Prior to 1930, railroads were the primary freight haulers in the United States. Then, during World War II railroads also moved much of the war materiel for the U.S. armed forces. But despite that, railroads lost freight traffic to the growing trucking industry.
In the eastern United States, the region’s railroads were hurt financially by the rapid decline in coal tonnage as the nation increasingly shifted to oil in the 1960s. A consequence of the shift was that between 1967 and 1972, six major northeastern railroads went bankrupt (the Penn Central, the Jersey Central, the Lehigh Valley, the Reading, the Lehigh & Hudson River and the Erie Lackawanna railroads).
Of these six railroads, the Penn Central Railroad was the largest. It was created on February 1, 1968, when the Pennsylvania Railroad and the New York Central Railroad merged. However, the merger was poorly planned and executed and it failed badly. The new railroad was losing $1 million per day, freight cars were “lost” within the system and maintenance was deferred because of the financial losses. Many freight trains ran at speeds of no more than 10 mph because of the poor condition of sections of track.
The Penn Central entered bankruptcy on June 21, 1970; at the time it occurred it was the largest corporate bankruptcy in U.S. history. The other five Northeastern railroads soon followed Penn Central into bankruptcy. Many reasons have been cited for the collapse of these railroads: insufficient traffic; suffocating regulations imposed by the Interstate Commerce Commission (ICC); and excess capacity due to too many railroads operating in the same area, as well as continued loss of freight traffic to trucking.
Initially, the Erie Lackawanna was not going to be included. It had double-tracked rails from New York to Chicago. It had been created by a merger of the Erie and Delaware and Lackawanna & Western railroads in 1960. It was expected to be a competitor to Conrail, offering customers a choice of railroads. However, its financial situation was not strong enough, and it was eventually folded into Conrail.
Congress passed the Regional Rail Reorganization Act of 1974 (the “3R Act”) in an attempt to stop the collapse of freight and passenger traffic in the East as a result of the bankruptcies. 3R provided interim funding to the railroads and the Consolidated Rail Corporation (Conrail) was created as a government-funded private company. The United States Railway Association (USRA) prepared a Final System Plan, which identified the key rail lines from the six railroads that would be transferred to Conrail. Congress approved the plan and it became the basis of the Railroad Revitalization and Regulatory Reform Act of 1976 (the “4R Act”). The 4R was signed into law by President Ford on February 5, 1976. The 4R established Conrail as the freight railroad in the Northeast and Amtrak as the passenger railroad. Ownership of most of the Northeast Corridor rails was also ceded to Amtrak.
Start-up and deregulation
Conrail began operations on April 1, 1976. Its purpose was to operate as a for-profit company and revitalize rail service in the Northeast and Midwest. However, it wasn’t until the Staggers Rail Act, which deregulated the railroad industry when it became law in 1980, that Conrail’s economic turnaround began. Many railroad managers and analysts believe that railroad deregulation occurred in large part because of the formation of Conrail. Although Conrail was not under the ICC’s control, it still had to comply with many of the agency’s regulations that were strangling the industry.
When Conrail was created, it “inherited” thousands of miles of track from the six bankrupt railroads. Penn Central operated over 20,500 miles; the Jersey Central operated about 700 miles; the Reading operated about 1,300 miles; the Lehigh & Hudson River operated only 86 miles; the Lehigh Valley operated 1,250 miles; and the Erie Lackawanna about 3,000 miles. In total, there were more than 26,800 miles of trackage.
Of that total, Conrail’s management sought to cut more than half the route miles from what the six former railroads operated. They pointed out that nearly 50% of the trackage should be abandoned, since only 11,000 miles of the combined railroads generated 80% of the freight revenues.
As Conrail began operating it lost nearly $1 million daily, similar to the Penn Central before Conrail was created. The new railroad’s management told members of Congress that they needed more freedom to set freight rates and to abandon unprofitable routes.
Congress actually listened. The Staggers Rail Act (which deregulated the railroads and took regulatory authority away from the ICC) was passed and signed into law by President Carter on October 14, 1980.
Railroad deregulation meant that the railroads could be more competitive with the trucking industry. For the first time in nearly 100 years, railroads were allowed to price their services, adjust rail rates and provide special contracts.
The first five years
While deregulation helped Conrail (and other railroads), the new railroad still had serious issues to resolve. The most significant was Conrail’s inherited workforce and labor costs. When Conrail was created, USRA administrators expected the railroad to continue losing money for the foreseeable future because of labor costs.
That prediction was true; Conrail lost money from its creation through the end of 1980. However, while many contributed to the turn-around, it was Stanley Crane that led the effort. He became Conrail’s CEO on January 1, 1981, after retiring from the Southern Railroad.
The Crane era
When Conrail was created in 1976, it was allowed to abandon thousands of miles of unprofitable track. Crane further reduced Conrail’s size by another 4,400 miles in the 1981-83 time period. This reduction in track miles saved millions of dollars in maintenance costs and only cost the railroad 1% of its overall traffic and 2% of its total profits.
Further improvements that Crane oversaw included: the expansion of centralized traffic control, which helped the railroad more efficiently move its trains; job cuts that were approved by the rail unions; and the end to its money-losing responsibilities for commuter rail, which was transferred to state agencies under the Northeast Rail Services Act (NERSA).
Moreover, by 1983 Conrail had become a for-profit, freight-only railroad. It was the fourth-largest freight hauler in the United States.
The company’s eventual turnaround can be greatly attributed to the workforce cuts. Crane understood that the railroad’s negative cash flow it needed to reduce the wage increases that had previously been negotiated, as well as ending payments to laid-off workers.
To bring that to fruition, Crane gave union leaders access to the railroad’s financial records so that they could see the company’s financial crisis. The tactic was successful; the labor unions agreed to the cuts. However, when profits began to grow larger some of the railroad’s senior officers did not want to return the $200 million in wage concessions. However, Crane believed the workers had saved Conrail and stated, “You give that money back. We’re making money. They helped us. Don’t forget that.”
These actions helped Conrail generate a profit by the end of 1981 (for the first time since the early days of Penn Central in 1968, over 13 years earlier). Planners at the USRA had expected Conrail to generate “…a negative cash flow until at least 1990.”
Crane and U.S. Secretary of Transportation Elizabeth Dole sparred for five years over the fate of Conrail. Dole proposed to sell Conrail to Norfolk Southern Corporation for $2 billion. Crane argued in favor of a stock offering that would remove the railroad from a government agency and turn it into a publicly traded company.
Conrail’s management proposed a public offering of Conrail stock in 1985. The Conrail Privatization Act was signed into law in the fall of 1986. It authorized a public stock offering that would return Conrail to the private sector. Conrail became a publicly traded company in the largest IPO to-date in U.S. history. The sale of Conrail stock raised $1.6 billion.
Conrail is pursued for acquisition
When the trucking industry was also deregulated in 1980, it led to thousands of new trucking companies being founded. Conversely, the deregulation of the railroad industry led to consolidation; hundreds of railroads were purchased by larger rivals.
Following deregulation, the three major Class I railroads in the eastern U.S. were Conrail, Norfolk Southern Corporation (NS) and CSX Corporation (CSX). The first battle between NS and CSX Transportation for control of Conrail began in the mid-1980s. That ended when Conrail’s IPO was successful and the railroad returned to private operation.
The intermodal revolution greatly helped Conrail’s financial recovery. It owned two direct main lines that served New York and Chicago; therefore, it dominated piggyback (trailers on flatcars, or TOFC) and intermodal services (containers on flatcars, or COFC).
As Conrail grew more profitable, CSX and NS once again began seeking control of the railroad. The second fight for Conrail began in the mid-1990s when CSX announced it was going to purchase the railroad. However, NS intervened and stopped the sale of Conrail to CSX.
Eventually the two railroads agreed to split Conrail; in the spring of 1997, NS and CSX acquired Conrail through a joint stock purchase. Crane saw Conrail sold for more than $10 billion (five times the price that Transportation Secretary Dole and the Reagan Administration had been willing to sell the railroad).
The Surface Transportation Board (STB) was the regulatory agency created to oversee the railroads after the ICC was shut down. The STB approved the acquisition and restructuring of Conrail on July 23, 1998. NS and CSX took administrative control of Conrail on August 22, 1998 when the two railroads split most of Conrail’s assets.
CSX received 42% of Conrail, acquiring most of the former New York Central lines. Norfolk Southern received 58% of Conrail and acquired most of the former Pennsylvania Railroad routes.
Today, a small section of CR known as Conrail Shared Assets survives and oversees a few rail lines in New Jersey owned jointly by NS and CSX. Conrail was restructured into a Switching and Terminal Railroad, and it began operating about 1,200 miles of track in three regional areas on June 1, 1999. Its operational areas were in northern New Jersey, southern New Jersey/Philadelphia, and Detroit. In 2007, Conrail’s operations were expanded from northern New Jersey to Staten Island, New York.
“Conrail began in 1976 as a federally subsidized operation with 100,000 employees, losing $1 million per day,” noted Conrail’s former Vice President and Chief Engineer Tim Tierney. “The Staggers Act led to substantial deregulation, and the company took full advantage of that. By its 1987 IPO, Conrail was starting to make $1 million a day.” Tierney added, “Management identified premium markets such as intermodal and automotive. But success required many sacrifices: employee reductions; line and division consolidations; line spinoffs to short lines, etc. The remaining employees were true survivors who became very efficient and productive.”
During its two decades of existence as a Class I railroad, Conrail was profitable. Meanwhile, Amtrak, which is now more than 50 years old, has yet to turn a profit and continues to “live” due to continued federal funding.
Author’s note: This article would not have been possible without the resources made available by Adam Burns of American-Rails.com. Those interested in learning more about the railroads operating now in North America – and those that are now “fallen flags” – should explore the American-Rails site.