A Government Bailout That Worked

A trucking company owner (whose trucks operate on state-built, state-owned highways) I was talking to earlier this year referred to Conrail as “Communist Rail”. I did not directly respond to his characterization, but told him that in my opinion Conrail saved railroading in the Northeast.

Source: Bulletin of The National Railroad Historical Society, Winter 2005

On April 1, 1976 Conrail took over seven bankrupt railroads as mandated by the Regional Rail Reorganization Act 0f 1973. The new company was named Consolidated Rail Corporation. Fifteen percent of the company’s stock was reserved for the company’s employees and 85 percent for the U. S. Department of Transportation. The company’s early demise was widely predicted.

After a slow start, Conrail rebuilt the tracks and rolling stock fleets of its predecessors: Penn Central, Central of New Jersey, Erie Lackawanna, Lehigh Valley, Reading, Lehigh & Hudson River and Pennsylvania Reading Seashore Lines. Along the way the new carrier shed the local commuter operations they had been initially saddled with. Congress, at the same time, gave railroads more authority to set their own freight rates.

After 45 months of intensive rehabilitation, Conrail in 1979 began to provide a level of service that met most of the rail transportation needs of its shippers in the Northeast and Midwest regions. In 1981, L. Stanley Crane, retired Southern Railroad president, became chairman and CEO of Conrail. Together with senior vice president-operations Richard B. Hasselman, Crane cut costs, streamlined operations and built a reputation for providing fast and reliable freight service. In 1981 Conrail captured the Golden Freight Car, one of the rail industry’s most prestigious marketing awards. That year also saw Congressional approval of the Northeast Rail Service Act, which in effect gave the railroad more time to become profitable by laying out a timetable for “an orderly return of Conrail freight service to the private sector.”

If there was one marketing development that offered flexibility for Conrail and its major customers is was the shipper contract. Forbidden under the Interstate Commerce Act from 1887 until 1980, when the Staggers Act loosened governmental restraints, the contract was where innovative pricing and tailored service came together. Conrail was a pioneer in exploiting this opportunity, negotiating more than 180 contracts by 1982. One example was unit-train service instituted for Niagara Mohawk Power Corporation, which led to a ten-year contract for transporting oil between Albany and Oswego, N.Y. The utility had previously shipped by barge and was forced to stockpile a supply during the winter months when the Great Lakes were frozen.

Elizabeth Dole became U.S. Secretary of Transportation in 1982. She was quite confident that the sale of Conrail would be a crowning achievement of her career. Dole picked Norfolk Southern who had bid $1.2 billion for the government’s 85 percent ownership of Conrail’s common stock. She believed that NS had the “deep pockets” to see Conrail through tough times and could provide the most cash to the government. Staking much of her reputation on this choice, Dole declared that NS offered the best deal for the American taxpayer. With that, the proposed sale to NS became an objective of the Reagan Administration. Dole had not reckoned on L. Stanley Crane.

By 1986, following much lobbying in congress, Conrail was sold to the public in an IPO that netted the U.S. Treasury $1.6 billion. By 1989 Conrail had earned $2.5 billion on gross revenues of $26.2 billion over the 8 years of Crane’s leadership. In 1997, following a bidding war by NS and CSX to buy Conrail, the railroad was sold to NS and CSX for an astounding $10.2 billion, with NS paying the larger share. On June 1, 1999 Conrail operations came to an end.

While Conrail as a separate entity existed for only 23 years, its leadership and rank-and-file employees can be justly proud of what they accomplished in that short time. The turned a collection of threadbare, bankrupt properties into a profitable, efficient system which provided a new standard of service to the Northeastern United States. While many have referred to the region as the ‘rust belt,” Conrail demonstrated that the prudent investment of government money can pay off handsomely in economic benefits for the entire nation. The Conrail experience has helped restore the good name of railroading in the eyes of industry and government professionals, and has benefited the millions of customers who depend on low-cost, efficient transportation to enhance the American way of life.