A Fork in the Railroad
Can 2 Systems Be Better Than 3? Skeptics Abound in Conrail Merger
By Don Phillips
Washington Post Staff Writer
Friday, June 5, 1998; Page D01
Conrail, an industrial Cinderella that succeeded beyond the dreams of its federal planners, became such an asset that two rival railroads waged a $10 billion bidding war to acquire it. Now, in what may be one of the greatest gambles in modern transportation history, authorities will discover whether splitting up the railroad will build on that success -- or lead to failure.
On Monday the Surface Transportation Board, which regulates railroads, appears likely to give rivals Norfolk Southern Corp. and CSX Transportation Inc. a chance to see whether they can divide Conrail Inc. between them without creating the same economic mess that stained the last big rail merger.
Richmond-based CSX and Norfolk-based Norfolk Southern say wonderful things will happen when they acquire Conrail, created on April 1, 1976, from the bankrupt Penn Central Corp., and other eastern lines that had become little more than pitiful streaks of rust. They promise, in fact, that the merger ultimately will erase a million truck trips a year on eastern and midwestern interstates.
"I think we'll look back in a few years and regard this as one of the great investments in rail history," Norfolk Southern Chairman David R. Goode told the transportation board during two days of hearings this week.
But the two railroads -- and the board -- are surrounded by skeptics and nervous industrial shippers who heard the same sorts of promises from the western railroad Union Pacific Corp. before the Omaha-based railroad took over the Southern Pacific.
"Dividing up a major rail system has never been done before; it will be messy," said Scott N. Stone, speaking for the Chemical Manufacturers Association and the Society of the Plastics Industry Inc.
The Union Pacific merger began with great hopes, but service deteriorated under the burden of managerial miscalculations, late labor agreements, unusually bad snowstorms, a rash of train wrecks and crush of traffic brought on by the booming economy.
Beginning in Houston in the summer of 1997, Union Pacific experienced a breakdown in operations that is now usually called a meltdown. Because the nation's railroad system is interconnected, the problems rippled to the rest of the UP and then to the rest of the country.
The once financially flush Union Pacific suffered its first quarterly loss in decades in the last quarter of 1997. The losses continued into 1998 as credit rating agencies began downgrading UP's debt. The railroad's stock price, which rose as high as $73 in recent years, has fallen steadily. It closed at $45.43 3/4 a share yesterday, up 31 1/4 cents.
CSX and Norfolk Southern are running scared because of the UP's problems. Officials know a similar meltdown on their new system would blemish their reputations, depress their stock prices and send them into a spiral of money losses and lost customers.
The two railroads are competing to hire outgoing Conrail managers -- unlike Union Pacific, which fired many experienced Southern Pacific managers before executives realized they were banishing the very people who knew how to keep the railroad's operations fluid.
CSX and NS also are buying locomotives and cars to avoid shortages, just in case their rosy predictions for increased traffic actually come true.
"I give you my pledge, we're going to implement this merger effectively," said CSX Corp. Chairman John W. Snow, who said his railroad is now running with 120 percent of the number of engineers and conductors that it actually needs and is stepping up orders for locomotives.
But major shippers are asking whether Norfolk Southern and CSX will make the same mistakes -- or perhaps mistakes that no one has yet hypothesized.
The chemical and plastics industries, for instance, have lost millions of dollars and been forced to shut plants temporarily because of UP service problems. Some officials fear shipments to New Jersey's "chemical coast" could suffer under a Conrail takeover.
There's also nervousness because only two major railroads would be left east of the Mississippi River after the merger, just as Union Pacific and Burlington Northern-Santa Fe Corp. divide railroading to the west. Such "duopolies," critics say, are not truly competitive.
In the last decade or so, the nation's rail system has roared back from the brink of disaster, partly because large trucking and steamship companies found it was less costly and more efficient to ship truck trailers and marine containers by rail than by truck for long hauls. This success has raised the stakes for all players in the shipping business.
But all sides realize the board probably will approve the Conrail split. So shipper opponents have shifted their strategy to demanding rate relief and special conditions, some labor unions have turned to political intrigue, and cities and states have asked for special environmental protections such as noise barriers in areas that will see increased train traffic.
In general, the unions and the cities have lost their bids. Although the two major rail unions -- the United Transportation Union and the Brotherhood of Locomotive Engineers -- support the merger, other unions went to the White House and Congress in an unsuccessful attempt to change the makeup of the Surface Transportation Board before the Conrail vote.
Led by Cleveland, cities also have demanded the rerouting of trains away from populated areas. But the board's environmental impact statement required relatively mild environmental steps. Yesterday CSX and Cleveland reached a settlement in which CSX must spend $13.2 million over five years to build noise barriers, reroute some trains and address concerns about increased rail traffic through residential neighborhoods.
The focus of Monday's board vote, therefore, will be dozens of requests for special commercial requirements, some of which the railroads say could cause chaos or dilute the merger's value. Most of the requests would expand competition for individual shippers or geographical areas, giving shippers leverage to negotiate lower rates or special services.
The three major requests would expand competition in Buffalo, Indianapolis and New York east of the Hudson River. In each case, the cities and local industry want the board to require that the two railroads share all shippers within a wide area, no matter who owned the track, just as they agreed to do in New Jersey-Philadelphia and Detroit, "shared access" areas.
c Copyright 1998 The Washington Post Company
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