THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, October 20, 1996 TAG: 9610190218
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM BELDEN, THE PHILADELPHIA INQUIRER
LENGTH: 73 lines
Ten years ago this month, Congress did the American taxpayers and Conrail stockholders a favor when it authorized a public offering of the railroad's stock held by the U.S. government. The idea was to get the government out of owning a freight railroad, and let Conrail try to make it on its own as a private-sector company.
Taxpayers got their reward in 1987, when the public offering on the New York Stock Exchange netted the U.S. government $1.58 billion for Conrail. The public got back 20 cents on the dollar of its investment in the once-money-losing enterprise.
Now, the stockholders - especially those who bought shares a decade ago - are poised to get a much richer payoff, with the proposed $8.4 billion acquisition of Conrail by CSX Corp., announced Tuesday.
Conrail's appeal as a merger partner is remarkable considering the Philadelphia company's rise from the ashes of what 26 years ago was the wasteland of the northeastern U.S. rail system.
Conrail's corporate roots can be traced to the Pennsylvania Railroad, once the city's most prominent and powerful business, but one that went into decline in the 1960s along with all U.S. railroads.
A merger with the New York Central Railroad in 1968, forming the huge, unwieldy Penn Central Corp., didn't help. Penn Central filed for federal bankruptcy court protection in June 1970. At the time, it was the largest corporate collapse in U.S. history. Within months, five other equally troubled U.S. railroads in the Northeast had joined Penn Central in bankruptcy.
For the next six years, bankruptcy courts and Congress struggled with how to restructure the system, in order to preserve jobs at industries across the region that depended on rail service. Congress created Amtrak to handle intercity passenger service in 1971, and set up a small watchdog agency, the U.S. Railway Association which devised Consolidated Rail Corp. as the way to handle freight and commuter trains.
The railroad that the association pieced together went into business April 1, 1976, and turned out to be a money-gobbling monster, with more than 100,000 employees and 22,000 miles of track (the work force today is less than a quarter of its size then, and the track system half as large). The company would lose money for the next five years.
When the Reagan administration took office in January 1981, it was determined to stop the red ink. The administration wanted to break up Conrail, selling it piecemeal to the highest bidder. But at the same time, Conrail had a new CEO at the throttle, L. Stanley Crane, a retired chairman of the Southern Railway.
Crane turned out to be what one Conrail executive at the time called ``a one-man credibility fix.'' He convinced Congress to let Conrail turn over its commuter train service to agencies like SEPTA and New Jersey Transit, and let the company begin slashing its work force and abandoning underutilized track. Simultaneously, Crane convinced Conrail managers that they had to cut costs immediately, or the company would be out of business.
Within six months, a stunning transformation had taken place. Conrail became profitable - and hasn't quit making money since.
By 1984, Conrail was doing well enough for the administration, under the direction of then Transportation Secretary Elizabeth H. Dole, to sell Conrail to another railroad. The government accepted a bid of $1.2 billion from Norfolk Southern Corp. Crane, however, believed Conrail had the financial strength and management prowess to stand on its own as a private-sector company, and lobbied Congress to sell the railroad in a public stock offering. Congress eventually rejected the Norfolk Southern offer and authorized the March 1987 offering.
Since then Conrail has behaved much like other big railroads. It has continued to trim its work force. It has shed more unwanted lines, in many cases selling them to short-line railroads able to run them more efficiently. Conrail has added more fast long-distance trains that carry ``inter modal'' freight, meaning containers or truck trailers on flat cars.
And until Tuesday, Conrail was similar to other U.S. railroads in another key respect: It was the subject of intense speculation about whether it would merge with another line to save both companies money and increase traffic. by CNB