Why did the PC merger fail?

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Why did the PC merger fail?

Postby TR-00 » Wed Mar 17, 2004 12:58 pm

Considering the success of post 1990 mergers, why did the PC fail? Which factor(s) were the primary cause(s) of the downfall?

Red team vs. Green team? General economic down turn? Under capitalization? Line and service redundancies? Defered maintenance after the merger? Labor problems? Government problems?

Why did two major carriers merge, then collapse?
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Postby walt » Wed Mar 17, 2004 2:03 pm

All of the above!
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Postby Aa3rt » Wed Mar 17, 2004 4:28 pm

What Walt said! Also, deferred maintenance BEFORE the merger and the incompatibility of NYC & PRR computers.

This topic has been heavily covered-try finding a copy of "Wreck of the Penn Central" (author forgotten) for an insider's view.
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Penn Central failure

Postby LCJ » Wed Mar 17, 2004 5:02 pm

This topic was discussed ad nauseum in the prior incarnation of these forums. At times, the discussion was rancorous due to the personal involvement and experience of some members that shaped their perceptions of "why."

I worked for the company (PC) for the entire time it was in existance as a railroad operator. I was in the operations side of things -- on the front lines in the eastern portion of the railroad. We on the trains new little of what was happening in the executive offices in Philadelphia. Some members (or at least they were members) had higher levels of experience and knowledge.

I'll proclaim what I believe to be the chief cause of failure of Penn Central, and others can add their views as they so desire.

From what I've read, if the original planners of the merger had not been so hell-bent on putting the railroads together immediately -- keeping them separate until the operational kinks could be worked out -- PC would have had a better chance. B&O/C&O/WM showed that this approach was better.

Of course, the usual suspects of over-regulation, commuter passenger service that drained cash, the forced inclusion of NH, too many non-producing branch lines, tragically poor labor agreements, and not enough revenue to invest enough capital to prevent the deferred maintenance that developed are all contributors as well.
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Postby walt » Thu Mar 18, 2004 11:38 am

Basically PC was the wrong merger of the wrong railroads, in the wrong place at the wrong time. Remember, the advent of Amtrak was only three years in the future and Conrail wasn't far behind. The mergers which created CSX and NS occurred much later and only involved freight operations which, historically, were always more profitable ( or cost effective, at least) than was passenger service, particularly if you factor in the commuter service that both PRR and NH were saddled with. And, although Conrail originally took over the former PRR-PC commuter lines, those lines now are operated by local transit authorities.
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Postby Trackbolt » Fri Mar 19, 2004 8:57 pm

One of the main problems as I understand it was that the Pennsylvania and New York Central were direct competitors for the same markets and competed with each other even after they had merged. Both companies had too much of everything (except cash) to maintain and not enough of traffic to efficiently operate the enormous physical plant both companies possesed. Both companies had deferred maintenance on multiple track mainlines to the point where speed restrictions and breakdowns of equipment made service on the entire system unreliable. If you combine that with tax problems, (especially in New Jersey and New York) and federal regulatory issues, passenger losses, and the imfamous non-compatible computers and horrific management decisions things spiraled downhill quick. The comparison with the C&O/B&O/WM is not a good one. The C&O's export coal business was a cash pump and the road was in good financial shape. The B&O had it's financial difficulties in the late 50's like most other roads but not was in direct compition for the same markets with the C&O and did posess much online business. The C&O saw the potential for the B&O to add market share and began rebuilding the B&O right after the merger in 1963. The Western Maryland came with the B&O and when the ICC allowed the the Western Maryland to be absorbed all Western Maryland trackage paralleling the B&O was either abandoned or downgraded to local service. The Penn Central just had too much of everything.

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Postby mxdata » Fri Mar 19, 2004 11:08 pm

I always enjoyed the Penn Central diesel shop practice of taking groups of dead locomotives and sending them out on a train just before the shop count was taken each day. That way the shop manager wouldn't get chewed out by the brass in Philly for having too many units out of service at his location. Those were great lashups, with two or three crippled, leaking, smoking wrecks pulling another six or eight dead ones.
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Good discussion! Oh those black PC days!

Postby LCJ » Sat Mar 20, 2004 12:01 am

My comparison to C&O/B&O/WM was merely in reference to the way they kept things operationally separate instead of pretending that all would just "work out" as did the PC folks (Saunders et al) before and after day 1 of trying to make it one railroad service provider.

The Boards of Directors of both component companies were asleep at the switch, so to speak (pun intended).

I agree the comparision in any other regard is not valid. They (C&O etc. and PC) were definitely different animals in many ways.

I still say extremely poor planning and the inability to recognize the "elephant" of the cash vacuum (sucking at full force!) in their midst were the main drawbacks of the RR merger from hell.
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Postby Lehigh Valley Railroad » Sat Mar 20, 2004 8:39 am

How many locos on a train?

Regulars RR's solution- As many as needed, 3 for that train

PC' s solution - 5 for that train, 2 are likley to break down.
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Postby Elwood » Sat Mar 20, 2004 11:20 pm

The way I remember it, the PC crashed as a result of:
bickering and fighting among the corporate officials
rivalries between employess that carried overf from the parent railroads
Passenger service, both long distance and commuter
the forced addition of the New Haven system
a myriad of surfacte troubles like deferred track woork, redundant lines, etc.
Government regulation

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Postby John_Perkowski » Mon Mar 22, 2004 2:01 pm

Lest we forget...

PC was before Staggers and deregulation...
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Postby jlpack153 » Wed Mar 24, 2004 10:58 pm

There's one more possibility. Maybe it all came out the way it was There's one more possibility. Maybe it all came out the way it was intended. PC owned some of the most prized and valuable real estate in NYC, Phila, Balt, Wash and other major cities. If I'm not mistaken PC split into a real estate company and a railroad. The Railroad went under quickly and the real estate is still a going concern. Privately held based in Ohio. Maybe the goal all along was get out of the marginally profitable railroad business and concentrate on the very profitable real estate business. I’m not saying the bankruptcy was planned, but maybe they just didn’t care about the railroad. They were out to protect the one profitable part of the merger. This post might touch a nerve or two
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Not so much a nerve

Postby LCJ » Wed Mar 24, 2004 11:50 pm

Some factoids about PC:

Yes, both New York Central and PRR owned a lot of valuable real estate. Yes, this valuable property did not accompany the railroad operations assets into the post bankruptcy organization (into Conrail). Yes, much of the non-railroad holdings of an investment firm owned by the same company that owned the new railroad made their way into the books of American Premier Underwriters in Ohio.

But no one stood to gain from the gigantic failure of this very prominent firm -- no one!

The Penn Central Company was a holding company. This company owned Penn Central Transportation (the railroad operating company). PC Co. also owned The Pennsylvania Company, a firm set up to hold the investments of PRR from many years earlier. It was earnings from the investments of The Pennsylvania Co. (such as PRR's shares of N&W sold before the merger) that went into the diversifications much vilified in the press and in politically motivated revelations and conflagrations.

Financial experts did not advise PC to take cash from the valuable holdings of Pennsylvania Co. to prop up the railroad, nor were they required to do so after the merged railroad failed. They tried in vain to stave off the inevitable by leveraging their good standing with financial folks, but they could not spend the nest egg. It would have been a huge waste of many years of earnings from investment (and re-investment). Spending was way out of control with the doomed railroad company at this point. Money has a tendency to disappear, you know, if not guarded carefully.

Some of the investments of The Penn Co did not pan out, but gains exceeded losses by far.

Yes, both The Central and The Pennsy sold real estate to prop up their operations (I guess we all know about Madison Square Garden and the beautiful station that once occupied that site). PRR could have never paid the dividends it did for so many years without that self-consuming source of cash. This selling of assets continued into the Conrail era, mostly because the revenues (as I've stated before here) did not support the value of the holdings. Use it well or sell it is the mantra.

Penn Central shareholders (the people who owned the company, after all) certainly did not profit from the failure. The value of shares went to near zero. You can buy cancelled PC certificates on Ebay worth more as wall hangings than the actual shares were worth after the bankruptcy. Assets were sold to pay creditors a pittance on the dollar. Many creditors got nothing!

Senior executives did not gain. Although many able managers went on to full, successful careers in railroading (because they were, after all, talented), a few key decision-makers were cast out in shame.

Nobody won -- except maybe the lawyers who litigated all of the claims against the estate.
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Postby videobruce » Fri Mar 26, 2004 12:00 pm

Reason?

Stuart Saunders and the PRR!
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What Really Happened

Postby catfoodflambe » Fri Mar 26, 2004 6:33 pm

I think that PC was doomed before it began - If James Hill or Edward Harriman himself had been running the railroad, it STILL would have collapsed on about the same schedule.

These were the three railroads nobody else wanted. They were the most extreme cases of what was wrong with the competive environment the railroads had to operate in at that time. The systems were totally incapable of generating the amount of cash needed to operate and maintain the system they had - let alone invest in new technologies needed to remain competitive.

They had too much trackage they could not abandon, too many employees they could not remove (lets not get into that subject here, please!), were handcuffed on raising prices cover costs on unprofitable business, or lowering prices to retain business that could have made money. Everyone vilifies the predecessor roads for letting their physicial plant go and reducing service - but these are about the only thing railroad management had left that they could control.
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