Go East, Stop West

For the first time in history, the U.S. Government last week made sense out of the least profitable industry in the most populous part of the nation. The eleven-member Interstate Commerce Commission approved unanimously the coupling of the two biggest railroads in the eastern U.S., the Pennsylvania and the New York Central. The ICC at the same time stalled the merger trend among the richer railroads of the U.S. West. In a surprising and bitterly dissented 6-5 decision, it vetoed--at least for now--a union of the Great Northern, the Northern Pacific and the Chicago, Burlington & Quincy.

From Montreal to Cairo. Despite the stop sign in the West, the go-ahead in the East signals significant progress for the U.S.'s railroads. The Penn Central link-up will be the largest corporate merger ever in U.S. business, forming the nation's biggest new company since U.S. Steel in 1901. Going into business on June 1 will be the Pennsylvania New York Central Transportation Co., the greatest private transportation outfit in the world, with assets of $6 billion and annual revenues of $1.6 billion. On 19,356 miles of road, it will haul 12% of the nation's freight and serve 2,816 communities from Montreal to Cairo, Ill., and from Chesapeake Bay to uppermost Michigan. The deal between two century-old rivals climaxes nine years of negotiations, which began with huddles among the late Central Chief Robert R. Young, current Central President Alfred Perlman, and former Pennsy Chairman James Symes.

In this corporate marriage,the Pennsy will play the husband. Its 97,400 shareholders will hold 61% of the stock in the new company and control 14 of the 25 directorships. Chairman and chief executive will be Pennsy Chairman Stuart Saunders, 56, a Harvard-educated lawyer who started the rail industry's merger marathon a decade ago as boss of the Norfolk & Western, which he arranged to unite with four other roads. The president and chief operating officer will be the Central's Perlman, 63, who is more noted for forceful operating know-how than deft administration. And keeping a close eye on moneybags will be the major stockholders: the Central's Allan P. Kirby and the Pennsy's celebrated Mellon family of Pittsburgh.

Making Time. After pondering 40,000 pages of evidence from 461 witnesses and 337 attorneys, the ICC decided to approve because the merger's obvious economic advantages will make way for meaningful technological improvements. By scrapping hundreds of miles of competitive track, dozens of duplicating terminals and scores of overlapping maintenance plants, the two lines will save up to $100 million a year by 1974. More important to customers, the efficiencies of combination will cut the freight transit time by 11 % from New York to Chicago, 27% from Boston to Cincinnati, and 36% from Buffalo to St. Louis.

The benefits of bigness will not hurt anyone. Thanks to agreements that Saunders and Perlman made with 24 rail unions, the new company will not lay off a single one of its 106,000 workers but will wait for retirements and other forms of attrition to reduce the Penn Central's labor force by 8,000 in eight years. The ICC built in unusual protection for five marginal lines that compete against the new giant. They will ultimately merge with it or, more likely, with one of two other eastern rail networks created by the recent merger trend--the Norfolk & Western system or the Chesapeake & Ohio-Baltimore & Ohio system. Meanwhile Penn Central must pay subsidies to some of the smaller lines if they lose any business to the new giant.

The toughest condition laid down by the ICC is that within six months the Penn Central must submit a plan to absorb all of the bankrupt New Haven line. While Saunders and Perlman are more than willing to pick up the New Haven's freight, their undisguised opinion of its passenger service is that of 19th century Rail King James J. Hill: "A passenger train, sir, is like the male teat--neither useful nor ornamental."

The Penn Central is particularly unenthusiastic about carrying the New Haven's 25,000 commuters daily into New York City. Long and loudly, New Haven executives have complained that the line loses $1,900,000 a year on New York area suburbanites. But the ICC pointed out that if the line had properly accounted for its income from operating Grand Central Station, the commuter run would actually show a profit of $1,100,000.

Penalizing Prosperity. The Penn Central combine crowns a 50-year trend toward mergers that has reduced the number of U.S. railroads from 1,243 in 1916 to fewer than 400 today. Congress has called for rail consolidation ever since it passed the Transportation Act of 1920, prompting the ICC in that era to write a plan for cutting the number of roads to only 21. Though the commission is still far short of that goal, it has since 1955 approved 25 major mergers and delayed decisions on only six. But it unaccountably clouded the future of mergers last week by rejecting the petition of the Northern Pacific, the Great Northern and the Burlington to create a 26,000-mile system from Chicago to Puget Sound.

The ICC openly penalized those lines for their prosperity. Blessed with little passenger business and large revenues from long hauls of timber, oil and ores in a fast-growing region, the Great Northern in the past five years has earned an average of 3.8% on its shareholders' equity and the Northern Pacific earned 3.1%, compared with the Pennsylvania's 1.1% and the New York Central's 0.7% . The western merger previously had been approved by an ICC examiner and practically all the shippers in the region; it would save the lines and their customers up to $25.5 million a year. But the commission turned it down, primarily because it would draw traffic away from Ben Heineman's Chicago & North Western and William Quinn's Chicago, Milwaukee, St. Paul & Pacific. In uncommonly biting dissent, the ICC's five-member minority indicted the majority for "an excursion into a transportation netherland ... an affinity for the status quo." Burlington Chief Louis W. Menk, 48, who had been in line to boss the merged road, put it another way: "Well, that's the ol' ball game."

Maybe not. The western roads have spent six years mustering their case, are likely to push it further. The ICC invited them either to take it to the courts or resubmit it to the ICC in a year. During that time, at least one of the commissioners may well retire, and the thinking of the commission could change. The future of rail mergers thus depends heavily on the opinions of the man who appoints new commissioners, Lyndon Johnson.

Catching Up with Foreigners. Pending now are nine other merger proposals, notably the Chesapeake & Ohio and Norfolk and Western; the Union Pacific and Rock Island; and the Milwaukee and Chicago & North Western. Already some western railroad chiefs are talking about much bigger mergers that would overcome Government objections by absorbing all the small, weak lines, as well as the large, muscular ones, into a few grand systems. John W. Barriger, chairman of the Missouri-Kansas-Texas line, is one of several ranking railbirds who believe that the industry within a decade or so will consolidate into eight super-railroads--two in the East, two in the South and four in the West. That would mean so much in efficiency and economy that the lines would be able to invest unheard-of sums in technology. It could also help give the nation the kind of 100-m.p.h. express service already enjoyed by Japan, Germany, France and other countries, which have fewer resources but more enlightened regulation of the rails.

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