1960 to 1970: what the heck happened?

[Datafever]

You seem to be off topic here.  The subject is not the 70's.  (read the thread title) It's the decade preceeding that lead to the financial collapse of much of the US railroad network.

Ouch.  Kind of a backwards point there, greyhounds.  Gabe makes it very clear in his initial post that he is saying that the 60's were a time that the railroads "made it", while they failed in the 70's.  While the groundwork for failure may have been set up in the 60's (or not), it was the 70's that the failures occurred.

Nope,  Penn Central (aka, "The Big One") went under in the 60's and its predicessors had been going downhill for a long time before that. 

I'm not disagreeing with you on that.  I was taking objection to your statement that Mr. Sol's response was off-topic.

Granted my pool of knowledge is small, but my knowledge of the Illinois Central, Nickle Platte, Southern Pacific, and a few other railroads indicate that--although I would not describe the 1960s as a boom of rail traffic--rail lines seemed healthy and sustainable.  But, by the 1970s, it looked like every rail line was heading for a two mile run off a one mile pier.

 

[MichaelSol]

You seem to be off topic here.  The subject is not the 70's.  (read the thread title) It's the decade preceeding that lead to the financial collapse of much of the US railroad network.

Ouch.  Kind of a backwards point there, greyhounds.  Gabe makes it very clear in his initial post that he is saying that the 60's were a time that the railroads "made it", while they failed in the 70's.  While the groundwork for failure may have been set up in the 60's (or not), it was the 70's that the failures occurred.

Nope,  Penn Central (aka, "The Big One") went under in the 60's ...

June 21, 1970

[Datafever]

Nope,  Penn Central (aka, "The Big One") went under in the 60's ...

June 21, 1970

Well, greyhounds does have a point there.  If PC hadn't been taking in water during the 60's, it wouldn't have gone under when it did. 

[MichaelSol]

You seem to be off topic here.  The subject is not the 70's.  (read the thread title) It's the decade preceeding that lead to the financial collapse of much of the US railroad network.

Ouch.  Kind of a backwards point there, greyhounds.  Gabe makes it very clear in his initial post that he is saying that the 60's were a time that the railroads "made it", while they failed in the 70's.  While the groundwork for failure may have been set up in the 60's (or not), it was the 70's that the failures occurred.

Nope,  Penn Central (aka, "The Big One") went under in the 60's and its predicessors had been going downhill for a long time before that.   As others have said, it took a long time to destroy the New York Central and Pennsylvania.  They were financially sick in economically good times. 

Most industries and companies go through lean times - but then they get good times.  The regulators never let the railroads prosper. 

And the title of the thread is "1960 to 1970".

And Gabe clearly stated:

But, most importantly, you have yet to answer the initial question of this thread.  Why did the rail industry collapse in the 70s when it did not during other recessions, panics, or economic slow downs?

 

[MichaelSol]

Nope,  Penn Central (aka, "The Big One") went under in the 60's ...

June 21, 1970

Well, greyhounds does have a point there.  If PC hadn't been taking in water during the 60's, it wouldn't have gone under when it did. 

Neither regulation nor deregulation is insurance against poor management, changing industrial patterns, nor a dumb idea writ large. 

GN, NP and CBQ were taking on water during the 1960s as well. Their merger saved their bacon. 

The moral of their stories: probably didn't have much to do with regulation, since that common element cannot explain diametrically opposed outcomes.

 

[Datafever]

GN, NP and CBQ were taking on water during the 1960s as well. Their merger saved their bacon. 

Along those lines -

I know that you have mentioned many times the "diseconomies of scale" that have resulted from railroad mergers.  In what way was the BN merger a boon for the railroads involved? 

[MichaelSol]

I can think of at least three Fortune 500 Companies--not counting asbestos-related companies and airlines--that filed for bankruptcy during this time, and I am a long way from being knowledgeable about such things. 

Yes, outside of the heavy industries we have been discussing, there was a "bubble" and it burst -- especially upon the telecom and energy companies  -- ironically, newly deregulated.  

[Anonymous]

Railroads respond as other industries do to general economic conditions -- and regulation is blamed in one instance, and deregulation cheered in the other -- even though the results track almost identically the performance of capital-intensive deregulated industries under both circumstances.

To suggest that the reason that regulated railroads suffered the same fate as other capital intensive but deregulated industries under identical economic conditions was because railroads were regulated is simply a non-sequitur. It does not, cannot, follow from the premise.

This to me represents a "Belief System," not a genuine analysis of either regulation or deregulation.

 

A "belief system?"  A lack of "genuine analysis?"  Come now, Sol.  You know there is data, and you know there are "genuine" history books that empirically demonstrate that during the economically prosperous 1950's and 1960's, railroads were in decline while their deregulated competitors were experiencing growth.  Who is being irrational? Your thesis is on the verge of saying that deregulation was completely irrelevant to how railroads fared financially.  It's an extreme thesis you're arguing, and you know it. 

One problem with your thesis is its premise that railroad performance tracks the performance of the nationwide economy.  I think railroads are so large and have so much inertia that an economic shock like a nation-wide recession won't really be noticable on the railroad until maybe ten years down the road when the deferred maintenance that took place during the recession finally catches up to them.  Thus, there is a response lag.

Another problem with your thesis is its premise that one business is like any other.  How can you compare the Burlington Northern with Toyota and come to any meaningful conclusion?  A railroad mainline is not an auto assembly line.

I think you're arguing extreme views to test them out, to mine the knowlege available here on the forum to proof them.  I don't think you really believe most of what you argue.

 

[MichaelSol]

Your thesis is on the verge of saying that deregulation was completely irrelevant to how railroads fared financially.  It's an extreme thesis you're arguing, and you know it.

Sol: "... to this idea that regulation explains every failure, and deregulation explains every success: baloney. It's more complicated in both directions."

You mischaracterize my comments.

And I don't see Toyota mentioned on this thread at all.

 

[erikem]

We are not used to the idea in our current lifetimes, but the American economy, post-Civil War was a deflationary economy. Rates declined all during that period. Historian Gabriel Kolko documented how the origins of the ICC Act lay with the railroads themselves asking the government to regulate "destructive competition" and plummeting rates. The Panic of 1893 brought down more railway mileage than any time before or since -- an occurence related more to general economic conditions than regulation or deregulation but due in part to the corrosive effects of deflation on organizations that required substantial capitalization.

 

If you're talking about a geneal deflationary period, then  you're right in that the American economy hasn't experienced anything like it in the ast 100 years. On the other hand the electronics industry has been in a prolonged deflationary period for several decades. The reasons for this are very similar to what was behind the post Civil war deflationary period, a prolonged period of dramatically improving labor productivity. Railroad labor producitvity was increasing from larger locomotives, standard guage, air brakes and automatic couplers. In addition, the rapid axpansion of the economy was increasing utilization of the lines that had been built.

I remember George Hilton asserting in the late 1960's that the ICC was originally set up as a cartelizing agency to prevent destructive competition. It wasn't till later (e.g the Hepburn Act) that the ICC's mission was amended to include
regulating rates. The adverse effect of state and federal regulation wasn't really felt until WW1, where fares and rates were often kept at pre-war levels despite labor costs being twice pre-war levels - and this pretty much killed off the traction industry in the US.

 The major construction projects after the finish of the WP and the CM&StP's PCE were for areas with developed traffic and were dramatic cost reductions could be obtianed (e.g. GN's Cascade tunnel). It would have been interesting to have seen what other projects would have been built if money wasn't so tight ca 1910 (e.g the Cadotte Pass line).

[billbtrain]

GN, NP and CBQ were taking on water during the 1960s as well. Their merger saved their bacon. 

Along those lines -

I know that you have mentioned many times the "diseconomies of scale" that have resulted from railroad mergers.  In what way was the BN merger a boon for the railroads involved? 

GN,NP,and CB&Q were doing ok during the late 1960's.They struggled thru the early and mid 60's due to a recession.The BN merger allowed all three to eliminate duplicate facilities in the Twin Cities area and eliminate the interchange hassle there and in the Billings-Laurel area as well.Another advantage for the merged system was that the coal companies were knocking on BN's door the day after the merger was consumated.CB&Q would have in no way been able to handle that boom on it's own.Yes BN struggled thru the 1970's with the coal boom and need to replace locomotives and freight cars and rebuild track structure(especially along the CB&Q).Great Northern was in good shape at the time of the merger,having no Federally funded land grants to pay back(remember that what land grants GN had were from the state of Minnesota included in the original charter of the Minnesota & Pacific in 1852).Northern Pacific was doing well in spite of it's land grants and poor,meandering route.Chicago,Burlington & Quincy would have been in trouble along with the other granger roads had the merger not intervened.Coal was the CB&Q's only savior.The big problem that all three had to deal with was the same problem all the railroads had at that time:Passenger Service and the inability to be rid of it.Now I will say that GN's management failed to follow thru on Jim Hill's practice of growing the territory served by the railroad as did all railroads in spite of the claims about the ICC.I believe GN would have been in better shape had Hill's philosiphies(sp?) been followed no matter the time period.

Penn Central was in trouble from the start with opposing management teams and then being saddled with the New Haven(in trouble itself long before PC due to passenger service).The PC failure came at a bad time,just 4 months after the BN merger which made investors take a step back from railroad stocks at that time.Then you had the CRI&P failure due to bad management and ICC's failure to make a timely decision about the UP and SP breaking it up between them.

So that's what I see as the railroad's problems in the 70's.Passenger service,Bad management,and too much regulation by an inefficient government entity(ICC).

Have a good one.

Bill B

[greyhounds]

So, I think we've established that the economy of the 1970's had nothing to do with the Penn Central collapse or the other Northeast railroad bankruptices that brought on the much needed and benificial deregulation. 

 

 

 

[Datafever]

So, I think we've established that the economy of the 1970's had nothing to do with the Penn Central collapse or the other Northeast railroad bankruptices that brought on the much needed and benificial deregulation. 

As a side note, you bring up an interesting point.  I don't know for sure, but it appears that it was the eastern railroads that had the majority of the problems in the 70's (60's) as far as bankruptcies were concerned.  If that is so, why were the eastern railroads more heavily impacted than the western railroads?

[MichaelSol]

We are not used to the idea in our current lifetimes, but the American economy, post-Civil War was a deflationary economy. Rates declined all during that period. Historian Gabriel Kolko documented how the origins of the ICC Act lay with the railroads themselves asking the government to regulate "destructive competition" and plummeting rates. The Panic of 1893 brought down more railway mileage than any time before or since -- an occurence related more to general economic conditions than regulation or deregulation but due in part to the corrosive effects of deflation on organizations that required substantial capitalization.

 

If you're talking about a geneal deflationary period, then  you're right in that the American economy hasn't experienced anything like it in the ast 100 years. On the other hand the electronics industry has been in a prolonged deflationary period for several decades. The reasons for this are very similar to what was behind the post Civil war deflationary period, a prolonged period of dramatically improving labor productivity. Railroad labor producitvity was increasing from larger locomotives, standard guage, air brakes and automatic couplers. In addition, the rapid axpansion of the economy was increasing utilization of the lines that had been built.

Labor productivity and inflation/deflation are two different things. The U.S. economy continually deflated 1873-1890, yet labor productivity increased by more than 2.5% per year -- a boom period for productivity. The next boom period was 1917-1927, when productivity rose nearly 4% per year, but opposite of the earlier period, this was a period of high inflation.

What deflation does is drive down the market. What the steel mill paid for to ship steel last year, the railroad can only charge 90% this year, and less in subsequent years as the value of each dollar increases.  The problem for capital intensive industries -- and it is a big, big problem -- is that bonds sold to finance construction and improvements are paid in current, more valuable, dollars -- not the value of the dollars that purchased the original construction. Each passing year brings lower revenues to pay debt, but the debt becomes relatively more burdensome. The solution: expansion and hope that new traffic and current debt stays ahead of deflation and old debt. This is why railroads "overbuilt" in those two decades prior to 1893 -- they were on a horse they couldn't stop in a horserace that wouldn't end. Over the long run, something breaks, and it broke for railroads in 1893.

"Morganization" was the process designed to break that cycle.

This is the opposite of the 1960s and 1970s, as inflation reduced the burden of existing debt and debt payments relative to income with each passing year. This is one of the conundrums of the 1970s -- bankrupt railroads had "monstrous debt loads" only in rail fan magazines.

In real life, by and large bankrupt railroads in the 1970s had the lowest debt service ratios in their histories at the times of their bankruptcies and better, for the ones I am familiar with, than their un-bankrupt peers. The paradox was that companies that had large debt saw the effect of that debt quickly inflated away -- but for those companies with small debt, that only meant that those companies hadn't invested in their physical plants and, ultimately, those companies could no longer compete effectively because of the inefficiency of their physical facilities.

Again, to me that underscores a philosophy of capital investment, not regulation. Those companies that had holding companies -- a sure signal that capital investment in railroad plant was not a priority -- did more poorly when the 1970s arrived than those companies which were independent railroads -- and which had to invest in the railroad as their number one priority.

What happened during the 1950s? The largest single capital investment in railroad history in the motive power change-over. By 1961, costs associated with motive power -- labor, maintenance, fuel, finance charges -- consumed on a sample Class I railroad 24% of revenues compared with 18% of revenues only a decade earlier. What went down in order to compensate for that substantial rise in that particular area of operating costs?

Maintenance-of-Way.

Railroads were consuming just as much capital -- they were just spending it differently -- and debt instead of long-tem became short term.

This process was something part smoke, something part mirror.

In the early 1950s, the motive power changeover promised 1-2% interest rates on 20 year depreciation property. By 1957, the depreciation period was revised downward to 14 years, at 5% interest rates.  Further actual experience lowered the depreciation period to eight years, at 8% interest.

The economic consequences were substantial, but also showed up in lowered railroad earnings as the result of accelerated depreciation of machines, rather than of investment in railroad track. Railroads appeared less profitable on paper, as more of their revenue was spent on a certain class of capital equipment, and the effect on the bottom line was even more significant than that simply because of accelerated paper depreciation deductions compared to both the former equipment class and for actual investment in the track.

What that process obscured was the undercapitalization of the physical plant. Well, that could only last so long, and the advent of the 100 ton car no doubt considerably shortened whatever period that might have been otherwise.

Were railroads unique? No, during the 1960s, Big Steel was coasting on merger savings -- substituting merger for investment. Rich, prosperous, they thought they could. American Motors was trying to make it on one or two car lines. Studebaker and Kaiser met their fates. Chrysler was already in trouble -- and began looking at AMC. GM was coasting on market share acquisition from consolidation of the industry -- then tried to catch up on investment at exactly the wrong time in the 1970s.

Recall that during the 50s and 60s, these were companies that thought they had everything figured out. Only the Japanese were hiring Edward Deming. The Penn Central stood for an announcement that diversification was the key -- and weren't those guys the leaders of the industry?

But for the most part, Companies willing to invest, generally made it.

Companies that did not invest, generally did not make it.

Managements that invested wisely generally made it. Managements that did not -- and that could include entire industries -- had a harder time of it.

There does seem to be a moral to the story.

 

[Anonymous]

So, I think we've established that the economy of the 1970's had nothing to do with the Penn Central collapse or the other Northeast railroad bankruptices that brought on the much needed and benificial deregulation. 

As a side note, you bring up an interesting point.  I don't know for sure, but it appears that it was the eastern railroads that had the majority of the problems in the 70's (60's) as far as bankruptcies were concerned.  If that is so, why were the eastern railroads more heavily impacted than the western railroads?

For one there were a lot more of them in the Official Territory, so you first have to zero out for sheer percentage of the total. 

Second, they were compacted into a lot smaller space, so the traffic cannibalism was very high. 

Third, much of the traffic base these roads were built to handle had evaporated, notably passengers, anthracite, and New England textiles, brassware and shoes, whereas outside the Official Territory traffic was actually up as traditional resource bases for lumber, minerals, etc., shifted west and south following exhaustion in the East as well as population shift to the sunbelt. 

Fourth, western roads inherently had longer hauls due to widely separated and highly concentrated urbanization, whereas eastern urbanization is not widely separated and not highly concentrated, but worse from a railroad's point of view, is of sufficient mass to afford industrial economy of scale without requiring concentration.  Western geographic factors were very much in a railroad's favor whereas eastern population geography was very much in trucking's favor.  Ironically the long distances that made western roads such an iffy proposition in the mid-1800s turned out to be their greatest advantage by the mid-1900s.

Fifth, prior to WWII there was a substantial coastwise and intercoastal shipping business (more than 1,000 vessels) that ceased during the war (the ships were requisitioned) and did not restart after the War because its costs climbed so much faster than rail costs it was soon priced it out of the market for just about everything except crude oil and refined petroleum products.  The decline of coastwise shipping was highly beneficial to southern and western roads but actually hurt eastern roads because of the traffic shift away from traditional hinterland-to-port routes toward gateway routes where they had little investment.

S. Hadid

[Datafever]

Mr. Sol,

If I can try to recap what you have said:

Part of the problem that some railroads had (in the 60's/70's) was a lack of debt - debt that in a period of high inflation is paid back with cheaper dollars.  Those railroads that had encumbered themselves with debt in order to rebuild infrastructure found themselves in a cozier position than those railroads that had delayed infrastructure expense and had cash instead.

So if the 70's had not been a time of high inflation, one could posit that the results would have been significantly different.  In that case, capital investment in infrastructure may have been an undesirable use of monies.

Were there indications that inflation was going to be as bad at it ended up?  Could a savvy management team have foreseen that inflation was going to go "out of control" and acted accordingly? 

[Datafever]

Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.

[Anonymous]

I believe we have differing opinions regarding the "efficiencies" of trucks v rails.  Sure, the cost of transporting via rail is considerably lower, but the efficiencies of trucking was (is) the flexibility it offered.  LTL trucking ate into REA business, it was much more efficient and quicker. Truckload offered the ability to ship from door to door via a single carrier.  Often railroad boxcar freight had to move thru several carriers...plus one had to fill a boxcar to get the rate.  Trucking offered rate structures which rewarded the movement of partial truckloads or "header rates".  Interchange between railroads was painfully slow, interlining between LTL carriers was much more efficient.  LTL terminals "cross docked" freight in hours, rail terminals took  much more time.

What I look at is the relative running speeds of the fastest highway vehicles vs those of the railroads.  1930's - 50 mph highways were still the exception, not the rule, but railroads were in seeming competition to break the 100 mph barrier with dedicated trains.  Granted, those were mostly passenger trains, but the standard was still set.  Thinking about it now, can you imagine what things would look like today if those 100 mph railroads had offered TOFC service in tandem with those passenger hotshots to haul those new fangled truck trailers?  The whole dock to dock dynamic changes in terms of transit time for OTR vs TOFC.

Fast forward to the 1950's - highway speeds are now up in the 60 mph range, but railroads have decreased their top speeds!

Again, the theoretical advantage in flexibility still favors rail transit over highway transit for all but the shortest hauls in the dock to dock race, but with what is offered/allowed today TOFC is only advantageous in the longer haul lanes, and that's only because of the new truck driver rules.

Finally...I am not sure if the HAL's was the main factor in the deterioriation of the ROW's or simply along for the ride.  Was it HAL's or the inability to maintain the track due to the deployment of assets in uncompensated endeavors such as branch lines with five member crews and 4 car trains?

Well, it does correlate.  The 264k car with 100 ton trucks came into it's own during the 1960's, so you have the efficiency gains over the 220k car with 70 ton trucks which correlate with the relative financial health of the railroads during this period.  Then by the advent of the 1970's tracks were starting to fall apart - could it be the move from 70 ton truck (55,000 lbs per axle) to the 100 ton truck (65,750 lbs per axle) was finally taking it's toll?  It may be the move to the 100 ton truck was seen as a short term gain for investors, with the usual tendency to bail before the longer term consequences came about.

 

[Anonymous]

Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.

The pleasure is all mine.  Your posts are always a good read -- precise, measured, and collegial.

S. Hadid

[MichaelSol]

Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.

It was an interesting summary that put change, success and failure, squarely in the context of economic circumstances, not some generalized and ambiguous regulatory wrong.

[MichaelSol]

Mr. Sol,

If I can try to recap what you have said:

Part of the problem that some railroads had (in the 60's/70's) was a lack of debt - debt that in a period of high inflation is paid back with cheaper dollars.  Those railroads that had encumbered themselves with debt in order to rebuild infrastructure found themselves in a cozier position than those railroads that had delayed infrastructure expense and had cash instead.

Well, the "cash" mght have gone out the door to dividends. Every railroad in serious trouble 1965-1980 had been engaged in very serious merger efforts during the 1960s. While I would agree that by and large the ICC's efforts to "get it right" backfired into time-consuming, time-wasting, proceedings, I also note that the rail industry itself bore a large burden for time-consuming objections, appeals, and argument, often based purely on obstructive litigation tactics rather than honest participation in the process.

But, your point is, I think, accurate.

So if the 70's had not been a time of high inflation, one could posit that the results would have been significantly different.  In that case, capital investment in infrastructure may have been an undesirable use of monies.

I think railroads would have benefitted from infrastructure investment no matter what. High inflation was a boon to discounting debt, but an enormous obstacle to railroads genuinely growing during the 1970s, such as Milwaukee. Recall, railroads themselves were "investing" heavily in merger efforts during the 1960s. Infrastructure had to wait until the merger was resolved.

Econometric studies -- Kent Healy -- suggested that mergers would harm the industry, rather than help it. Penn Central proved it. Burlington Northern threaded the eye of a needle with a camel. It was close. Had it not been for the extraordinary planning by Robert Downing and Worthington Smith, the outcome could have been considerably different and almost was.

Were there indications that inflation was going to be as bad at it ended up?  Could a savvy management team have foreseen that inflation was going to go "out of control" and acted accordingly? 

The argument about "Guns and Butter" starting with the Great Society and Viet Nam War of Lyndon Johnson in 1965 brought about exactly such predictions from the Chicago School Monetarists. The accuracy of their predictions -- shown conclusively with a vengeance during the 1970s -- fundamentally changed American political and economic thinking. Railroads, however, did not employ "economists" -- not a useful tool in that industry's mindset at that time.

But, what does any of that suggest about "regulation" during that time?

In 1981, it gained its "freedom." It merged, it gained market share, it created captive shippers, it abandoned useless lines, it consolidated traffic into high utilization corridors. It did everything that deregulation permitted.

Union Pacific Railroad earned a 12.2% operating profit in 1965 in an anemic economy operating underutilized track with multiple inefficient interchanges and running a large transcontinental passenger train service.

Forty years later (2005), after deregulation and historic productivity achievements, it earned a 7.6% operating profit in a booming economy.

Progress?

GN in 1968 -- 12.38%, operating at about half capacity, running a transcontinental passenger train service.

BN in 2005: 12.27%.

It is simply stunning what these companies achieved when the artificial burden of regulation was removed and they were finally unshackled to permit their creative management abilities to soar to new heights of corporate profitability.

 

[MP173]

Michael:

Regarding the operating margins of UP and GN, points well taken.

What were the margins on lets say Illinois Central in 1966 and CN in 2006?

As I stated previously, great thread.

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

[MP173]

Just for fun...what were the strong railroads of that era (1960's -70's)?

And where are they now?  Are their franchises as solid as before? 

I will start out with NW.  Lets see in the early 1960's they made their $$ hauling coal, some have argued mainly downhill.  They had the foresite to expand beyond Appalachia and created one of the truly great mergers (IMO) with NKP and Wabash in 1964.  With that merger they gained access to Detroit and the automakers, Chicago and the western railroads, Northwest Indiana and another market for coal, St Louis and more western railroads, Kansas City and a longer haul.  Ok, the line to Omaha really didnt do much and the NKP line to St. Louis didnt really add much, nor did the Wabash Chicago - Toledo line, but overall they got pretty good jump on the merger wave.  Let's not forget the Virginian merger in the 50's.

It seemed they used their base of coal to expand and diversify. 

That merger with Southern in the early 1980's didnt turn out too badly either did it.

Sometimes the best deals are the ones you dont do...and that certainly was the case for not pulling the trigger on Dereco (EL and D&H) in the mid 70's meltdown.  They let the deep pockets sort out the problems of the day.  Their obligation was not to the industry, but to their shareholders. 

 

ed

[gabe]

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

Thank you.  For a minute, I was fearful to point out the 2000 lbs, in this case pink, elephant in the room that I thought I was seeing.  I really do not understand the relationship between an 80 mph speed limit and the collapse of the rail industry that I seem to observe in the 70s. 

Whether a steamship is hauling intermodal containers for a three week voyage that then sits in a dock for a few days, whether it is grain that might take as much as a month to transport from a farmer's silo through grain bins and what not, or merchandise freight that dwells in a yard three days regardless of transit, I never saw how the 7 hour-benefit of an increased speed limit might rescue the industry.

Added speed might help capacity.  But, the issue of the 70s was getting rid of excess capacity, not making room for more.

Gabe

[MichaelSol]

Michael:

Regarding the operating margins of UP and GN, points well taken.

What were the margins on lets say Illinois Central in 1966 and CN in 2006?

As I stated previously, great thread.

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

Wellll, IC was not a railroad I ever had any reason to follow, but the annual report for 1966 in my file is, for some reason, the strangest annual report I have ever seen. It tells me nothing, except a big feature on the new "IC" logo. It has to be a defective mailing. The 1970 IC annual report for the railroad, separated out from IC Industries, shows a 12.31% operating profit -- railway operating income --

 

[gabe]

Just for fun...what were the strong railroads of that era (1960's -70's)?

And where are they now?  Are their franchises as solid as before? 

I will start out with NW.  Lets see in the early 1960's they made their $$ hauling coal, some have argued mainly downhill.  They had the foresite to expand beyond Appalachia and created one of the truly great mergers (IMO) with NKP and Wabash in 1964.  With that merger they gained access to Detroit and the automakers, Chicago and the western railroads, Northwest Indiana and another market for coal, St Louis and more western railroads, Kansas City and a longer haul.  Ok, the line to Omaha really didnt do much and the NKP line to St. Louis didnt really add much, nor did the Wabash Chicago - Toledo line, but overall they got pretty good jump on the merger wave.  Let's not forget the Virginian merger in the 50's.

It seemed they used their base of coal to expand and diversify. 

That merger with Southern in the early 1980's didnt turn out too badly either did it.

Sometimes the best deals are the ones you dont do...and that certainly was the case for not pulling the trigger on Dereco (EL and D&H) in the mid 70's meltdown.  They let the deep pockets sort out the problems of the day.  Their obligation was not to the industry, but to their shareholders. 

 

ed

As an aside, the premier railroads--at least in the early 70s--in my opinion were the SP and the Southern.  The Southern did quite well, the SP did not.  There was a pretty informative article that I read about the SP covering its decline . . . .

I think a great example of railroading in the 60s and 70s is the IC.  From everything I read about the IC, it was very stable during the 60s and was actually retiring debt.  In the 70s, things got pretty ugly fast.

Gabe

[Datafever]

Well, the "cash" mght have gone out the door to dividends. Every railroad in serious trouble 1965-1980 had been engaged in very serious merger efforts during the 1960s. While I would agree that by and large the ICC's efforts to "get it right" backfired into time-consuming, time-wasting, proceedings, I also note that the rail industry itself bore a large burden for time-consuming objections, appeals, and argument, often based purely on obstructive litigation tactics rather than honest participation in the process.

Using the BN merger as an example (merely because I am a little more familiar with that one, which isn't saying much) --

NP and GN announced in 1960 of their plans to merge.  They filed in 1961.  The merger was completed in 1970.  That seems like an incredibly long process, even for a highly regulated environment.  Could you (or anyone else) elaborate on why that merger (or mergers in general) took so long back then?

 

I think railroads would have benefitted from infrastructure investment no matter what. High inflation was a boon to discounting debt, but an enormous obstacle to railroads genuinely growing during the 1970s, such as Milwaukee. Recall, railroads themselves were "investing" heavily in merger efforts during the 1960s. Infrastructure had to wait until the merger was resolved.

Econometric studies -- Kent Healy -- suggested that mergers would harm the industry, rather than help it. Penn Central proved it. Burlington Northern threaded the eye of a needle with a camel. It was close. Had it not been for the extraordinary planning by Robert Downing and Worthington Smith, the outcome could have been considerably different and almost was.

Did those studies pinpoint where the diseconomies of scale were likely to occur?  And under what circumstances that they would occur?

If so, would it not be possible to organize the merged company in such a way as to overcome the diseconomies of scale while still benefitting from economies of scale in other areas? 

[MichaelSol]

Using the BN merger as an example (merely because I am a little more familiar with that one, which isn't saying much) --

NP and GN announced in 1960 of their plans to merge.  They filed in 1961.  The merger was completed in 1970.  That seems like an incredibly long process, even for a highly regulated environment.  Could you (or anyone else) elaborate on why that merger (or mergers in general) took so long back then?

Well, your timeline combines two proceedings.

A formal application was made to the ICC February 17, 1961.

A hearing examiner approved the proposed merger in a report issued August 24, 1964.

On April 27, 1966, the ICC rejected the proposed merger, stating that it was not "consistent with the public interest." This was based primarily on opposition from within the rail industry -- the process consumed five years.

On July 26, 1966 the Northern Lines asked the ICC to reconsider its decision; but at the same time they assiduously cultivated the managers of the Chicago and Northwestern and the Milwaukee Road -- the primary opponents of the orignal merger application. Essentially, this was the beginning of a second proceeding.

Given that the Northern Lines used tactics of negotiation rather than confrontation, the approval process of the resubmitted application moved much faster. Both MILW and CNW consented to the merger based on conditions accepted by the applicants. On November 30, 1967, the ICC approved, 8-2, the creation of the Burlington Northern Railroad. A little more than a year from reapplication to approval -- pretty fast for a big merger.  A formal merger date of May 10, 1968 was approved.

However, during that time, Department of Transportation economists had been studying railroad mergers, and concluded that "the economic evidence is that the cost savings arguments for large railroad mergers have to be very largely discounted, and must be applied to individual cases with very great circumspection." United States Government Department of Transportation, Western Rail Mergers (Washington, D.C.: U.S. Government Printing Office, 1969) p.13.

Based on the existing econometric studies, the US Department of Justice appealed the ICC 1967 decision through the federal court system. The United States Supreme Court approved the Northern Lines merger February 2, 1970, in a 7-0 vote. On March 3, 1970, the Burlington Northern Railroad formally came into existence.

 

[Datafever]

Thank you, Mr. Sol.  That was quite enlightening.

[Anonymous]

Thank you, Mr. Sol.  That was quite enlightening.

 

Enlightenment --

"Ignorance means the absence of enlightenment, that is delusion.  ...[W]e speak of fifty-two stages, of which one [the first] is a stage where the mind attaches itself to any object it encounters.

"When I look at a tree, I perceive one of the leaves is red, and my mind 'stops' with this leaf.   When this happens, I see just one leaf and fail to take cognizance of the innumerable other leaves of the tree.  If instead of this I look at the tree without any preconceived ideas, I shall see all the leaves.  One leaf effectively 'stops' my mind from seeing all the rest.  But when the mind moves on without 'stopping,' it takes up hundreds of thousands of leaves without fail."

[Suzuki, Daisetz T., Zen and Japanese Culture, 1959, pp. 95-96]

 

It was a good thread.