The Penn Central Transportation Company, commonly abbreviated to Penn Central, was an American Class I railroad headquartered in Philadelphia, Pennsylvania, that operated from 1968 until 1976, when it was folded into Conrail. It was created by the 1968 merger of the Pennsylvania and New York Central railroads. The New York, New Haven & Hartford Railroad was added to the merger in 1969; by 1970, the company had filed for what was, at that time, the largest bankruptcy in U.S. history.
Background of the merger
The Penn Central was created as a response to challenges faced by all three railroads in the late 1960s. The northeastern quarter of the United States, these railroads' service area, was the most densely populated region of the U.S. While railroads elsewhere in North America drew a high percentage of their revenues from the long-distance shipment of commodities such as coal, lumber, paper and iron ore, Northeastern railroads traditionally depended on a mix of services, including:
- Commuter rail service
- Inter-city rail service
- Railway Express Agency freight service
- Break-bulk freight service in boxcars
- Consumer goods and perishables, such as fruit and dairy products
These labor-intensive, short-haul services were all vulnerable to competition from automobiles and buses (for the first two services) and the trucking industry (for the remaining three), particularly where facilitated by four-lane highways. In 1956, Congress had passed, and President Dwight D. Eisenhower had signed, the Federal-Aid Highway Act of 1956. This law authorized construction of the vast Interstate Highway System, which provided an economic boost to the trucking industry.
Another significant problem was the inability of the New York Central and Pennsylvania railroads to respond to market conditions. The railroad industry at the time was heavily regulated by the Interstate Commerce Commission (ICC) and was unable to change the rates it charged shippers and passengers. Therefore, reducing costs was the only way to become more profitable. Government regulation and agreements with labor unions tightly restricted what cost-cutting could take place.
Additionally, the Northeast United States was saturated with railroads. The New York Central and the Pennsylvania were the largest railroads in the region, but competition also existed from other lines like the Erie-Lackawanna (itself a merged company from the Erie Railroad and the Delaware, Lackawanna and Western), the Lehigh Valley Railroad, Reading Railroad, Delaware & Hudson, Baltimore & Ohio, Jersey Central, and Lehigh & Hudson River. All of the Northeast railroads were suffering from the changing economics of the times, the decline of manufacturing, the opening of the Saint Lawrence Seaway, and particularly damaging was the sharp drop in demand for anthracite coal that was by and large the reason many of the northeast railroads were initially created. All of this competition brought massive redundancy to an industry that needed efficiency. Management came to the conclusion that the only way to survive was to merge with one or more complementary railroads. In theory, a merger would combine the best of each system, while elimination of redundant track, staff, and reduced taxes, would save tens of millions of dollars. Railroad mergers were happening nationwide, and the idea of merger had come to the New York Central in the late 1950s. By 1955, the New York Central was all but bankrupt. The Pennsylvania Railroad, the so-called Standard Railroad of the World, hadn't turned a profit since 1946. Both railroads had approached each other about merging, and held a series of discussions on the idea in the 1950s. The talks went nowhere.
The Central then turned to other carriers outside of the Northeast, particularly the Chesapeake & Ohio which controlled the Baltimore & Ohio and the Western Maryland. The Chesapeake & Ohio was a very profitable coal carrier that has expanded into the Midwest. The Central saw the C&O as the perfect merger partner. The C&O's coal would serve as a pillar of stability, while the Central's and B&O's network throughout the Midwest would add new business opportunities. On paper it was the perfect marriage. The NYC and the C&O/B&O complemented each other, whereas the NYC and PRR duplicated each other's efforts just about everywhere. Serious merger discussions were held between the NYC and the C&O, but those talks failed too when agreement could not be reached. With nowhere else to turn, the New York Central reluctantly restarted talks with the Pennsylvania in the early 1960s, which led to the creation of the Penn Central.
The merged railroad
At 12:01 AM on February 1, 1968, the Penn Central began operation. The Penn Central was the largest corporation in the United States. It had over $5 billion in assets, 20,000 miles of track, 180,000 employees, and projected $17 billion in operating revenue for 1968---all on paper. To the public and to Wall Street, the Penn Central projected an image of modernity and stability. In reality, the merged Penn Central was little better off than its constituent railroads were before. On the first day of operation, the Penn Central only had $13.3 million of cash. Everything else they owned was on paper. The added burden imposed by the ICC of adding the bankrupt New York, New Haven and Hartford to the Penn Central made a bad situation worse. A decade of merger talks and agreements between the NYC and the PRR led to an implementation plan, but it was never carried out. Attempts to integrate operations, personnel and equipment were not very successful, due to sharply clashing corporate cultures, incompatible computer systems, and overly generous union contracts that loaded the PC with staff they did not need. All of the cost savings and reduction in expenses that was supposed to occur to a merged railroad never materialized with the Penn Central. The NYC had cultivated a corporate culture of openness where ideas were freely exchanged and managers did not operate in a top-down fashion. At the PRR there was a clearly defined hierarchy, management was slow to embrace new technologies and ideas, and lower level people deferred to those above them. The two corporate cultures were 180-degrees opposite each other. The merger technically was supposed to be two equals joined together, yet it was the PRR management team that ended up dominating the new Penn Central, which made the merger technically an acquisition of the NYC by the PRR. The NYC management team (the Green Team) was subordinated to the PRR management team (the Red Team). The merged Penn Central's corporate headquarters was in the former Pennsylvania Railroad head office at Six Penn Place in Philadelphia.
Track conditions deteriorated (some of these conditions were inherited from the three merged railroads) and trains had to be run at reduced speeds, resulting in delayed shipments and personnel working extensive overtime. As a result, operating costs soared. Derailments and wrecks became frequent, particularly in the Midwest. Operation of the merged railroad became frustrating and difficult. Trains could not be routed properly because the separate NYC and PRR computerized routing systems could not communicate with each other and were incompatible. Trains began rolling but cars were often routed to the wrong destination, or dispatchers could not easily locate cars once they were sent out into the system. PC's poor shipment of Maine's potatoes resulted in many rotting before they could get to market. In the winter of 1969, most of Maine's potato harvest froze in PC's Selkirk Yard after being transferred from the Bangor & Aroostook Railroad but the computer system could not locate the cars. Unable to collect damages from the bankrupt PC, many Maine potato farmers went out of business, while those who survived the loss of their crop ceased shipping potatoes by rail, ending a profitable market for Maine's railroads.
Penn Central management created a holding company, the Penn Central Company, and tried to diversify the troubled firm into real estate, pipelines, trucking, and other non-railroad ventures. However, in a slow economy, these businesses performed little better than the railroad assets. In addition, these new subsidiaries diverted management attention away from the problems in the core railroad business. To make matters worse, management insisted on paying dividends to shareholders to create the illusion of success. The Pennsylvania Railroad had a gold-plated reputation on Wall Street since it had the longest record of dividend payment in American corporate history. It was this stellar reputation on Wall Street that permitted the PC to borrow money easily and cheaply. The company had to borrow enormous sums to keep operating. The interest on the loans became an unbearable financial burden, but this fact was kept hidden from shareholders and the general public.
Bankruptcy and Conrail merger
From inception, the Penn Central consumed enormous amounts of cash in order to operate. Revenue generated from the various business units was not enough to cover operating expenses, but this fact was downplayed or denied by optimistic statements of management. To operate and keep up appearances, the Penn Central had to borrow money from Wall Street banks and financial firms. The corporate annual reports filed for 1968, 1969 and 1970, obscured the actual dire financial status of the company. At the end of the first year of operating, the Penn Central lost $150 million. The next two years were worse. Wall Street became increasingly alarmed at the losses and one by one, the banks refused to lend any more money. This forced the hand of the Penn Central Board of Directors, who voted on June 21, 1970, to file a Chapter 77 motion in the Federal bankruptcy court. The American financial system was shocked when after only two years of operations, the Penn Central Transportation Company was bankrupt. It was the largest corporate bankruptcy in American history at that time. Although the Penn Central Transportation Company was put into bankruptcy, its parent Penn Central Company was able to survive.
The Penn Central's bankruptcy had a ripple effect on the Northeast economy. The PC bankruptcy absolved them from paying their debts, which included payments owed to other railroads. The PC's failure to pay was a major contribution to other Northeast lines that also entered bankruptcy protection. The bankruptcy was the final blow to long-haul private-sector passenger train service in the United States. The troubled company filed proposals with the ICC to abandon most of its remaining passenger rail service, causing a chain reaction among its fellow railroads, who also decided to drop their money losing passenger trains. In 1971 Congress created Amtrak, a government corporation, which began to operate a skeleton passenger service on the tracks of Penn Central and other U.S. railroads.
The Penn Central continued to operate freight service under bankruptcy court protection. After private-sector reorganization efforts failed, Congress nationalized the Penn Central under the terms of the Railroad Revitalization and Regulatory Reform Act of 1976. The new law folded six northeastern railroads, the Penn Central and five smaller, failed lines, into the Consolidated Rail Corporation, commonly known as Conrail. The act took effect on April 1, 1976.
Facing continued loss of market share to the trucking industry, the railroad industry and its unions were forced to ask the federal government for deregulation. The 1980 Staggers Act, which deregulated the railroad industry, proved to be a key factor in bringing Conrail and the old Penn Central assets back to life.
During the 1980s, the deregulated Conrail had the muscle to implement the route reorganization and productivity improvements that the Penn Central had unsuccessfully tried to implement during 1968 to 1970. Many miles of old Pennsylvania and New York Central track were abandoned to adjacent landowners or rail trail use. The stock of the subsequently-profitable Conrail was refloated on Wall Street in 1987, and the company operated as an independent, private-sector railroad from 1987 to 1999.
Corporate history
The Pennsylvania New York Central Transportation Company was formed February 1, 1968, as an absorption of the NYC by the PRR. The trade name of "Penn Central" was adopted, and on May 8, the company was officially renamed to the Penn Central Company.
The Penn Central Transportation Company (PCTC) was incorporated on April 1, 1969, and its stock was assigned to the new Penn Central Holding Company. On October 1, the PCTC merged into the Penn Central Company. The next day, the Penn Central Company was renamed the Penn Central Transportation Company, and the Penn Central Holding Company became the Penn Central Company.
The old Pennsylvania Company, a holding company chartered in 1870, reincorporated in 1958, and long a subsidiary of the PRR, remained a separate corporate entity throughout the period following the merger. While the PCTC had been merged into Conrail in 1976, the holding company, the Penn Central Company, continued as a separate firm. In the 1970s and 1980s, the new PC was a small conglomerate that largely consisted of the diversified sub-firms acquired by the old PC before the crash.
Among the properties Penn Central owned when Conrail was created were the Buckeye Pipeline and a 24 percent stake in New York's Madison Square Garden (which stands above Pennsylvania Station) and its prime tenants, the New York Knicks basketball team and New York Rangers hockey team.
Though the new PC retained ownership of some rights of way and station properties connected with the railroads, it continued to liquidate these and eventually concentrated on one of its subsidiaries in the insurance business. Penn Central Corporation changed its name to American Premier Underwriters in March 1994. It became part of the Cincinnati financial empire of Carl Lindner and his American Financial Group. Up until late 2006, American Financial Group still owned Grand Central Terminal, though all railroad operations were managed by the New York Metropolitan Transportation Authority (MTA) through a lease that began in 1994. The current lease with the MTA was negotiated to last through February 28, 2274.
On December 6, 2006, the U.S. Surface Transportation Board approved the sale of several of American Financial Group's remaining railroad assets to Midtown TDR Ventures LLC for approximately US$80 million. The New York Post on July 6, 2007 reported that Midtown TDR was controlled by Penson and Venture. The Post noted that the MTA would pay $2.24 million in rent in 2007 and has an option to buy the station and tracks in 2017. However, Argent could also opt to extend the date another 15 years to 2032.
The assets included the 156 miles (251Â km) of rail used by the Metro-North Railroad Harlem and Hudson Lines, and Grand Central Terminal in New York City. The most valuable asset cited by Midtown TDR were the unused "air rights" for additional development above Grand Central's underground boarding platforms and switch yard. The platforms and yards extend for several blocks north of the terminal building under numerous streets and existing buildings leasing air rights, including the famous MetLife Building and Waldorf-Astoria Hotel. The cash value of the Terminal building itself is limited. In spite of the fact the Terminal was originally designed to accommodate a skyscraper above it, as the building is listed for purposes of historic preservation it cannot, under current law, be torn down for redevelopment.
Heritage unit
As part of Norfolk Southern Railway's 30th anniversary, the railroad painted 20 new locomotives utilizing former liveries of predecessor railroads. NS #1073, an EMD SD70ACe, was painted using the standard black-and-white Penn Central color scheme. It was delivered to NS on June 26, 2012.
See also
- Alfred E. Perlman - PC President
- Stuart T. Saunders - PC Chairman & CEO
- History of rail transport in the United States
- Penn Central Transportation Co. v. New York City (1978 Supreme Court case)
References
Further reading
- Daughen, Joseph R. & Peter Binzen (1999). The Wreck of the Penn Central (2nd edition). Boston: Beard Books Little, Brown. ISBNÂ 1-893122-08-5.Â
- Prell, Donald (2003). The Untold Story of the Survival of the Penn Central Company (eBook 2010 ed.). Palm Springs: Strand Publishing. ISBNÂ 0-9741975-0-5.Â
- Salsbury, Stephen (1982). No Way to Run a Railroad. New York: McGraw-Hill. ISBNÂ 0-07-054483-2.Â
- Saunders, Richard (2001) [1978]. Merging Lines: American Railroads 1900â€"1970 (Revised ed.). DeKalb, Illinois: Northern Illinois University Press. ISBN 978-0-87580-265-7.Â
- Sobel, Robert (1977). The Fallen Colossus. New York: Weybright and Talley. ISBNÂ 978-0-679-40138-4.Â
External links
- "Penn Central Document, Timetable and Publication Archive". Unlikely PCRR.Â
- "Penn Central Information". Penn Central Railroad USA at Tripod.com.Â
- "Penn Central Maps and Track Diagrams". Penn Central Railroad Online.Â
- "Penn Central Railroad Historical Society". pcrrhs.org.Â