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Wall Street History
https://www.gofundme.com/s3h2w8
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12/20/2002
The Erie Lackawanna Railroad, Part II
The more I get into the history of the Erie Lackawanna Railroad,
the more I realize it’s a good case study for not just the railroad
industry, but also all business in general.
Last week we explored the origins of the Erie Railroad and the
creepy characters that flocked to it in the boom of the 1850s and
60s. This time we are advancing one hundred years, as the Erie
had finally reached profitability, after its bankruptcy back in
1877.
Up front, I would like to acknowledge author H. Roger Grant and
his book “Erie Lackawanna: Death of an American Railroad,
1938-1992.” It is the major source for all that follows.
Throughout most of the 1950s, the Erie held its own, which
wasn’t too hard a thing considering that the nation’s economy
was doing quite well. Then in 1955 the Erie and Lackawanna
(formerly the Delaware, Hudson & Lackawanna Railroad) began
to coordinate service. Both were primarily freight lines
(passenger traffic was secondary) and ran basically parallel
tracks in large swaths of their operations, so an eventual merger
made sense. For those of you who have used the PATH trains
("Hudson & Manhattan," back in the 50s) to travel between
New Jersey and Manhattan, the Erie and Lackawanna combined
operations on October 13, 1956 (in case you want to celebrate
that anniversary with a glass of champagne each year). The Erie
moved its main operations to Hoboken from Jersey City
(Pavonia), where the Lackawanna already had its hub.
It was in September of 1956 that formal merger talks began and a
third line was initially involved, the Delaware & Hudson, which
operated primarily in New England and Canada. But the D&H
withdrew from talks in April 1959 (these guys were moving
slow) and both Erie and Lackawanna were mighty upset. Said
one official, “It’s like your nice, rich uncle deciding to leave you
out of his will You know that you’re going to have to be on
your own.” The E&L proceeded with talks nonetheless.
But as the two were discussing their union, overall, there were
big changes taking place in the U.S. economy. Railroads were
losing freight traffic to airlines, barges, pipelines and trucks, the
latter particularly as the interstate highway system was built out.
The share of intercity freight that went by rail dropped from 68%
in 1944 to 44% in 1960. Intercity passenger traffic plunged from
74% to 27% over the same period. Meanwhile, dieselization and
other advances in technology were reducing the need for many
jobs, and this caused labor strife. Not a great need for firemen,
for example.
Merger talks between the Erie and Lackawanna ground on, and
by 1959 the red ink was beginning to pile up with a softening
national economy. Finally, on October 17, 1960, the Erie-
Lackawanna was formed (it then kept the hyphen until 1963, in
case you were interested).
But wait, hold on a second. The E-L was seeking to eliminate
1,600 jobs and transfer another 1,700 over a 5-year period, but
the Brotherhood (of all railroad-related unions) was none too
pleased. [It should be noted, however, that the unions had very
attractive severance packages as part of the labor negotiations of
the 1940s.] The court ruled that the company could not abolish
any jobs or transfer workers until further hearings were held, so
the merger, while official, really wasn’t.
Then the Supreme Court stepped in, ruling in January 1961 that
the new operation could indeed combine its workforces, but the
Supremes had a change of heart and issued a restraining order in
February. Then in May, the robed ones ruled that, yes, the
merger could go through and yes, the Erie-Lackawanna could
reduce its workforce because of the adequate compensation
provisions in the Brotherhood’s contracts. So it turns out that
according to the courts the merger was finalized in June 1961.
Well, both parties probably wish it hadn’t been, because in ’61
the new entity lost a staggering $26.5 million. All Eastern
railroads combined, for that matter, lost $100 million that year.
The Erie-Lackawanna followed up this miserable performance
with another $16.6 million loss in 1962, thanks to a still soft
national economy and the aforementioned general patterns in
both commercial and passenger traffic.
In addition, by the early 60s you had a large decline in hard- and
soft- coal traffic because of the development of alternative fuel
sources. This had been a huge revenue generator for the rails
since the beginning, while at the same time the grain export rail
traffic was suffering due to the opening of the St. Lawrence
Seaway in 1959. Another contributing factor to the diminishing
influence of the rails was the fact that Europe’s recovery from
World War II was now in full swing and the U.S. was importing
more goods, which meant that export tonnage was dropping.
But the E-L still should have been doing better than it was,
though CEO Milton McInnes was moved to say, “If you merge
two losers, you get a bigger loser.”
And a good example of the culture clash that existed, at least
from an accounting standpoint, is the following description of
how some corporate practices differed between the two railroads,
as stated by Curtis Bayer, a former purchasing agent for the
Lackawanna, in a 1962 industry speech.
“To begin: In the one company the monthly inventory balance
statement was prepared in its entirety by the Accounting
Department [Lackawanna].
“In the other company this statement was prepared in the Stores
Department [Erie].
“In the one company the preparation of vouchers covering
invoice payments for materials purchased, was jointly done by
both the Stores and Accounting Departments [Lackawanna].
“The Purchasing Department of the other company carried out
this function [Erie].
“In one company credit memorandums were held in the
Purchasing Department to be deducted from the next invoice of
the supplier concerned [Lackawanna].
“In the other company the Stores Department issued collection
bills against credit memorandums received [Erie].
“One company’s Accounting Department priced the charge-out
tickets received for materials issued [Lackawanna].
“In the other company the Stores Department priced the charge-
out tickets [Erie].
“In the one company invoices received were forwarded to the
department receiving the materials for certification or approval
[Lackawanna].
“In the other company all departments receiving materials
prepared a receiving record which was forwarded to the Stores
Department for matching with the invoice covering such material
[Erie].
“Both companies followed an entirely different policy for
placing a value on secondhand and repaired materials. In this
way they were as far apart as the poles.”
Oh, Mr. Bayer went on and on in similar fashion, but I think you
get the point. As he argued these dissimilarities should have
been considered before the merger. Because they weren’t, the
difficulties only escalated.
As for the executives themselves, however, they had it good.
Real good, to say the least. In interviews that author H. Roger
Grant conducted with various officials, including the
aforementioned Bayer, the following picture emerges.
“The Erie created a pleasant environment for its executives. ‘If
you played the game, you had a comfortable job.’ Examples
abound. Top employees enjoyed club memberships that were
gratis, whether or not these perks fostered business. The
treasurer, Jasper Van Hook, for one, belonged to a prestigious
Cleveland country club, but he never entertained anyone who
generated income for the railroad. Excessive drinking and
gambling routinely occurred in office cars, even during
inspection trips. Attendants ‘pulled the blinds and the good
times began not a great idea if the point was to see the
property.’ Apparently few officers paid for their meals. ‘(They
were) just put on Uncle Erie’s tab.’ The head of the dining car
service for years sent turkeys at Thanksgiving and Christmas to
officials and then billed the company.”
Darn. I wish I was an exec with the railroad back then. Sounds
like a helluva good time, don’t you think? Of course it’s also
similar to what goes on in Corporate America today. The more
things change, the more they stay the same.
We’ll try and wrap up the story of the Erie-Lackawanna next
week.
Merry Christmas.
Brian Trumbore
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