Penn Central Transportation Company

For decades, merger proposals had tried to balance the competitors instead, joining them with lesser partners end-to-end. The unexpected NYC+PRR proposal required all the northeastern railroads to reconsider their corporate strategy, clouding the waters for the ICC. The resulting negotiations took nearly a decade, and when the PRR and NYC merged, they faced three competitors of comparable size: the Erie had merged with the Delaware, Lackawanna and Western to create the Erie Lackawanna Railway (EL) in 1960, the Chesapeake and Ohio (C&O) acquired control of the Baltimore and Ohio (B&O) in 1963, and the Norfolk and Western Railway (N&W) absorbed several railroads, including the Nickel Plate and the Wabash, in 1964.

Regulators also required the new company to incorporate the bankrupt New York, New Haven and Hartford Railroad (NH) and New York, Susquehanna and Western Railway (NYS&W); if neither the N&W and C&O would buy the Lehigh Valley Railroad (LV), then that railroad would also be required to be incorporated. Ultimately, only the New Haven successfully joined the Penn Central; the conglomerate failed before it could incorporate the latter two. The only railroad leaving the Penn Central was the PRR's controlling interest in the N&W, whose dividends had generated much of the PRR's premerger profitability.

Merger begins

The legal merger (formally, an acquisition of the NYC by the PRR) concluded on February 1, 1968. The Pennsylvania Railroad, the nominal survivor of the merger, changed its name to Pennsylvania New York Central Transportation Company, and soon began using "Penn Central" as a trade name. That trade name became official a month later on May 8, 1968. Saunders later commented: "Because of the many years it took to consummate the merger, the morale of both railroads was badly disrupted and they were faced with unmanageable problems which were insurmountable. In addition to overcoming obstacles, the principal problem was too much governmental regulation and a passenger deficit which amounted to more than $100 million a year."

Almost immediately after the transaction cleared, the organizational headwinds presaged during the merger negotiations began to overwhelm the new corporation's management. As ex-PRR managers began to secure the plum jobs, the forward-thinking ex-NYC managers departed for greener pastures. Clashing union contracts prevented the company's left hand from talking to its right, and incompatible computer systems meant that PC classification clerks regularly lost track of train movements.

Subpar track conditions, the result of years of deferred maintenance, deteriorated further, particularly in the Midwest. Derailments and wrecks occurred regularly; when the trains avoided mishap, they operated far below design speed, resulting in delayed shipments and excessive overtime. Operating costs soared, and shippers soured on the products. In 1969, most of Maine's potato production rotted in the PC's Selkirk Yard, hurting the Bangor and Aroostook Railroad, whose shippers vowed never to ship by rail again. Although both PRR and NYC had been profitable pre-merger, Penn Central was — at one point — losing $1 million per day.

As PC's management struggled to wrestle the company into submission, the structural headwinds facing all northeastern railroads continued unabated. The industrial decline of the Rust Belt consumed shippers through the Northeast and Midwest. Penn Central's executives tried to diversify the troubled firm into real estate and pipeline ventures, but due to these companies embarking on large expansion programs, none of them made any money for Penn Central until long after the bankruptcy had already happened. In the short term it only served to starve the railroad of over $100 million in cash, dry up lines of credit, and divert management attention away from the problems of the core business.

To create the illusion of success, management also insisted on paying dividends to shareholders, desperately borrowing funds to buy time for the business to turn around. Stuart Saunders also began pressuring the financial department to make the situation seem better. In 1968 and 1969 complex efforts were undertaken to conceal the company's true state from investors. For example, in 1969 Penn Central reported the railroad had lost $56 million, but that the parent company had made $4.3 million. These figures, however, varied widely depending on the intended audience. The Interstate Commerce Commission, after objecting to some of PC's accounting strategies, was told the railroad lost $67.8 million that year. The figures for internal management showed a $190.8 million loss. In 1970 some Nixon administration officials were told it was in fact $193 million. David C. Bevan, the Chief Financial Officer at one point informed the board that he believed the true figure was a $220 million loss. PC had arrived at the more flattering numbers largely by writing off the entire passenger department, along with some associated depreciation costs at a total value of $130.5 million, among other strategies. As a general rule Saunders pressured the financial department to record extraordinary profits as ordinary, and ordinary expenses as extraordinary. Similar tactics were used in 1968 to make a $145 million loss for the railroad look like only $2.8 million. As much as possible, this was kept secret. For the vast majority of the pre-bankruptcy period, not even the board of directors was aware of the railroad's true financial state.

All of this financial wrangling was technically legal thanks to the fact that the Securities and Exchange Commission (SEC) did not have purview over railroads. That was instead handled by the ICC, which was much more lenient when it came to creative accounting. Many banks were still wary of how unspecific their reports had become, and it would get progressively harder and harder to get loans as time went on.

On August 26, 1969, the board voted to replace Perlman with Paul Gorman, an executive from Western Electric, who they expected would be more in line with their vision for the company; with more money spent on diversification, as opposed to railroad investment. Perlman was made vice chairman of the board.

Bankruptcy

By early 1970, PC's financial condition had deteriorated significantly. Commercial banks had largely ceased extending credit, while approximately $150 million in outstanding debt matured that year. The railroad reported a loss exceeding $100 million in the first quarter of 1970. Bevan disclosed the full extent of the company's financial instability to Saunders, who subsequently initiated efforts to secure a federal loan guarantee. The company sought $750 million from Congress and, alternatively, proposed a $200 million direct loan from the Department of Defense, citing its status as a significant freight carrier for the U.S. military.

This strategy proved counterproductive. Federal officials required leadership changes as a precondition for any assistance. Saunders, assuming that Bevan's removal would satisfy the requirement, convened a board meeting. The board, however, elected to dismiss both men. Perlman, long viewed unfavorably by certain directors, was also removed at this time. Despite these actions, political opposition, particularly from southern lawmakers, resulted in the failure of both loan proposals. On June 21, 1970, with no viable alternatives remaining, the board of directors voted to file for bankruptcy protection under Section 77 of the Bankruptcy Act.

At the time of its filing, PC was the sixth-largest corporation in the United States. The bankruptcy constituted the largest corporate insolvency in U.S. history until Texaco in 1987. Railroad historian George H. Drury described the event as "cataclysmic", citing its systemic implications for both the railroad sector and the broader business community. The collapse occurred during a period of widespread retrenchment in passenger rail services, which had long represented Penn Central's core business. Railroads across the country discontinued intercity passenger operations as regulatory barriers diminished. The Rock Island and the Milwaukee Road, two major carriers with longstanding financial instability, soon declared bankruptcy.

Following the bankruptcy, new president Paul Gorman quickly resigned. Graham Claytor, president of the Southern Railway, proposed William H. Moore as a successor. Moore had been a protégé of former Southern Railway president D. William Brosnan, known for aggressive cost-cutting and confrontational management, both of which had gotten him ousted from the company some years earlier. Moore adopted similar practices at PC. Budget reductions were implemented across departments, capital improvement projects were canceled, and yard operations were scaled back. Track maintenance was minimized, and several unautomated hump yards were closed.

In 1972, Hurricane Agnes inflicted widespread damage on PC infrastructure, including main lines and branch routes. The storm contributed to the collapse of other northeastern railroads. By the mid-1970s, few carriers remained solvent in the region east of Rochester and Pittsburgh, north of Philadelphia, and southwest of the Maine and New Hampshire border.

During this period, PC partnered with the U.S. Department of Transportation to test experimental passenger technologies on what would become the Northeast Corridor. The railroad continued operating PRR's Metroliner service between New York City and Washington, D.C., and introduced the United Aircraft TurboTrain between New York and Boston. These efforts failed to produce sustained improvements, primarily due to degraded track conditions and unreliable schedules. PC, as well as many other railroads, were still collectively losing hundreds of millions every year providing passenger trains. In response, the Nixon administration established Amtrak in 1971 to relieve railroads of their passenger service obligations.

In a separate effort to generate revenue, PC attempted to sell off air rights above Grand Central Terminal to private developers. The transaction was blocked by New York City, which had designated the terminal a landmark. In Penn Central Transportation Co. v. New York City (1978), the U.S. Supreme Court upheld the city's decision and ruled that the landmark designation did not constitute an unlawful taking of property.

By 1974, PC's physical infrastructure had deteriorated severely. Deferred maintenance and hurricane-related damage contributed to a significant increase in derailments, including 649 in January and 1,179 in February. The Cleveland hump yard reported an average of six derailments per day. Around this time there were alleged incidents of "standing derailments", in which rotted crossties would snap under the weight of an unmoving car. A 1973 inspection by the Federal Railroad Administration concluded that the railroad would need to cease operations soon if the situation did not improve.

Moore's leadership became increasingly controversial. A well known incident in December 1973 contributed to his removal. While traveling on a Metroliner between Washington and Philadelphia, Moore was informed that a coal train had derailed in the Baltimore and Potomac Tunnel in Baltimore. He called the division superintendent, and ordered the line cleared within one hour -- an impossible task. When that didn't happen, Moore fired the superintendent on the spot. Chief trustee Jervis Langdon Jr. heard about this event, and began looking for means to fire Moore. The reason Langdon eventually used to get him dismissed was that he had been using railroad employees to do work on his house, as well as secretly borrowing a corporate jet from the Scott Paper Company and having them bill the railroad for an equivalent amount of toilet paper.

In May 1974, the bankruptcy court determined that Penn Central's rail operations would not produce sufficient income to support reorganization. Under the Regional Rail Reorganization Act of 1973, the federal government assumed control of PC's railroad assets. The United States Railway Association, established for this purpose, spent two years evaluating the holdings of PC and six other bankrupt carriers, including Erie Lackawanna, the Central Railroad of New Jersey, and the Reading Company. On April 1, 1976, PC's viable rail operations were transferred to the federally owned Consolidated Rail Corporation (Conrail).

Despite federal intervention, freight railroads continued to lose market share to the trucking industry. Industry leaders and labor unions advocated for deregulation. The Staggers Rail Act of 1980 reduced federal oversight and enabled Conrail to implement route consolidations and productivity improvements. Former PC trackage that lacked economic viability was abandoned or repurposed for interim recreational rail trails. In 1987, following a return to profitability, Conrail stock was publicly offered. The company operated as a private entity until its acquisition and division by Norfolk Southern Railway and CSX Transportation in 1999.

During Penn Central's financial collapse, investor Max Heine bought substantial amounts of the company's bonds which traded as low as four cents on the dollar due to widespread pessimism. Heine's calculations showed despite Penn Central's financial troubles the company had more than enough assets to eventually earn a profit for bondholders, even if their freight cars and rails were sold for scrap. Heine ended up reaping large profits from the 1978 bankruptcy reorganization