The Penn Central Railroad

Despite the resounding failures of the Penn Central there were some good things which came from it. First and foremost the collapse was a wake-up call to the government that assistance was desperately needed to not only save Northeastern railroading but also the rail industry as a whole. A year following the Penn Central’s filing for bankruptcy, Amtrak was established as a federally assisted railroad company to take over the private railroads’ intercity passenger trains and most were quite happy to rid themselves of the service.

Soon realizing that Penn Central’s problems were far to entangled and complicated for the railroad to stabilize itself and recognizing that it was threatening total shutdown, Conrail was created and began operations on April 1, 1976 taking over the remnants of the PC and several Northeastern carriers. Just four years later in 1980, the Staggers Act (named after Republican Harley O. Staggers of West Virginia) was created and signed into law, which allowed for enormous deregulation of the railroads (such as allowing carriers to enter into contracts with shippers to set prices and services, without ICC approval.

What would eventually lead to the creation of Penn Central began as early as the latter 1950s when the Pennsylvania Railroad began looking for a merger partner to help right a ship that was sinking. By the 1950s the Pennsylvania was very sick, although few except upper management knew this. As Northeastern traffic dried up from a loss of industry and competition (from planes and trucks) the handsome profits the Pennsy was used to were no more and passenger losses were dragging down the company even more. Its savior to offset these massive deficits was its controlling interest in the Norfolk & Western, which was a black diamond specialist hauling coal from the hills of West Virginia and Kentucky to Virginian ports at Norfolk.

Contrast this to the New York Central, which under the guidance of railroading man Alfred Perlman was not only back in the black and slashing its operating ratio but also looking for a suitable partner to increase its marketing position and cut costs even farther (Perlman was an excellent manager who recognized many cost-saving and profit-earning measures which are still used today, such as high speed COFC service). This partner certainly did not include the Pennsy and realizing that he was under pressure by the NYC board to find someone began looking for the best possible suitors (while once again earning profits, the NYC was still not healthy enough to survive independently for the long-term).

The NYC was particularly interested in the Baltimore & Ohio, which would open up the railroad to new southern markets, particularly the very lucrative coal traffic the B&O held in northern West Virginia and parts of Pennsylvania, Maryland, and southeastern Ohio. While a fight for the B&O ensued between the NYC and Chesapeake & Ohio, the NYC’s bid to secure the B&O failed as the railroad was awarded to the C&O, mostly on the grounds that the investors were distrustful of the NYC and that once it had gained control of the B&O would merge it into its system and completely out of existence (which was partially true).

With the B&O no longer an option, all other southern lines were either not interested or not appealing and with the board pressuring for a merger Perlman began to realize the that the Pennsylvania was likely the only optional partner. Many in the industry and those who understood it, realized that if such talks were underway at least one of the railroads was extremely desperate and the likelihood of such a union being successful was highly doubtful. - Everyone knew that the two were bitter rivals. How could such a merger be successful?

In the end it was eventually decided that a merger with the PRR was the only option for the New York Central. Surprisingly the ICC approved the merger that virtually allowed for a monopoly in the Northeast and the Penn Central Corporation was born on February 1, 1968.

Aside from that fact that the new railroad literally began to fall apart from the very beginning, other problems resulted as a condition of the merger. First, the PRR was forced to divest itself entirely of the lucrative coal earnings it was siphoning from affiliate, Norfolk & Western. Second, the new railroad was forced to take on the New Haven, a commuter-heavy operation between New York and Boston that was in shambles itself and PC was in no condition to take on a bankrupt carrier.

With a merger that was not only a terrible fit but also unplanned it comes as no surprise that the situation resulted in bankruptcy. To make matters worse the NYC and PRR could not have had more opposite corporate cultures. The management of the New York Central System was more laid back, open to new ideas, and the chain of command was “loose” so to speak (one reason for its renewed success in the 1950s under Perlman) whereas the PRR was extremely strict, new ideas were shunned and looked down on (the railroad was still using practices that had been out-dated since the 19th century!), and orders came down through the chain of command. Naturally, then, these two management teams did not get along at all and pure hell and pandemonium resulted across the entire system.

The Penn Central was losing over $1 million a day and trains were becoming lost throughout the system, as dispatchers were not properly trained on how to dispatch their trains. To make matters worse as the red ink began to become an unstoppable flash flood maintenance was deferred and derailments became the norm with large sections of main line reduced to 10 mph slow orders and freight snarled to a crawl.

After only two years since its creation and financial assistance completely gone, the destitute Penn Central officially declared bankruptcy on June 21, 1970. The result of this was a ripple effect throughout the entire Northeast, as other railroads, which depended on the Penn Central to ferry traffic, no longer had a means to move their freight. It became so bad that the Penn Central was facing total shutdown if financial assistance were not located.

Realizing the severity of the situation the federal government stepped and setup the Consolidated Rail Corporation, which comprised the skeletons of several bankrupt Northeastern carriers, and began operations on April 1, 1976. With federal backing Conrail began to slowly pull out of the red ink (it took many years) and by the late 1980s was a profitable railroad after thousands of miles of access trackage was abandoned and/or upgraded.

While Conrail was able to make a profitable railroad from the skeletons of several Northeastern carriers, today even it is no longer with us being split up amongst CSX and Norfolk Southern in 1999, with CSX taking much of the NYC while NS got a good chunk of the Pennsy. In any event many parts of both the New York Central System and Pennsylvania Railroad continue to serve an important role in moving goods (and people) from eastern markets to the Midwest and vice versa.

For more reading on the Penn Central, especially regarding the inside management and accounting practices of the railroading, leading up to and through the disaster (and into the Conrail era) I strongly recommend The Men Who Loved Trains from Rush Loving, Jr. It is one of my personal favorites and Loving gives a detailed look (as he was in the middle of and lived through the disaster) at management and operations (and their fundamental problems and flaws) while also keeping things very interesting and not just a boring textbook filled with dull numbers and procedures (the book was also given high marks by the leading industry magazine, Trains from Kalmbach Publishing). The book will also give you a bit of understanding about how the current eastern road’s fate came about through failed mergers and other attempts that were unsuccessful. If you own one railroad book in your collection I would highly suggest it be this one, you won’t be disappointed!