258 Chapters
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Medium 9780253347572

5 An Eleventh Hour Surprise

RushJr. Loving Indiana University Press ePub

As McClellan—now at the Central—watched the merger’s inevitable approach, he and the other junior officers of the two railroads grew increasingly apprehensive. Although they could not imagine its impact, they were about to be caught in the middle of the biggest debacle the transportation industry had ever experienced. For McClellan it would be a watershed that would determine everything he was to experience or do for the rest of his life.

If the Central had joined with the C&O–B&O and the Pennsy with the N&W, it would have created two competitive lines. Instead, they were being amalgamated out of fear, not from some grand dream of creating a better transport system. “I didn’t think it was a particularly good merger, but we were trapped into some kind of merger,” Perlman said later. They had too many tracks, too many yards, too much railroad, and they needed to cut back by consolidating. It did not seem normal for two such fierce competitors to join up. “Those of us inside the New York Central or Pennsy said, ‘This is an unnatural act! Not the way to go. This is crazy. It’s going to be a monopoly,’” said McClellan. In his view, railroads got lazy and unimaginative when they held monopolies.

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10 Some High Society Sex

RushJr. Loving Indiana University Press ePub

As the snowdrifts melted and the flowers started blooming on Philadelphia’s Main Line, Stuart Saunders was still demanding savings, but no one could find anything else to cut—except for workers, but that would have cost millions because of the labor agreement. More urgently than ever, Saunders and David Bevan went on searching for new capital, but now no source seemed left but Washington.

Bevan and Saunders were walking a high-wire, because one was trying to keep the financiers thinking all was relatively well while the other was trying to convince Washington that Penn Central’s straits were so dire that help was imperative. This, plus the constant search for more savings and more paper profits, would tax the time and imagination of the most formidable chief executive officer, and although a man of whirlwind energy, Saunders’s days were being stretched to the limit. In the middle of all that, the chairman’s attention and even valuable working hours were captured and diverted by a much more personal concern that was so well guarded that only three or four of his closest aides ever knew of it.

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13 Booted Off the Property

RushJr. Loving Indiana University Press ePub

As he had watched Penn Central unravel from his post at the Federal Railway Administration, Jim McClellan had continued exploring ways to relieve Penn Central of its passenger losses. He and the staff of the ICC had found that while the railroads were overstating the losses, the railroad labor unions and politicians who advocated continuing passenger trains were understating them by a significant margin. Moreover, not only Penn Central but all the nation’s railroads were losing more and more cash every month on passenger services.

Their report had been sent to Congress in July 1969, sparking a Senate hearing two months later when Stuart Saunders had traveled down to urge immediate government action. Some senators had responded with open skepticism. “This house is on fire now, and it has been on fire for some time!” Saunders had retorted.

The problem was lack of revenue and high costs. The railroads had a market share of only 7.5 percent, and train after train was leaving the station nearly empty. For example, two Penn Central trains between Harrisburg and Buffalo were carrying an average of only 17 passengers apiece. Just after its merger, Penn Central was allowed to discontinue two trains that ran between St. Louis and the Indiana/Ohio border that carried an average of only seven passengers a day at a loss of more than a half-million dollars a year. The passenger business had once been as profitable as it was glamorous. Twenty-six percent of the Pennsylvania Railroad’s operating revenues in 1900 had come from passenger service. Except for those people who journeyed by river or coastal steamer, the railroad industry’s market share of intercity travelers had been essentially 100 percent. Forty years later, private automobiles had accounted for nearly 90 percent of the mileage traveled by intercity passengers, and railroads had provided only 7.5 percent. Cars would retain pretty much that share of the market for the decades to come.

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17 Merging Railroads over Bourbon

RushJr. Loving Indiana University Press ePub

Claude Brinegar had been wasting no time. Just a few months after the 45-Day Report, knowing that the new bill would require an even more detailed study of the problem by DOT, he had put to work a team of analysts, Jim McClellan among them. Viewing his brief March report to Congress as merely the forerunner of more advice and counsel, Brinegar wanted a document that would outline the kind of rail system that the region between the Mississippi and the Mid-Atlantic and New England needed. The secretary intended that it become a blueprint for resolving the crisis, and that is what the new law was to require of him. “Brinegar had us solving a problem,” said the Federal Railway Administration’s Bill Loftus. “We were searching for the solution, but Brinegar wanted a nongovernment solution.”

The network that would result had to be solvent and strong enough to provide dependable service to the region’s shippers. Early in their study the FRA staff agreed that they must look at all the railroads in the region, healthy as well as sick. Unquestionably, a lot of blood would flow. For instance, a line that wound past the estates of northern Baltimore and through the Amish farms of southern Pennsylvania had carried for decades the Pennsy’s sleepers and express trains bound from Washington to Harrisburg, Buffalo, Pittsburgh, and points west. Now it bore not one passenger train and barely any freight. Just to the west lay the tracks of the Western Maryland Railway, which paralleled the Pennsylvania almost all the way to York and carried at least five times the tonnage that moved over the Pennsy line.

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24 John Snow, CEO

RushJr. Loving Indiana University Press ePub

Norfolk Southern may have lost the round, but the war was by no means over, and while NS licked its wounds, McClellan assessed its mistakes. Quickly he concluded that in the next confrontation he and the others would concentrate on the media and geographical targets that were important and try not to spread themselves so thin. Furthermore, they would not let themselves be constrained by price. Norfolk had more money than CSX. It should be willing, if needed, to outspend its opponent.

In the meantime, Norfolk Southern expanded by acquiring a moving van company. Of much greater importance, the railroad bought the rights to a new kind of highway trailer that was designed so that railroad wheels could be attached to it, thereby enabling it to run both on the road and on the tracks, where it was pulled along on the back of a train. Since NS’s corporate symbol was a racehorse, the marketing department named the new enterprise Triple Crown Service. The innovative van would some day help boost Norfolk’s intermodal revenues to the point where they excelled income from every commodity the railroad carried, except coal.

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4 The Portly Virginia Gentleman

RushJr. Loving Indiana University Press ePub

When they met, Alfred Perlman and James Symes agreed once again that New York Central shareholders would get 40 percent of the new company and that the Pennsylvania’s owners would hold 60 percent. The “new” company actually would be the Pennsylvania Railroad, but it would assume a new name, Penn Central Corp.

The shareholders approved the merger, and the Interstate Commerce Commission began more than a year of hearings in 1962. As the sessions were getting under way, McClellan was starting his job at the Southern Railway. Although he paid scant attention to rail mergers, his bosses cared, and from their vantage point just nine blocks from the ICC’s ornate quarters on Independence Avenue, they watched with concern as the Penn Central argued its case. Symes and Perlman both defended the size of the proposed railroad, Symes reminding the commission that the combined system would be moving fewer cars than the Pennsylvania carried without any disruptions in its heyday, a reassurance that would help shake the Penn Central’s credibility later.

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6 “Where the Hell Is Harrisburg?”

RushJr. Loving Indiana University Press ePub

The merger started at 12:01 a.m. Thursday, February 1, 1968, a cold, rainy night in Philadelphia. The system that the marriage brought together was larger than anything American railroaders had ever seen. Penn Central was the longest investor-owned railroad in the world. If coupled end to end, its fleet of cars and locomotives would stretch from New York to Laramie, and its tracks could stretch all the way around the world and then some. In one day all its trains combined traveled the equivalent of halfway to the moon. Even if their cultures had not clashed and even if their computers had blended, they were not prepared, and combining everything the first day made Penn Central almost impossible to manage.

No sooner had they merged than they were plunged into chaos. “It was just a goddamned operating mess,” said one veteran railroader. Routes were changed immediately for some types of shipments, but none of the classification clerks had been taught the 5,000 new combinations of routings. By the thousands, cars began flowing into the wrong yards. As the yardmaster at Selkirk described it: “They’d get a car for Harrisburg, which wasn’t on the old Central, and they’d say, “Where the hell is Harrisburg? I know where Pittsburgh is. Shit! I’ll send it to Pittsburgh.’”

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12 The Scandals Unfold

RushJr. Loving Indiana University Press ePub

In the days just before the board took the company into receivership, 4 of the 16 directors bailed out. Immediately after the board passed the bankruptcy petition, William L. Day, chairman of a Philadelphia bank that was a substantial Penn Central creditor, resigned, too, saying his attorneys advised him that he now had a conflict of interest. Some critics charged that Day was not alone, that there had been numerous conflicts of interest on the board. Three other directors headed financial institutions, and 10 additional directors, including Stuart Saunders and David Bevan, had been directors of banks, many of them Penn Central creditors. The question of directors’ conflicts of interest never was resolved satisfactorily in the months that followed, and it still haunted boardrooms when Enron collapsed.

All the top players were embarrassed by the obvious fact they had been caught unawares, and many felt tainted, Paul Gorman foremost among them. Summoning Bill Lashley, the public relations vice president, he said, “Bill, I want you to keep my name out of the press.” Lashley replied in his Southside Virginia drawl, “Paul, that’s gonna be hard to do because people want to talk to the head person, either the president or the chairman of the board, and you’re both!” Gorman wanted nothing to do with a failing company, and within a few months he would find another job, running International Paper Co.

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18 Selling the Shiny Silver Sphere

RushJr. Loving Indiana University Press ePub

Still pushing his scheme, William T. Coleman approached the chairmen of the Norfolk and Western and the Chessie System. The N&W’s John Fishwick already had some idea of what was to be proposed. Some time earlier at a Washington dinner he had sat next to one of Jim McClellan’s old friends from the New York Central, David DeBoer, now one of the Federal Railway Administration’s top planners and analysts. DeBoer had mentioned the idea of Controlled Transfer, of which he was an avid proponent, and later he had met one Saturday in an Alexandria, Virginia, hotel room with Fishwick’s top lobbyist and outlined the idea in further detail. The lobbyist had expressed interest.

When Coleman met with Fishwick and the Chessie’s Hays Watkins, he did most of the talking while the two railroad chief executive officers listened. Coleman offered each railroad half of all the bankrupt properties and a gift of $500 million to cover the cost of refurbishing the lines. In addition, each would get $2 billion in low-interest federal loans. The two executives told the transportation secretary they would consider his offer and have their answers in a couple of weeks.

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26 “I Think We Want to Be Seen as Somewhat Crazy”

RushJr. Loving Indiana University Press ePub

David LeVan did not resemble a railroad chieftain. Looking a decade younger than his 50 years, LeVan sported a great bushy mustache that underlay his brown eyes and glasses. The only sign of age was his receding black hair. He had come to Conrail from one of the large accounting firms and was known in the company as a cost-fixated bean counter who harbored an incredible knowledge of finance.

His personal life was also a stark contrast to those of other railroad chief executives. Married to a young, attractive ski instructor, LeVan lived in a converted fire station in downtown Philadelphia. He and wife Jennifer spent much of their time skiing and riding some of the Harley-Davidson motorcycles that LeVan had collected and parked in the fire house.

During his first decade at Conrail, LeVan moved slowly through several modest posts in middle management, but then his understanding of finance, his smooth articulation, and his ability to think on his feet marked him as a comer. Each year since 1988 LeVan had been promoted—and in the process he had moved around the company’s upper sphere learning the art of running Conrail. Although inexperienced in railroad operations, LeVan had an instinct for people and understood the importance of personal contact and leadership in such a company. Said Conrail’s vice president for corporate communications, Craig MacQueen, “LeVan would go out in the middle of the night at a crew change and talk to the men. That’s what was different. It was leadership by example.”

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27 In the Betrayal Suite

RushJr. Loving Indiana University Press ePub

Six days later, David Goode tried to increase the pressure by firing up further the issue of market dominance, sending a letter to shippers opposing a CSX-Conrail monopoly, and declaring that Norfolk Southern, as winning bidder, would sell off duplicating lines so that places like the Port of New York would have balanced competition. He argued that the region would be best served by two railroads of fairly equal size instead of having one that had 70 percent of the tracks and another with only 30 percent. Norfolk’s argument was embarrassing to Conrail because in the previous year in the UP merger case it had argued that rail customers needed balanced competition. Now Conrail had returned to its original stance, maintaining there was no need for two railroads. Admitted one vice president, “We were flip-flopping.” Nevertheless, trying to counter NS’s spin, CSX put out a press release dismissing Norfolk Southern’s letter as an “act of desperation.” It added that Norfolk was following “a loser’s strategy, solely intent on gaining or forcing competitive concessions.” Mark Aron, by now CSX’s executive vice president for law and public affairs, told a reporter that NS had given up on bidding and was now posturing for a battle before the Surf Board.

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1 The Forrest Gump of Railroading

RushJr. Loving Indiana University Press ePub

Dawn was creeping up over Lynnhaven Bay as Jim McClellan walked briskly out of his kitchen, down a hallway, and out the back door. It was a perfect October morning. The air was brisk, barely 50 degrees. McClellan drove to his office in downtown Norfolk. He was going early to clear his desk of any unfinished work because he was leaving later in the week for four days of vacation in southern California.

James W. McClellan was vice president for corporate planning at Norfolk Southern Corp., one of the nation’s five largest railroads. His job was to advise NS’s chairman, David R. Goode, on a wide range of key questions that the railroad faced, issues as subtle as changes in the corporate culture or as visual as deciding which tracks to shut down or which railroads to acquire in order to keep the company viable.

It was 1996, and for nearly 20 years he had been watching the moves of NS’s archrival, CSX Corp., and its chairman, John W. Snow, who later was to become George W. Bush’s treasury secretary. The two railroads served almost the entire eastern half of the country save for a highly contested block of states in the Northeast, and both needed to get into those states for access to the rich port of New York and the chemical plants of New Jersey. The only way to do that was to acquire Conrail, a railroad that held a monopoly of the rail markets in New York, New Jersey, and most of Pennsylvania. The railroad that won Conrail would then be able to negotiate a merger with one of the western roads at favorable terms and form a system that spanned the continent. McClellan was worried because he knew that if NS lost this race, it would remain a regional line that would be at the mercy of one of those western roads. Moreover, NS had another reason for wanting Conrail, a need so crucial to the future of the company’s most critical source of revenues, McClellan and others at the top of the company kept it a closely held secret.

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7 Cooking the Books

RushJr. Loving Indiana University Press ePub

In the late fall of 1968, Jim McClellan and a friend from the Central rode the train together to Washington for interviews at the Federal Railroad Administration. The FRA administrator, who had been a protégé of Alfred Perlman at the Central and the Rio Grande, wanted one of them to come to FRA on a new exchange program that he was setting up. He selected McClellan, who left behind at Penn Central a memo to Perlman. Even if he hadn’t paid much attention to the financials, McClellan was beginning to see with ominous clarity that the chaos and fighting were putting the railroad on a track to disaster. Accordingly, he sent the warning that Penn Central would not make it if nothing were done to change things. Perlman could be surprisingly tolerant of such ideas, but others in the top ranks of Penn Central could not, and immediately it became clear that McClellan’s appointment at FRA was not temporary, because Penn Central was not going to let him come back. It didn’t seem that way at the time, but nothing could have been more to McClellan’s advantage.

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14 A School Band on the Railroad Tracks

RushJr. Loving Indiana University Press ePub

While McClellan and the others had been creating Amtrak, Judge John P. Fullam, who was presiding over the Penn Central bankruptcy, had named four trustees, three to serve part-time as the equivalent of directors. The fourth was Jervis Langdon Jr., who became the chief trustee and served full-time. A former president of the Baltimore and Ohio, Langdon, 65, had flown the Hump with the Flying Tigers during World War II and continued to pilot his own airplane. He was a tall man with a rocklike face that was softening with age. His looks and demeanor seemed soft, but that was misleading, for his cold, alert eyes told the real story about Langdon, who was well versed in the subtleties of corporate politics.

Langdon was a great-nephew of Mark Twain, who wrote Tom Sawyer in an outbuilding at the family farm—where Langdon himself still lived—outside Elmira, New York. Langdon was the ideal choice because—although no operating man—he knew how to scrutinize operations, and he understood the art of diplomacy and compromise. The latter skills would be mandatory, since working with Washington and the labor unions would be key to Penn Central’s survival. He knew the railroad business from the viewpoint of a strategist.

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19 “God save me from the Planners and Thinkers!”

RushJr. Loving Indiana University Press ePub

While everyone had been preoccupied with the task of creating Conrail, John W. Snow, a tall, balding 33-year-old lawyer from Ohio, had arrived at DOT. A man of innate charm, Snow had earned a Ph.D. in economics as well as a law degree, which stood as a testament to his memory and his ability to focus on specific goals to the exclusion of everything else. Although they would have little contact at DOT, the paths of Snow and Jim McClellan would be entwined for the next 25 years. Behind the scenes they would become adversaries, trying incessantly to outwit each other, and their battles would totally reshape eastern railroading.

Much like some moments in McClellan’s career, when Snow arrived at DOT he was unknowingly being made the beneficiary of adversity. He had been married for eight years to a granddaughter of former senator Burton K. Wheeler of Montana. Wheeler was known as a strong-willed man who could be a fierce adversary. When Franklin Roosevelt was trying to steer the country toward its entry into World War II, Wheeler had fought him loudly and tenaciously. Now Snow’s marriage had foundered, the divorce had turned bitter, and Wheeler was subjecting him to the same kind of seek-and-destroy campaign that he had waged against FDR.

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