounting systems that, legally or illicitly, cooked the books to provide whatever immediate-term cash return objectives top management and usually a few very big stockholders wanted. The point made about the diversification atmosphere of the 60's is a valid one and is highly relevant here. Play the shell game well enough and you can pull the rip cord on your golden parachute and be long gone and out milking company 2 well before the company 1 system crashes. Gould and friends did it with the Katy and MP, etc. in the 1880's and 90's (see the string from about a week ago on why TX required corporate domicile for RRs operating in the state) This is also exactly what LTV did with Braniff Airlines in the late 60's and 70's, raiding their coffers to pay for more and more expansion in other business areas until the airline virtually collapsed (the first time--not the big one of the 1980's, although that one was ultimately a result of Ling's earlier raid on the coffers). The infamous "ICC Formula" that came in in the 1950's with the RRs' blessings and allowed them to calculate huge and unrealistic losses on paper from pax operations (e.g., being allowed to charge a third of the track maintenance cost on a heavy freight line with a tri-weekly pax train-you can figure out which one in this example-to the pax train) was the same sort of creature and some of the companies were truly shocked when the trains came off but the costs didn't go down dramatically as predicted! One of the dangers of believing your own stuff. PC did basically all of the above, and became, for practical purposes, a real estate company at the expense of the transportation company. Now that doesn't downplay the very real on-the-ground problems they had, which have been discussed well and in great detail here, and need no additional input from the likes of me.

My point is that if you look hard enough at these disasters and corporate meltdowns (except those where the market simply evaporated), you will almost inevitably find financial manipulation and disproportionate rewarding of top management going on, even in spite of massive strategic and tactical blunders. PC was not immune to these hijinks, and one can argue that it hastened the downfall.

So have we learned anything from it? That remains to be seen, but up to now I doubt it (this includes RRs and all kinds of other corporations). One positive note about the UP operational meltdowns--they seem to be making a concerted effort to plow a big chunk of their earnings back into fixing the physical plant , which can only help them. But, as others have pointed out, shot themselves in the feet numerous times with their corporate arrogance in places like Houston, which is where the dominoes consistently start to fall.

[Anonymous]

Someone mentioned earlier that the PRR and NYC might just as well have had different track gauges.

Well, they did. In places, anyhow.

At one time the Pennsy was considering using a gauge of 4' 8.25" on straight track to reduce the incidence of truck hunting and thus smooth the ride at high speed.

I don't know how much of the system was affected, but it was, at least, considered.

Old Timer

[Anonymous]

ALL OF THE REASONS STATED FOR THE FAILURE OF PC ARE CORRECT BUT I THINK THE PORTRAYL OF BEVAN IS A LITTLE OFF THE MARK , I READ HIS TAKE ON THE PRR/PC FROM THE 50S ON INTRESTING SOME OF THE FACTS ESP ON PRR PREMERGER AND AND THE FAILURE OF THE MERGER BEING THE OPERATIONAL DISASTER FROM RUSHING THE MERGING OF OPERATIONS AS OPPOSSED TO THE SLOW APPROACH OF B&O-C&O-WM. IN HIS OPINION THE BANKRUPTCY WOULD HAVE OCCURED 10 YRS LATER IF NOT FOR POOR IMPLEMENTATION OF MERGED OPERATIONS,

[Anonymous]

IN BEVAN S OPINION PRR HAD IN EFFECT BEEN EATING ITS SEED CORN FROM THE LATE 50S ON ALSO THE FUNDS USED FOR PC DIVERSITY PROGRAM DIDN T COME FROM RR OPS BUT RATHER FROM THE PROCEEDS OF THE N&W STOCK SALES AND HAD IN FACT BEEN THE SOURCE OF ANY PRR PROFITS IN 67

[Anonymous]

Penn Central diverted a lot of funds into real estate investments, instead of railroad investing. PC continued to exist long after their railroad collapsed, but, as a real estate holding company.

[CSSHEGEWISCH]

The so-called ICC formula predates the Transportation Act of 1958 and was an early form of cost accounting applied to railroads before the concept came into general use in other businesses. It does distinguish between "solely related" and "fully allocated" expenses.

[Anonymous]

QUOTE: Originally posted by CSXrules4eva

I think the PC failed because the PRR failed in the first place. In the late 1800s and eairly 1900s they invested tons of money into new routes like the NEC and new projects. The electrification of passanger service was a huge step and PRR underestimated how much it would cost them for this project. The Philadelphia renovation project is a prime example. Broad Street station was torn down and 30th Street station was constructed. This improved eyesores like the "Chinese Wall" near 11th street in Philly. PRR ceased opperations of the eleavated tracks near Vine St which lead straigt into Broad Street Station. The also built other new stations like Market East and Suburban Station which were underground. The underground rail from Market to 30th Street improved the eyesores, reduced theft, and increased service. Local lines in Philly like the Chesnut Hill East and West lines were upgraded significantly. Other lines in the area that were upgraded were the Norristown line, and Paoli lines. (These today are owned my SEPTA) The NEC by far was the bigest project. They had to invest time and money into excivation, new power stations, locomotives, cars, and rail infastructure. I guess all of these reasons led PRR to bankrupcy, then lead them to merge w/ New York Central. Then PC was born and fell because of the enormous debt PRR was in. THIS IS MY THINKING.. . .. . .

Market East was built from 1978 to 1984 by the City of Philadelphia, not by the PRR. Chestnut Hill East was built, owned and run by the Reading Railroad, never by the PRR, and the currently SEPTA owned Norristown line was the same, the PRR's Norristown line being cut back to Ivy Ridge sometime in the 70's and eventually Cynwyd, where it ends today.

[Suburban Station]

what is the best book to read on the penn central bankruptcy?

[greyhounds]

what is the best book to read on the penn central bankruptcy?

"Enterprise Denied".  And it was written long before the fact.

[motor]

what is the best book to read on the penn central bankruptcy?

A book written right *after* the fact is "The Wreck of Penn Central" by Joseph Daughen and Peter Binzen.  Long on the origins of the PRR/NYC merger and the business aspects of PC and short on passengers' horror stories.  Even mentions the launch of Amtrak.

motor