Toward the 21st Century Ltd.

(See Cover) No green light flared from a track-side tower; no warning whistle echoed down the line. But no trainman missed the signal. When the Supreme Court gave its approval last week to the merger of the Pennsylvania and New York Central railroads, it was clearing the track for the nation's entire rail system. It was giving railroad management permission to highball into the future.

As Justice Abe Fortas read the 37-page opinion that put an end to ten years of frustrating negotiation and deliberation, the smile on the face of a chunky, balding spectator seemed to light up the marbled chamber. For Stuart Thomas Saunders, 58, the man who has already been picked to head the Pennsylvania New York Central Transportation Co., the court's 8-0* vote was a singular personal triumph.

It was Saunders, as chairman and chief executive officer of the Pennsylvania, who planned the tactics and organized the arguments that led to one of the largest mergers in corporate history. It was Saunders who held the pieces together during the frequent assaults from competitors concerned about the Penn Central's potential power; it was Saunders who won over dubious labor leaders, worried lest future economies lead to fewer jobs. Above all, it was Saunders, the lawyer-turned-railroader, who convinced the Interstate Commerce

Commission and the Justice Department that both public interest and private good would be helped if two troubled rivals were allowed to operate as a unit, instead of continuing costly and wasteful competition. His victory was a victory for railroads across the country. For the court gave its approval to his philosophy that railroads must combine, that they must grow in size and decline in number if they are to serve their customers and survive.

Envious Hill or Harrimcm. Saunders will be working in tandem with the Central's President Alfred E. Perlman, 65, one of the best operating men in the business; and the two men will be managing a railroad empire to excite the envy of a Hill or a Harriman. The Penn Central will operate on 40,000 miles of track in 14 states and two Ca nadian provinces. It will run 4,200 locomotives, 195,000 freight cars, and 4,937 passenger cars. It will also be the nation's largest private landlord, with real estate holdings that include Park Avenue hotels and a Pittsburgh office building-apartment complex, a 25% share in the new Madison Square Garden, erected over the rebuilt Pennsylvania Station in New York City, resorts in Florida, parks in Texas and housing developments in California. The diversified corporation will have total assets of $6.3 billion, annual revenues of almost $2 billion, and tidy tax-loss credits from dismal years in the past that will help to improve net income for years to come. Most of all, in its plans and in its performance, Penn Central will be a prototype of the U.S. railroad of the future.

Saunders moved into the chairman's suite at Pennsy's Philadelphia headquarters only four years ago. He brought with him the bright reputation he had built as president of the Norfolk & Western, which he helped turn into one of the nation's most profitable railroads. He also brought a consuming energy that threatened to wear out associates. For he is a man who dotes on work. An average day includes twelve hours at the office, another three working at home--after which Saunders relaxes with a vengeance. He ordinarily takes a couple of double martinis before dinner, wine during the meal, and brandy plus two or three Scotches and soda afterward. Not long ago, at a reunion at Roanoke College, where Alumnus Saunders ('30) is now chairman of the trustees, a classmate told him: "You always were a lucky guy." Replied Saunders: "Yes, I suppose I was--but I have also noticed that the harder you work the luckier you get."

To work out his luck when he came to the Pennsy, Saunders had two major aims. One was to shake awake a slumbering, 121-year-old railroad that had stumbled onto hard times. Falling earnings and a high debt had led the road's conservative management to cut back on new spending; the Pennsy had hardly enough modern equipment to remain competitive. The new boss changed all that by allocating huge funds ($577 million in the last three years alone) for new equipment and by branching out into fields other than railroading. His other goal was to push through the merger with the New York Central, something that had been discussed and contemplated for years.

Tangled Midwest. To be sure, the merger trend among U.S. railroads is nothing new (see map). But the plans for the Penn Central were the most am bitious yet. As Saunders promoted them, his tireless determination seemed to promise eventual success. Inevitably, it gave new impetus to a growing roster of other corporate unions: P: In the East, the coal-rich Norfolk & Western and the Chesapeake & Ohio-Baltimore & Ohio are moving toward a merger that will probably be consummated some time in 1970. The C. & O. took effective control of the B. & O. five years ago in a move that enabled the limping B. & O. to use C. & O. credit ratings to buy new equipment ($312 million worth last year). Together, the two lines achieved savings averaging $35 million annually. By merging with the Norfolk & Western, they estimate that they can save another $30 million a year. The merger would create a system every bit as affluent as the Penn Central. It would include the Nickel Plate and the Wabash, already owned by the Norfolk & Western, as well as the Erie Lackawanna, Delaware & Hudson, and Boston & Maine, which the ICC already has ordered the Norfolk & Western to absorb.

P: In the Midwest, where the railroad map is incredibly tangled, several efforts are under way to unsnarl it. The aggressive Chicago & North Western, run by Ben Heineman, has merger agreements worked out with the Chicago Great Western, and would like to include the Milwaukee Road. The Illinois Central and Gulf, Mobile & Ohio, with 9,200 miles of frequently parallel track, hope to merge too. The Missouri Pacific is anxious to take over the Atchison, Topeka & Santa Fe. The three "Northerns"--the Great Northern, the Northern Pacific and the Burlington--have been given tentative ICC permission to combine lines that cover most of the territory between Chicago and the Pacific. The Rock Island Line, an enticing property despite financial difficulties, has a plethora of suitors. Hoping to take all or part of the Rock Island over are the Union Pacific, Southern Pacific, Santa Fe, and Heineman's Chicago & North Western. -- In the Southeast, the Atlantic Coast Line and Seaboard Air Line Railroad have already merged into the Seaboard Coast Line and expect to realize annual savings of $38.7 million. Meanwhile the Southern Railway, bothered by this increase in competition, has been shopping around for a partner. P:In the West, where mergers are less urgent because rail routes are longer, highways fewer and profits greater, one small railroad is being assiduously courted. Both the Southern Pacific and the Santa Fe have attempted to acquire the Western Pacific, if only because its profits are steady and its route includes the easiest pass through the Sierra Nevada. So far, Western President M. M. Christy has turned down all offers.

Sustained Sentiment. The man who is slated to preside over the Penn Central, fittingly enough, is the man who started the merger trend. It was Saunders, as president of the Norfolk & Western, who arranged for the takeover of the Virginian Railway in 1959 and laid the groundwork for the N. & W. to acquire the Nickel Plate and the Wabash. Born in McDowell, W. Va., Saunders grew up in Bedford, Va., within sight and sound of the N. & W.'s main line through the coal fields. He attended college in the town where the N. & W. has its headquarters. Even after he was graduated from Harvard Law School and set up a practice in Washington, Saunders retained his sentimental attachment to the region. In 1939, he and his wife Dorothy jumped at the chance to return to Roanoke when Saunders was offered a job in the legal department of the N. & W. There he made himself so valuable that he moved up steadily until he was finally named president in 1958. In that job, he left operating problems mostly to subordinates, concentrated on mergers and finance.

Saunders' performance at the N. & W. impressed the Pennsylvania Railroad directors, who, at that time, held 33% of the N. & W.'s stock. A delegation from the Pennsy, headed by

Pittsburgh Banker Richard Mellon, called on Saunders in Roanoke to of fer him the opportunity of running the nation's largest railroad. Saunders accepted without hesitation. When he moved to Philadelphia, he took along a cadre of N. & W. executives who are still known around headquarters as the "Virginia Mafia." Before long the Mafiosi had eased 550 oldtimers into retirement. Almost nothing about the Pennsy remained untouched. Saunders, who collects cookbooks as a hobby, even hired a new chef for the executive dining room, ordered him not to serve diet lunches.

He did much more than change menus. Besides making huge investments in equipment and rolling stock, he really began to diversify. He concluded the purchase of the Buckeye pipeline, which threads for 8,000 miles through eight states in the East and South. Today, Buckeye ownership makes the railroad the principal supplier of jet fuel to Kennedy International Airport through a pipeline laid under New York harbor. Already well-stocked with real estate through its rail-related holdings, the Pennsy spent some $80 million to get more. It bought into Arvida Corp., Great Southwest Corp. and Macco Realty Co., which deal in real estate in California, Texas and Florida. Through its subsidiaries, the Pennsy is now developing Rancho California, an 87,500-acre residential project near Los Angeles; it is opening industrial and recreational parks in the Dallas and Fort

Worth area, and it operates the Boca Raton Hotel and Club in Florida.

Unique Position. Saunders also bought a 57% interest in Executive Jet Aviation, a young company organized to provide charter service to businessmen. Among other advantages, Executive Jet gives the Pennsy a foothold in aviation and a start toward what Saunders calls a "total transportation company." For such investments the Pennsy has a large kitty. From its sale of the Long Island Railroad to New York State in 1966, and from the gradual disposal of its shares in the N. & W. and its 98.5% interest in the Wabash, the Pennsy had about $500 million to spend, still has around $107 million unallocated. "We are," says Saunders with some understatement, "in a rather unique position to pursue diversification."

For all the advantages of diversification, Saunders always looked upon consolidation with the New York Central as his most important project. The two lines were in the process of beating each other into bankruptcy. As early as 1957, merger talks had started between Saunders' Pennsy predecessor, James M. Symes, and the Central's Robert Young. Then, after Young committed suicide in 1959, he was succeeded at the Central by Perlman, an M.I.T. graduate who was with the Denver & Rio Grande before Young brought him back East. As it happened, Perlman was most reluctant to couple with the Pennsy, and Saunders had a tough time persuading him that it would be a good deal for both companies.

In his talks with Perlman, Saunders pursued a policy of not letting the opposition polarize. But keeping the opposition unpolarized was a herculean task; there was almost too much to keep track of. ICC examiners studying the Penn Central merger proposal, traveled to 18 cities, took 40,000 pages of conflicting testimony from 461 witnesses in 128 days. Nearly 350 lawyers have thus far been involved. Aside from legal tribulations (their case went to the

Supreme Court twice and lower courts five times) the prospective partners have had to overcome objections from both labor and Government.

First, as far as Saunders was concerned, came labor. At one point during the ICC hearings, a railroad spokesman had glowingly boasted that the merger would enable the lines to get rid of some 7,800 employees. Officials and members of the 24 railroad brother hoods reacted with understandable concern. In an industry where management and labor rarely meet except in the hostile atmosphere of the bargaining room, Saunders began seeking out union leaders for informal talks. "I knew I had to change labor's position," he says. "My argument with the leaders was: 'This is really in the interest of your people. Merger means better earnings, which mean better savings, more business and more jobs. I can only get these savings with your cooperation.' " As a more practical matter, Saunders also promised the unions that no one would be fired because of the merger; only as jobs become vacant because of retirement or death will the Penn Central cut down on employees.

Next came the Justice Department, which strongly opposed the merger on the ground that it would lessen competition among Eastern railroads. Saunders brought the Government lawyers over to his side by agreeing to absorb the bankrupt New Haven. Perlman and the Central had said that they would not take the New Haven under any circumstances. "But it was apparent," says Saunders, "that the New Haven provided the factor needed to get the merger through: an urgent public interest."

One of Saunders' main efforts was to cultivate Lyndon Johnson. A lifelong Democrat, the ambitious railroad man made himself available for public statements approving almost all Johnson Administration policies--from Viet Nam to tax increases. "I could not have gotten the merger through without help from members of the Administration," Saunders says frankly. Then, in a masterpiece of understatement, he adds: "They got the Justice Department to change its thinking." It was significant that Saunders, while celebrating his Supreme Court victory in a Washington dining room last week, received a congratulatory personal telephone call from the President.

Without Illusions. While Saunders was maneuvering so skillfully toward merger, an unexpected problem arose: the New York Central began making noises about backing out of the deal. Elated by rising profits in 1966, Perlman announced that the Central appeared to be "recession-proof" and might not have to merge in order to prosper. Saunders paid calls on Central directors, pointed out that their line, unlike the Pennsy, was not widely diversified; he warned that a dip in the general economy would cause the Central painful headaches. Last year's mini-recession proved Saunders right. Rail returns for the less diversified Central during the nine months figured so far showed a $2,640,000 deficit, while Pennsy earnings held up substantially better. Suddenly the Central's merger enthusiasm revived.

Now only ragtag ends of the complicated corporate battle remain to be resolved. But Saunders labors under no illusions about the future. "The Pennsy itself," he says, "is a tough property to operate." The Penn Central will be a lot tougher. Pennsy President Allen J. Greenough, 62, whose title in the company is still unsettled, puts it even more strongly. "This is a big dog with a lot of fleas," says Greenough. "We'll be scratching for a long time."

To ease the itch, 40 representatives of both the Pennsylvania and the Central have planned together for many months. They worked in neutral territory--offices of the consulting firm of McKinsey & Co. The first sessions were stiffly formal, but even though some Central executives fear that they will be frozen out of key jobs by their opposite numbers at the dominant Pennsy, the atmosphere soon thawed.

More than 3,000 major merger problems have been discussed. One of the first projects was to take an inventory of all the equipment on both roads, from diesel engines down to dining-car flatware. A unified purchasing system for 180,000 kinds of hardware should save $750,000 a year. Altogether, eventual savings from combined operations should be at least $80 million a year. Plans have been made to eliminate about 1,000 miles of duplicate tracks, and computers were called into service to help decide upon the best routes. With a choice of two main lines from Chicago to the Northeast, for example, the computers found that the Central's water-level route would be much more economical than the Pennsy tracks that ascend nearly 3,000 feet over the mountains of western Pennsylvania. Connecting links between Pennsy and New York Central tracks are being rushed at Toledo, Grand Rapids, Cincinnati, Terre Haute, Chicago, Buffalo and Detroit. Freight yards at Cleveland and Indianapolis will be modernized, and an entire new yard--to be named after Perlman--is being built at Albany. The basic idea is to take advantage of the savings that through-freight operations can provide. "The speed factor is vital," says Perlman. "If goods are in transit for four days, someone has to have them on the books for four days. Any reduction in time that we can make will be beneficial."

Flying the Colors. Hundreds of problems remain to be settled. One immediate difficulty was deciding upon a new emblem to replace the red and gold keystone of the Pennsy and the olive, black and white oval of the Central. "Red and green together are too psychedelic," explains a Pennsy vice president in charge of paints. Last week, therefore, Saunders and Perlman inspected four freight cars that have been painted in various combinations of browns, greys, blues and greens, and now will decide which to adopt.

When "M Day" (for Merger Day) takes place--with luck on Feb. 1 and almost certainly by March 1--the first order of business will be a meeting of the 25 directors of the combined lines.

Of these, 14 will come from the Pennsy and eleven from the Central. They will elect Saunders to be chairman and chief executive officer of the Penn Central and Perlman to be president and chief administrative officer. Even at that, it will be at least eight years before the two roads are completely integrated.

Small Succor. Long before then, freight should be moving faster and more efficiently than ever. But passengers will receive small succor from the merger. The benighted commuters of the New Haven will, to be sure, benefit from new equipment made possible by an infusion of money required by the ICC as part of the Penn Central deal. But the Pennsy lost $54 million last year on passenger service, while the Central dropped $25 million. And neither line is anxious to fritter away more cash. Says Saunders ominously: "We are studying all our passenger operations and will be forced, I am sure, to initiate at an early date a far-reaching program to adjust passenger service to actual public needs."

But even as the Penn Central prepares to cut back regular passenger service, it is forging ahead with a fleet of high-speed passenger trains. The railroad has committed $45 million of its own money, in addition to $11 million in Department of Transportation funds, to lay high-speed track between New York City and Washington and to buy ultramodern trains to make the run.

Already tested, the high-speeds will cruise at up to 150 m.p.h.; they promise to cut Washington-New York running times from nearly 4 hours to 2 hours and 18 minutes. Speed, plus such amenities as direct-dial telephones, good food and common courtesy, may win back shuttle passengers whose elapsed airplane time--commuting trips to and from airports--will at least be equaled by midcity to midcity railroad runs.

The high-speeds will spread no farther than densely populated corridors, for the long-distance (more than 200 miles) passenger train is already disappearing down the track to oblivion. "The railroads," says Saunders, "simply cannot compete with jets, to say nothing of supersonics." The Pennsy's boss is equally adamant that Government should support shorter-haul commuter service with subsidies. Says he: "The U.S. Government is spending virtually nothing to assist 73 million people to get to and from their jobs, while putting up $25 billion to send three men to the moon."

No railroad man anywhere disagrees. Western Pacific President Christy announced last week that his road will make another effort to drop the California Zephyr next month. "You can't run a long-distance passenger service on nostalgia," he says. The nostalgia-covered Twentieth Century Limited made its final run for the Central last month. Southern Pacific's president, Benjamin Franklin Biaggini, who would like to chop off his Lark trains running between Los Angeles and San Francisco, says: "It takes a crew of 21 and the operation of a whole train just to move an average of less than two busloads of people. There are 10,000 airline seats available each day in each direction, and it is obvious that the people who fly them don't want to ride trains."

Rent-a-Train. The future of the railroads, quite clearly, lies in freight. And in anticipation of that rich haul, railroads all around the country are adding new equipment, with a handsome outlay of $3.45 billion over the past two years. The results are already impressive. The Pennsy, for instance, pioneered with "unit" trains, in which continuously linked cars carrying bulk cargoes like coal can bypass freight yards and switching delays because they never have to be uncoupled. Beginning with one unit train in 1964, the road now runs 550 a month. Illinois Central has gone a step farther and devised a rent-a-train plan that Hertz and Avis might envy. Under the system worked out by I.C. Marketing Vice President John Ingram, companies can rent an 86-car train for $1,000,000 a year, run it as frequently as they like. Illinois Central has so far rented out five such trains to grain companies.

Three-tiered automobile haulers have won back new-car haul business from trucks and saved the auto companies on freight charges as well. For other customers, railroads can offer everything from "rail whale" tank cars with 50,000-gal. capacity to "high cube" cars built with extra-high roofs for odd-size loads. Piggyback hauls, in which flatcars carry over-the-road trailers, have increased 385% in a decade, to 1,207,242 carloads. The Southern Pacific, for one, has seen its piggyback service grow from 18,000 tons twelve years ago to 2,200,000 tons last year.

Everywhere, trains are getting bigger --the Norfolk & Western recently ran a 500-car train that was pulled by six engines with radio-connected controls operated by a single engineer. Last week the Santa Fe inaugurated service of its Super C freight from Chicago to Los Angeles. On its first run it zoomed from city to city in 34 hours and 35 minutes, or five hours faster than Santa Fe's famed Super Chief.

Happy Marriage. Nothing is changing railroading more than the computer. Just about every Class I U.S. road has acquired some of the electronic giants to control the costly and time-consuming business of putting freight trains together, taking them apart, and keeping track of the cars. The Union Pacific has so far installed 53 computers in 37 yard offices, ties them all in with four master computers in Omaha by a 2,900-mile private microwave system; the line figures that the economies obtained are equal to having 3,000 additional freight cars on hand.

Computers and the men necessary to run them have nourished a new breed of railroaders--management experts with wide-ranging interests. And they, in turn, have fueled the railroads' drive to diversify--if the Government eases up--into related areas of transportation. The Missouri Pacific, which already owns two truck lines extending 17,000 miles, last week applied to the CAB for permission to start an air-freight service. Says W. Graham Claytor Jr., new president of the Southern: "The railroads must press hard for the right to sell transportation, not railroad service. Then they must supply it in the most economical form suited to the customer's needs, including in many cases a combination of highway, rail, water and even air." Saunders enthusiastically agrees. "A transportation company," he says, "should be able to offer a customer every kind of shipping service."

In the effort to do that, the railroads are showing increasing enterprise. The Great Northern, Northern Pacific, Union Pacific and Southern Pacific, among others, have opened sales offices in the Far East. The Pennsy, in turn, has opened offices in seven European cities. The aim is to build up a business in containerized shipments that can be handled by rail after they are unloaded from ships. The U.S. railroads are pushing to establish a "land bridge" service by which freight bound between the Far East and Europe would travel by ship to the U.S., go by rail across the country, and on ships again to its final destination. The savings in time would be significant: 28 days from Japan to Europe by way of the land bridge v. 44 days on an all-ship transit through the Suez Canal.

Such is the future of U.S. railroading, and so auspicious is the outlook for the Penn Central merger, that Stuart Saunders last week relaxed his customary aggressiveness. "I have heard it said that a long courtship makes for a happy marriage," said Saunders, as he looked back over the years of fuss and frustration, "and I hope that it is true, for it will surely mean eternal bliss for the Penn Central." Bliss, perhaps. But with Saunders running things, certainly not tranquillity. Honoring Saunders last week with its annual Benjamin Franklin award, Philadelphia's Poor Richard Club summed up the situation pretty well. "When Benjamin Franklin arrived in Philadelphia," said a society spokesman at the presentation ceremonies, "things began to happen. It's the same with Stuart Saunders."

* Justice William Douglas dissented in part, but concurred in the court's conclusion; Justice Thurgood Marshall abstained because, as U.S. Solicitor General, he was involved in the litigation leading up to the decision.

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