Consolidated Rail Corporation
Consolidated Rail Corporation
Six Penn Center Plaza
Philadelphia, Pennsylvania 19103
Fax: (215) 977-4582
Sale: $3.37 billion
Stock Exchanges: New York Philadelphia
Consolidated Rail Corporation—best known as Conrail—was formed by the U.S. government out of six bankrupt railroads serving the northeastern United States. Conrail began operations in 1976. It was returned to the private sector through a public stock offering in 1987, after establishing a record of steady profits.
Between the 1930s and the 1960s, U.S. railroads, once the country’s primary source of freight transportation, were undermined by the growth of air and road transportation. Trucking had usurped so much of the freight transportation business that many railroads merged or went under in the 1960s and 1970s. The eastern railroads were hit additionally with the collapse of coal traffic during the 1960s, as emphasis shifted to oil as an energy source. Between 1967 and 1972, six significant northeastern railroads went bankrupt: Central Railroad of New Jersey; Penn Central Transportation Company—created from the 1968 merger of Pennsylvania Railroad and New York Central Railroad; Lehigh Valley Railroad Company; Reading Company; Lehigh & Hudson River Railway Company; and Erie Lackawanna Railway Company. The roots of these companies stretched back as far as 1826.
By 1975 railroads had lost so much business to the trucking industry—which could offer door-to-door service and was not subject to the same price restrictions—that railroads handled only 36% of the nation’s freight. As a result, bankruptcies and mergers left the country with only six major freight railroads. The government reacted with the 1974 Regional Rail Reorganization Act, which in turn gave birth to the United States Railway Association (USRA). A plan was devised by USRA for the consolidation of the six bankrupt lines into a single system, with the backing of federal funds. The initial investment was $2.1 billion. Conrail officially began operations in 1976, with Edward G. Jordan as chairman and CEO, and Richard C. Spence as president. The company’s mandate was to revitalize rail service in the Northeast and Midwest and to operate as a for-profit company. Conrail at its inception had about 17,700 track miles, 100,000 employees, and operated in 16 states and in Washington, D.C., and Canada. It handled both freight and passenger services. The government held 85% of the stock, with employees holding the remainder.
The first years of operation focused on rehabilitation. Deterioration of track and properties was advanced because of deferred maintenance during the years Conrail’s bankrupted predecessors struggled. Severe winter storms during 1977 and 1978 increased deterioration while thwarting rehabilitation. In 1978 $1.2 billion more in federal funds was authorized. Nearly all of the money went to upkeep and modernization. In 1979 Stuart M. Reed became president. From its inception through 1980, Conrail had a cumulative net loss of about $1.5 billion. The USRA system plan for the company had predicted it would be making a profit by 1979. In 1981, however, Conrail was still losing money on 20% to 30% of its traffic, and the government continued to support its operations as the industrial economy of the Northeast depended on the line. Auto, steel, and coal industries were especially dependent upon the railroad.
In 1980 the Staggers Rail Act was signed, with huge repercussions for the industry. This act essentially deregulated the railroads, whose pricings had been fixed since the turn of the century when railroads represented virtually the only mode of transcontinental transportation. The Staggers Act made railroads more competitive with trucks by allowing them to reprice services, adjust rail rates, react to market conditions, and provide special contracts. This marked the start of Con-rail’s recovery.
The Staggers Act permitted Conrail to cancel and reassess joint rates with connecting railroads. It was losing money on many of these arrangements as revenues were divided according to distance not costs. As much of Conrail’s lines included old terminals and yard operations—with costly upkeep and overhead—it was losing money on crucial business. The chance to offer contract rates to shippers who could guarantee a certain volume of traffic enabled Conrail to plan ahead, spending the assured revenues on equipment and maintenance. Above all, the Staggers Act allowed railroads to regain business lost to the trucking industry.
In 1981 L. Stanley Crane succeeded Jordan as chairman and CEO. Crane had been with Southern Railway Company for more than four decades when he retired as chairman in 1980, the same time the company joined Norfolk and Western Railway Company to become Norfolk Southern Corporation. Under Crane, Conrail began drastic cost-cutting measures, shaving marginal jobs, lines, and services. Another boost to Conrail’s competitiveness came in 1981 with the passage of the Northeast Rail Service Act, which enabled Conrail to shed the commuter services it had been required to operate and that represented a loss to the company of $70 million annually. The main transit agencies served by Conrail—which accounted for 215,000 daily passengers—were the New York Metropolitan Transportation Authority, New Jersey Transit Corporation, and Southeastern Pennsylvania Transportation Authority. Conrail concluded its first year of profitability in 1981, with a net income of $39.2 million. An assist toward profitability was the deferral of wage increases agreed upon by Conrail workers, which saved about $150 million in 1981. By 1984 these deferrals would amount to $300 million.
Conrail again made a modest profit in 1982—$174 million— doubly notable as the recession was rocking Conrail’s major customers in Pittsburgh and Detroit. Crane’s streamlining continued. The work force, once at 100,000, was cut to 60,000 by 1982, and route miles were reduced from 17,700 to 15,000 as excess track was torn up to save maintenance costs. Money-losing branch lines were abandoned. Taking advantage of the Staggers Act, Conrail went after piggyback business—carrying trailers on flatbed rail cars. In 1982 Conrail was profitable despite a 20% decline in car loadings.
By 1983 Conrail was the fourth largest freight hauler in the United States, and making money even though 40% of its revenues came from industries hardest hit by the recession—steel, autos, and coal. A severance arrangement financed by the government allowed the work force to be cut further, to 42,000. By year’s end, the company reported a $31.3 million profit, and suitors began to gather. Courtships would prove stormy.
By 1985 the government had spent more than $7 billion to restore Conrail’s profitability. The sale of Conrail to an undercapitalized or poorly managed company would be catastrophic to the Northeast’s economy and unpopular with taxpayers. Among the strong suitors were Norfolk Southern, CSX Corporation (formed by the merger of Chessie System, Inc., and Seaboard Coast Line Railroad), and Alleghany Corporation. Conrail employees submitted a $500 million bid for acquisition. The selling price range was set between $1 billion and $1.5 billion. A deadline for formal purchase offers was set in 1984, and 14 potential buyers submitted. Within a few months, these bidders were narrowed to three. Favored was Norfolk Southern, because of its financial strength and solid railroading background. Conrail finished 1984 with a net income of $500 million. The company’s profits were misleading because of wage concessions granted by unions and tax advantages, but its cash balance and sustained profits were reassuring to buyers.
In 1985 Conrail management proposed a plan for public offering of Conrail stock. The company, and others in the industry, feared that sale of Conrail to Norfolk Southern would create a monopoly, as the two railroads served many of the same markets. An Interstate Commerce Commission study confirmed this possibility. The sale would also create the country’s largest railroad, and would have threatened CSX. Early in 1985, Conrail reached a new agreement with labor unions and resumed paying industry scale wages, retroactive to July 1984. At year’s end, Conrail earnings dipped to about $416 million.
In 1986 Norfolk withdrew its bid, citing changes in tax laws that made the purchase less appealing. In the fall, the Conrail Privatization Act was signed, authorizing a public stock offering to return Conrail to the private sector. To prevent possible mergers and takeovers, restrictions were made: no other major railroad would acquire more than 10% of Conrail for one year, and any railroad would need Interstate Commerce Commission permission for a merger after that; any nonrailroad company was prevented from making more than a 10% purchase for three years. The company concluded its sixth straight year of profitability, with a net income of $431 million.
In 1987 Conrail was returned to the private sector in the largest initial public offering to date in U.S. history, raising $1.6 billion. With the $300 million in funds that Conrail had already returned to the government, the sale generated nearly $1.9 billion. The company faced immediate challenges—an Amtrak-Conrail train collision that killed 16 people and injured more than 170 others added lawsuits to the mounting liabilities incurred by employees exposed to asbestos. Then came the October stock market crash, shaking investors confidence and further wounding the economy. Conrail concluded the year, however, with a more than 7% increase in freight traffic and purchased 30 new high-horsepower locomotives. Helping to boost its traffic despite still sagging auto sales was Conrail’s commodity diversity: company revenues toward the end of 1987 were coming from chemicals, 17%; autos, 16%; truck trailers, 17%; and coal, 17%. Also a help was the fact that Conrail’s average crew was 25% smaller than other major freight carriers’ crews, giving it a competitive advantage.
Early in 1988, Conrail’s board of directors elected Richard D. Sanborn as president. He came aboard from CSX Corporation and succeeded Crane upon his retirement as chairman and CEO in early 1989. Following Sanborn’s untimely death in February 1989, however, the company again was in search of a new CEO. The board of directors elected James A. Hagen as chairman, president, and CEO in April 1989. Hagan, who had been Conrail’s senior vice president of marketing and sales between 1977 and 1985, most recently had been president of CSX Distribution Services, Inc. During its first years as a private company, Conrail had proven itself enough of a moneymaker to generate takeover attention, with eyes on the 1989 expiration of takeover protection legislation. The company began instituting takeover defenses, including a poison-pill provision. Revenues for 1988 were about $3.5 billion.
Because of the still declining shipments of autos and steel in 1989, all major railroads suffered a slowdown. By year’s end, Conrail reduced its nonunion work force by 12% and took a fourth-quarter pretax charge of about $234 million to cover reductions, consolidation of certain functions, and an increase in casualty reserves. Still seeking to thwart takeover early in 1990, Conrail announced a $1.3 billion plan to buy back more than a third of its outstanding shares. It also established a $300 million employee stock ownership plan. These actions helped to reduce the cash surplus that was tempting takeovers. There also were suits pending concerning safety and environmental issues, including the Amtrak collision case from 1987, which had cost Conrail more than $81 million in claims by late 1989. In addition, there was an ongoing antitrust suit for $10 million brought by the bankrupt Delaware & Hudson Railway.
While industrial freight shipments remained weak in 1990, coal and grain traffic picked up, but these were lower revenue commodities for Conrail and did not make up for the slump. Late in 1990, Conrail settled a trackage rights dispute with Canadian Pacific Ltd. (CP), based in Montreal. CP acquired Delaware & Hudson and thus revived competition against Conrail in the Northeast.
By the close of 1990, Conrail operated about 13,000 miles of track, 2,400 locomotives, and 69,000 freight cars with major ports including Philadelphia, New York, Baltimore, Boston, and Cleveland. During that year, revenues declined 1.1% to about $3.37 billion. The revenue-producing commodities were 18% chemicals and related products; 17% intermodal— trailers or containers on flatbed cars; 16% coal; 14% autos; 12% metals and related products; 10% food and grain; 9% forest products. The continuing recession kept high-revenue products such as autos and intermodal in weak demand, accounting for Conrail’s lower revenues for the year. There was a 9% decline in traffic volume early in 1991 due to the recession. Conrail was able to institute cost controls, however. As a result, although revenues were down 4.9% in the first nine months of 1990, operating expenses fell 6.6% and operating income rose 7.3%. While the company’s future is connected to the economy, Conrail performed well in its first major recession since going public.
Williams, Winston, “Turning a Railroad Around,” The New York Times Magazine, January 13, 1985.
—Carol I. Keeley