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12/27/2002

The Erie-Lackawanna Railroad, Part III

We now wrap up our story of the Erie Lackawanna (EL) railroad,
with the tale of the 1960s and 70s. While the operation was far
from America’s largest, the problems it encountered were little
different from other railroads and in the retelling of this story
there are echoes of today’s Corporate America.

From 1959 to 1962, the EL’s operating revenue dropped from
$226 million to $210 million, while long-term debt hit $322
million. The cost of operations in New Jersey and New York
City were huge, and the company probably should have cut the
lines off at Port Jervis, NY (across the New Jersey border).

In the early 60s, the EL was going to the Interstate Commerce
Commission (ICC) for loan guarantees, though it was either
turned down outright or received far smaller amounts than
desired. [Similar to the problems with the major airlines these
days.] The debt was coming due and taxes had to be paid.
Consequently, one of the things that suffered was maintenance,
which would have an adverse effect down the road.

Meanwhile, as I noted in our last installment, both the Erie and
Lackawanna lines derived most of their revenue from freight
traffic, but they nonetheless had extensive passenger service into
New York and New Jersey. For its part, between 1928 and 1931
the Lackawanna had spent $11 million to electrify most of its
tracks, but the revenue and efficiency gains were quickly offset
by the introduction of both the Holland Tunnel and George
Washington Bridge, which were built around the same time.
Both the Erie and Lackawanna (remember, this was pre-merger)
lost a lot of midday and casual travelers to auto traffic upon
completion of these projects.

Except during World War II and the fuel shortages of that time,
rail passenger traffic continued to decline. In 1947 the
Lackawanna, for example, served 38,000 each weekday, but by
1957 that total was 27,000 as the introduction of local shopping
centers also contributed to the surge away from the rails. By the
mid-50s, the Erie was losing $2 million on passenger traffic and
the Lackawanna $3 million. Of course operating costs were
rising all the time folks were fleeing.

And then there was the issue of property taxes. Particularly in
New Jersey, this was a huge problem in the 50s / 60s, just as it is
today, for that matter. Railroads were assessed at 100% of true
value, while other real estate was assessed at around 28%. For
example, the Lackawanna paid $2.5 million in taxes in 1958 to
Hudson Country (Hoboken and Jersey City), leading one railroad
official to say “confiscatory taxes have steadily depleted
Lackawanna’s cash and resources as tribute.”

At least Lackawanna’s top management lived in New Jersey and
could put pressure on the politicians, while Erie’s was in
Cleveland. New Jersey Governor Robert Meyner had
proclaimed, “The railroads cannot continue to take the stand that
they should operate passenger services at a profit. They assume
the obligation of carrying both passengers and freight in their
respective franchises. The level of freight rates has been set to
allow for passenger income losses.” Great.

By early 1966, though, the EL’s chairman, William White (who
had taken over in 1963), threatened to discontinue passenger
service in both New Jersey and New York unless he got some tax
relief, for starters, because the railroad couldn’t handle its debt
load, let alone come up with the $80 million needed to
modernize the service by replacing the equipment and rehabbing
facilities. The New Jersey Board of Public Utilities did grant
some tax concessions and allowed the EL to shut down train
service to some outlying or little served communities, which led
to a reduction in the number of trains by 30-50% per day. The
Erie, which had lost $17 million in 1963, made $8 million in ’65
and appeared to be on the right track pun intended.

In fact, things looked so rosy that Value Line, the financial
newsletter, commented thusly on the financial picture in early
1966: “This is not an impressive profit by most standards, but for
Erie it is nothing less than sensational when one realizes that this
was the first March quarter in which the company had earned a
profit since 1957.” William White and his fellow officers rightly
garnered the credit.

But White suddenly died of a heart attack in April 1967, a real
blow to the railroad, and one year later Jack Fishwick was
appointed chairman. Fishwick was the president of Dereco, Inc.
a holding company that was the creation of Charles Bergmann, a
leading bond trader on Wall Street. The name stood for
Delaware & Hudson, Erie Lackawanna, Reading, and Jersey
Central (though the leading line and parent was Norfolk &
Western).

Erie would make money in 1968 and 1969 and it redeemed a lot
of debt as well, thanks in large part to a surge in freight revenues.
But then EL lost $11 million in 1970 as freight traffic suddenly
dried up due to the merger of the New York Central and
Pennsylvania Railroads. The new ‘Penn Central’ pushed around
the smaller rails like EL.

Erie Lackawanna also wasn’t helped by a 1967 decision by the
Post Office Department to cancel contracts for Railway Post
Office service on intercity trains, which had helped support
passenger service. Yes, passenger service continued to bleed for
the EL and in 1970, after 87 continuous years, the Erie even had
to discontinue The Lake Cities train between New York and
Chicago.

Of course it didn’t help that by the early 1970s the nation’s
economy was hitting a Greenspan-like “soft spot” and for
marginal borrowers like the EL a full-blown credit crunch was
underway. After a small gain in 1969, the railroads of the
“Eastern District” in the U.S. lost a staggering $376 million in
1970. At the same time wages were continuing to rise, up 25%
for the 3-year period between 1968 and 1971. It was a recipe for
disaster, and then Agnes hit.

It was June 1972 when an erratic storm developed near western
Cuba and swept across Florida. After dumping lots of rain on the
southern states on the 18th and 19th, Hurricane Agnes appeared to
lose much of its punch. But, instead of breaking apart or heading
out to sea like 95% of the storms of this ilk, Agnes intensified as
it plodded up the coast. By the evening of June 20, a cold front
combined with the storm to flood southern New York State and
northern Pennsylvania. And then Agnes just hung around, like
the relative that won’t leave, for three days. The human toll was
some 118 dead, while property damage exceeded $1.5 billion.

All of the railroads, who could ill afford such a disaster, were
impacted, including the Penn Central, Lehigh Valley, and
Reading, but it was the Erie Lackawanna that took the biggest
direct hit. Portions of roadbed along 200 miles of the main line
were washed out. Some of them were 4,000-feet long, while 16
of its bridges were either damaged or destroyed. The main line
wouldn’t reopen for three weeks and it was far longer for the rest
of the network.

The loss for the already fragile EL was about $11 million and on
June 26 it was forced to seek protection in the bankruptcy courts.
By April 1, 1976, the Erie Lackawanna ceased operations as an
independent rail line as it was folded into the “quasi-public”
Consolidated Rail Corporation, “Conrail,” while the next 16
years saw various court fights over the surprisingly considerable
estate.

Lastly, some of us who rode the Erie Lackawanna in the 70s, or
for decades earlier, will always remember the old 1920s-style
cars with the wicker seats. Our particular line into New York
wasn’t modernized and we had to put up with these non-
airconditioned sardine cans. Many a dry cleaning bill was
unnecessarily high in the summertime, as you can imagine.
Come to think of it, we all should have been part of the
bankruptcy proceedings!

Wall Street History will return January 10.

Source: “Erie Lackawanna: Death of an American Railroad,
1938-1992” H. Roger Grant

Brian Trumbore



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Wall Street History

12/27/2002

The Erie-Lackawanna Railroad, Part III

We now wrap up our story of the Erie Lackawanna (EL) railroad,
with the tale of the 1960s and 70s. While the operation was far
from America’s largest, the problems it encountered were little
different from other railroads and in the retelling of this story
there are echoes of today’s Corporate America.

From 1959 to 1962, the EL’s operating revenue dropped from
$226 million to $210 million, while long-term debt hit $322
million. The cost of operations in New Jersey and New York
City were huge, and the company probably should have cut the
lines off at Port Jervis, NY (across the New Jersey border).

In the early 60s, the EL was going to the Interstate Commerce
Commission (ICC) for loan guarantees, though it was either
turned down outright or received far smaller amounts than
desired. [Similar to the problems with the major airlines these
days.] The debt was coming due and taxes had to be paid.
Consequently, one of the things that suffered was maintenance,
which would have an adverse effect down the road.

Meanwhile, as I noted in our last installment, both the Erie and
Lackawanna lines derived most of their revenue from freight
traffic, but they nonetheless had extensive passenger service into
New York and New Jersey. For its part, between 1928 and 1931
the Lackawanna had spent $11 million to electrify most of its
tracks, but the revenue and efficiency gains were quickly offset
by the introduction of both the Holland Tunnel and George
Washington Bridge, which were built around the same time.
Both the Erie and Lackawanna (remember, this was pre-merger)
lost a lot of midday and casual travelers to auto traffic upon
completion of these projects.

Except during World War II and the fuel shortages of that time,
rail passenger traffic continued to decline. In 1947 the
Lackawanna, for example, served 38,000 each weekday, but by
1957 that total was 27,000 as the introduction of local shopping
centers also contributed to the surge away from the rails. By the
mid-50s, the Erie was losing $2 million on passenger traffic and
the Lackawanna $3 million. Of course operating costs were
rising all the time folks were fleeing.

And then there was the issue of property taxes. Particularly in
New Jersey, this was a huge problem in the 50s / 60s, just as it is
today, for that matter. Railroads were assessed at 100% of true
value, while other real estate was assessed at around 28%. For
example, the Lackawanna paid $2.5 million in taxes in 1958 to
Hudson Country (Hoboken and Jersey City), leading one railroad
official to say “confiscatory taxes have steadily depleted
Lackawanna’s cash and resources as tribute.”

At least Lackawanna’s top management lived in New Jersey and
could put pressure on the politicians, while Erie’s was in
Cleveland. New Jersey Governor Robert Meyner had
proclaimed, “The railroads cannot continue to take the stand that
they should operate passenger services at a profit. They assume
the obligation of carrying both passengers and freight in their
respective franchises. The level of freight rates has been set to
allow for passenger income losses.” Great.

By early 1966, though, the EL’s chairman, William White (who
had taken over in 1963), threatened to discontinue passenger
service in both New Jersey and New York unless he got some tax
relief, for starters, because the railroad couldn’t handle its debt
load, let alone come up with the $80 million needed to
modernize the service by replacing the equipment and rehabbing
facilities. The New Jersey Board of Public Utilities did grant
some tax concessions and allowed the EL to shut down train
service to some outlying or little served communities, which led
to a reduction in the number of trains by 30-50% per day. The
Erie, which had lost $17 million in 1963, made $8 million in ’65
and appeared to be on the right track pun intended.

In fact, things looked so rosy that Value Line, the financial
newsletter, commented thusly on the financial picture in early
1966: “This is not an impressive profit by most standards, but for
Erie it is nothing less than sensational when one realizes that this
was the first March quarter in which the company had earned a
profit since 1957.” William White and his fellow officers rightly
garnered the credit.

But White suddenly died of a heart attack in April 1967, a real
blow to the railroad, and one year later Jack Fishwick was
appointed chairman. Fishwick was the president of Dereco, Inc.
a holding company that was the creation of Charles Bergmann, a
leading bond trader on Wall Street. The name stood for
Delaware & Hudson, Erie Lackawanna, Reading, and Jersey
Central (though the leading line and parent was Norfolk &
Western).

Erie would make money in 1968 and 1969 and it redeemed a lot
of debt as well, thanks in large part to a surge in freight revenues.
But then EL lost $11 million in 1970 as freight traffic suddenly
dried up due to the merger of the New York Central and
Pennsylvania Railroads. The new ‘Penn Central’ pushed around
the smaller rails like EL.

Erie Lackawanna also wasn’t helped by a 1967 decision by the
Post Office Department to cancel contracts for Railway Post
Office service on intercity trains, which had helped support
passenger service. Yes, passenger service continued to bleed for
the EL and in 1970, after 87 continuous years, the Erie even had
to discontinue The Lake Cities train between New York and
Chicago.

Of course it didn’t help that by the early 1970s the nation’s
economy was hitting a Greenspan-like “soft spot” and for
marginal borrowers like the EL a full-blown credit crunch was
underway. After a small gain in 1969, the railroads of the
“Eastern District” in the U.S. lost a staggering $376 million in
1970. At the same time wages were continuing to rise, up 25%
for the 3-year period between 1968 and 1971. It was a recipe for
disaster, and then Agnes hit.

It was June 1972 when an erratic storm developed near western
Cuba and swept across Florida. After dumping lots of rain on the
southern states on the 18th and 19th, Hurricane Agnes appeared to
lose much of its punch. But, instead of breaking apart or heading
out to sea like 95% of the storms of this ilk, Agnes intensified as
it plodded up the coast. By the evening of June 20, a cold front
combined with the storm to flood southern New York State and
northern Pennsylvania. And then Agnes just hung around, like
the relative that won’t leave, for three days. The human toll was
some 118 dead, while property damage exceeded $1.5 billion.

All of the railroads, who could ill afford such a disaster, were
impacted, including the Penn Central, Lehigh Valley, and
Reading, but it was the Erie Lackawanna that took the biggest
direct hit. Portions of roadbed along 200 miles of the main line
were washed out. Some of them were 4,000-feet long, while 16
of its bridges were either damaged or destroyed. The main line
wouldn’t reopen for three weeks and it was far longer for the rest
of the network.

The loss for the already fragile EL was about $11 million and on
June 26 it was forced to seek protection in the bankruptcy courts.
By April 1, 1976, the Erie Lackawanna ceased operations as an
independent rail line as it was folded into the “quasi-public”
Consolidated Rail Corporation, “Conrail,” while the next 16
years saw various court fights over the surprisingly considerable
estate.

Lastly, some of us who rode the Erie Lackawanna in the 70s, or
for decades earlier, will always remember the old 1920s-style
cars with the wicker seats. Our particular line into New York
wasn’t modernized and we had to put up with these non-
airconditioned sardine cans. Many a dry cleaning bill was
unnecessarily high in the summertime, as you can imagine.
Come to think of it, we all should have been part of the
bankruptcy proceedings!

Wall Street History will return January 10.

Source: “Erie Lackawanna: Death of an American Railroad,
1938-1992” H. Roger Grant

Brian Trumbore