The Penn Central Challenge

[Anderson]

So, I've been wondering about something...given the true comedy of errors that the Penn Central was over its short pre-bankruptcy existence, if you were allowed to step in six months or a year prior to the merger and oversee it, what would (or, if the list is shorter, wouldn't) you have done differently? Obviously, the objective would be to avoid the line going bankrupt, but failing that, how long could it have lurched along before some sort of cash flow crisis hit and took it down?

So, here's the challenge: You're dropped into the boardroom of either the NYC or the Pennsy in about 1967. The merger is inevitable/you can't stop it from happening, and you can't bring an Alien Space Bat along to simply throw out one management team or force the ICC to let you drop passenger and losing freight operations. What would you have done differently, and could the company have been saved? I'll grant, btw, that the $200 million loan is available in a crunch...that seems to have been a colossal spot of bad luck/the RR waiting until it was too late. So...what do you do, and how long could the line stagger on?

 

[GG-1]

Aloha

The merger should not have happened. For a loan there must be assets. Both companies moved their Land into holding companies. Then the loan holders had worthless paper.

I am not an expert, but in my opinion many of the officers of those companies committed fraud and should have, and still be in jail.

 

[Oldsmoboi]

I would have sold all of the rail to the government and then contracted with them to just operate the trains over the lines paying a fee per car mile.

 

[Anderson]

GG,

Oh, I agree. The mooted Pennsy-N&W and NYC-Chessie mergers made a lot more sense than the Pennsy dropping the N&W to allow the merger, and I'm still hard-pressed to understand why the Pennsy went along with it. Swallowing the NYNH&H to get approval just made things worse....the combined railroads went from having a profitable coal line to being saddled with a bankrupt wreck.

Olds,

What you're suggesting is, in essence, what the Brits have these days (Railtrack being nationalized while a number of rail franchises operate). I think the problem is, in essence, that the government wouldn't want the tracks unless there was an arrangement to ensure that service wasn't dropped on some of the smaller routes (and that the gov't didn't get caught holding the bag for those upkeep costs). Still...model-wise, that's not a bad option under the circumstances.

 

[Green Maned Lion]

Aloha

The merger should not have happened. For a loan there must be assets. Both companies moved their Land into holding companies. Then the loan holders had worthless paper.

I am not an expert, but in my opinion many of the officers of those companies committed fraud and should have, and still be in jail.

They should have, no question about it. I have seen some documentation (confidentially) that indicates that not only did P-C scrap several hundred passenger cars quietly between 1968 and 1971, but those passenger cars got transferred to Amtrak as part of the buy in. No, I am not going to show you the documentation. It took tooth pulling to just look at it and swear on every thing I hold dear never to divulge the restaurant I saw it in, let alone with whom or in what city.

 

[Anderson]

GML,

In plain language, what you're saying is that the Penn Central, in addition to everything else I read about, also scrapped cars and then transferred those non-existent cars to Amtrak to cover the cost of joining?

 

[George Harris]

At the time both companies appeared to thinking it was still the 1920's, both in their attitude toward getting and keeping business and in their operations. Much of their operational practices and maintenance practices and standards had been abandoned by most other railroad companies as obsolete. Even with the merger, they tended to take on the worst rather than the best of the alternatives. They did pull up or mothball a good bit of parallel trackage, but not near enough.

I would say the first thing would be to swallow their pride and go look over the shoulder of Southern Railway in everything that they did. Second would be to weld up the rails in track as fast as possible, even if it meant welding up old rail. Maintenance of track with CWR is about half that of jointed rail track given the same amount of traffic.

Simplify, simplify, simplify. A lot of what they did was the most complex way possible.

See how many layers of management they could eliminate.

Understand that buying lots of new ties is cheaper than picking up derailed cars.

Move the headquarters to someplace about mid-system, say like in Ohio or Indiana, and offer some reasonable buy-out to everybody that did not want to move out of Philadelphia. That might by itself solve some of the top-heavy deadwood issues.

 

[Green Maned Lion]

GML,

In plain language, what you're saying is that the Penn Central, in addition to everything else I read about, also scrapped cars and then transferred those non-existent cars to Amtrak to cover the cost of joining?

Yes. I was going to write a book on the history of Amtrak equipment, concentrating on the cars inherited that never turned a wheel in revenue service- there are more than three times as many cars in tha category than is currently in Amtraks fleet. After a lot of talking, phone calls, and FOIA requests getting nowhere I got a call from somebody who does not work for Amtrak asking me to stop kicking up buried sand. I agreed tO do so if I could find out the story for my own benefit, which I did. I am not saying more on the subject.

 

[PRR 60]

GML,

In plain language, what you're saying is that the Penn Central, in addition to everything else I read about, also scrapped cars and then transferred those non-existent cars to Amtrak to cover the cost of joining?

Yes. I was going to write a book on the history of Amtrak equipment, concentrating on the cars inherited that never turned a wheel in revenue service- there are more than three times as many cars in tha category than is currently in Amtraks fleet. After a lot of talking, phone calls, and FOIA requests getting nowhere I got a call from somebody who does not work for Amtrak asking me to stop kicking up buried sand. I agreed tO do so if I could find out the story for my own benefit, which I did. I am not saying more on the subject.

Whether the Penn Central cars transferred to Amtrak were real or fictitious may be a moot point. Most of the PC cars were junk and Amtrak dumped them as soon as possible. It did not take long for SF, UP, BN and other cars to find their way east. The term "roach coach" was not coined to describe the quality of Penn Central's passenger equipment for no reason. Sadly, I remember that era well. It was not pretty.

 

[Anderson]

Well, I think I realized what probably needed to happen: The overarching Penn Central entity should have been set up with two subsidiaries: A track ownership company and a train operating company (a third entity, containing the "other assets", is also an option). The track ownership company could have been set up as a REIT (Ike signed the law creating REITs), with the various RR's routes (and possibly even further internal subdivisions) being put into separate entities much as shopping mall REITs segregate their malls into different entities. As much debt should have been transferred to these entities as possible. The REITs would all have a single owner (PC at the top, and then PC-Tracks below it)...and yes, I think a strictly track-owning REIT would work. There would be substantial tax benefits to such an arrangement (REIT profits don't get taxed, and I think the dividends they'd have to pay to the overarching company would be taxable at a lower rate (though I'm not sure on this particular point).

The PC folks should then have systematically "bankrupted" the bottom-tier units that were performing badly, while keeping their train operations going. If the debtors move to take control of the tracks that are in a given unit...well, then fighting with the ICC about that route should become the new owners' problem and not the PC's.

This approach would likely have kept the trunk lines in one piece (the NEC, the Water Level Route, and the Broadway Line leap to mind). By bankrupting underlying units, the company would have been able to avoid a complete collapse. Another option would have been to move the passenger operations into a separate, wholly-owned subsidiary as well and to bankrupt that. Again...if the debtors want the equipment, they'd probably need to take over the operations...

For the record, I'm modeling all of this nonsense on something that was done with some mall REITs over the last few years.

Edit: Ok, forgot about the 5/50 rule...though dumping some of the trackage operations on the market as time bombs might have been an option to pursue...and it's always possible that they could have, in the initial euphoria around the merger, managed to sell off shares in the track companies they wanted to dump a limited, non-SEC offering on a closed market.

 

[railiner]

I don't think there was much that could be done once it was too late to stop the merger. Any attempts, be they feeble or heroic, would only delay the inevitable. The final solution--Conrail. If anything, it would have been better to accelerate that remedy. Of course, time had to pass, in order for the government to realize that was the only way out with the regulatory climate in effect prior to that.