Uncle, Can You Spare Some Millions?

AS plain as a red signal on the main track, the ominous figures in quarterly earnings reports showed for months that the Penn Central Transportation Co. was in precarious financial condition. The nation's largest railroad and its parent corporation, the Penn Central Co., are among the wealthiest companies in the U.S. (assets: $7 billion). But the railroad is burdened with debt, beset by spiral ing costs, tangled operations, a drop in freight shipments and the $100 million annual drain of unwanted passenger service. As a result, a convulsion last week shook the once-mighty Penn Central and spread deep concern among leaders of business and Government.

The company was so desperately strapped for cash that Penn Central directors abruptly dismissed the men they blamed for that plight: Chairman and Chief Executive Stuart T. Saunders, Vice Chairman Alfred Perlman and Finance Committee Chairman David Bevan. Next day, fearful that the collapse of so large a corporation might bring down other companies in the shaky economy, the Nixon Administration took unusual action in order to rescue the ailing railroad from the brink of bankruptcy. Under seldom-used powers of the Defense Production Act, the Defense Department agreed to guarantee up to $200 million in short-term bank loans for the road.

Protecting Customers. Federal officials reckon that a severe cash bind threatens as many as six other major railroads: the Western Pacific, the Missouri-Kansas-Texas, the Milwaukee Road, the

North Western, the Reading and the Erie-Lackawanna. The Nixon Administration began drafting legislation that would allow the Department of Transportation to underwrite as much as $750 million in loans for beleaguered railroads. The plan, however, faces considerable opposition in Congress.

In other industries, financially ailing companies are also turning to Washington for help. Last week the Senate Armed Services Committee voted $200 million in contingency funds for the C5A super-transport in order to aid cash-short Lockheed Aircraft Corp., the nation's largest defense contractor. The week before, by awarding the Air Force's new B-l bomber contract to North American Rockwell, a company with little recent bomber experience, the Administration lifted the threat of layoffs hanging over thousands of Southern California aerospace workers in an election year. Now Wall Street brokerage firms are asking Washington for a line of credit of about $1 billion in order to protect customers. The fund could be used to repay money owed to investors in case more firms fail because of rising costs, falling income, inefficient operations and losses suffered in the long bear market.

The Administration's tight money policies, which have put many companies in an acute financial squeeze, have had the most impact on those that grew too fast or papered over inherent problems when times were good and money was easy. Some overextended conglomerates, notably James Ling's LTV, have been forced to sell subsidiaries to meet debts. Many big-name corporations have quietly told their disbursing departments to delay paying their bills for 60 or even 120 days. Since important suppliers are often paid first, smaller and weaker firms at the end of the line are hurt worst. Shrinking profits have forced hundreds of corporations to dip into working capital to meet their payrolls. At the end of last year, major companies held only enough cash and short-term Government paper to cover 19.3% of their immediate debts, compared with 38.4% in 1961. The recent dip in interest rates on short-term commercial paper indicates that the worst of the squeeze may be past. Many corporate money men now speak of a "strain" rather than a "crisis."

Bickering at the Top. The agony of the Penn Central was aggravated not only by the money shortage but also by civil war within the company. The 28-month-old merger of the Pennsylvania Railroad and the New York Central was supposed to eliminate wasteful competition and thus enable two troubled rivals to highball into the future. Instead, executives of the Pennsy's "red team" and Central's "green team"*bickered over business methods, and politicked for status and promotions, while service deteriorated amid appalling confusion. Even the computer systems of the two roads were incompatible: they could not transmit information to each other. Thousands of freight cars were "lost" in Penn Central yards or along its 40,000 miles of tracks. Shipments were delayed for weeks or longer, and food, beer and other goods went stale in the cars. While infuriated shippers switched to other carriers, frustrated middle-managers from the New York Central quit in wholesale lots as Pennsy men took over most of the key positions.

Friction became especially grating between the Pennsy's Saunders, 60, a lawyer turned railroadman, and Perlman, 67, former boss of the Central, who had been named chief operating officer of the combine because of his reputation as a wizard at running trains. Strong-willed men, they held each other in low esteem --and showed it. Moreover, the merger that Saunders engineered had long been opposed by Perlman, who had favored another grouping of Eastern railroads. The squabbles became so frequent that last December the board of directors finally moved Perlman upstairs to vice chairman. Other railroaders who had thought that mergers would alleviate their own woes now looked at the Penn Central and began to have doubts.

Meanwhile, inflation sent the Penn

Central's costs soaring, while Government rate regulation kept a lid on fares and freight charges. (Last week the torpid Interstate Commerce Commission finally approved a 5% increase in freight rates that Saunders bagan begging for last winter.) In two years, the cost of a new freight car rose 37% and the payroll went up by 18%. Despite revenues of $1.8 billion, the railroad lost $56.3 million in 1969. The company fared even worse in this year's first quarter. Staggered by severe winter weather, rising local taxes, declining factory output, and strikes in coal and other industries, the line posted a $62.7 million operating loss.

The Penn Central's passenger service has been a particular plague. The railroad still runs 1,280 passenger trains a day--35% of the nation's total and 75% of the remaining long-haul sched-u'es. By Penn Central accounting, round-trip income from one New York-St. Louis train, for example, recently averaged $5,295 a day; but wages and other operating costs ran to $10,191. To pare such losses, the Penn Central two months ago petitioned the ICC to end all passenger service west of Buffalo, N.Y., and Harrisburg, Pa. Indignant protests from localities, rail buffs and organized passenger groups are likely to stall the commission's decision.

As Penn Central's fortunes faded, Chairman Saunders pressed anew for rate increases. In February, he met with Transportation Secretary John Volpe, members of the ICC, and staff men at the Treasury and the White House. "The tone was one of moderate financial stress," a Government official recalls. Actually, the company was in much graver trouble than that. "There were times when we frankly wondered if we'd be able to meet our payroll," said a Penn Central executive last week.

As the railroad took on more and more costly debt, Manhattan bankers began to worry. They were particularly concerned when the Penn Central borrowed $59 million in Eurodollars early this year at interest rates of 10.1%. U.S. banks slammed their loan windows, partly because too many of Penn Central's readily salable assets were already pledged as collateral. In desperation, the company tried in late May to raise $100 million in 25-year debentures, only to abandon the effort when underwriters reported that they could find no buyers, even at 101% interest.

Backward Chess. When he became convinced that the debenture would fail, Saunders went again to Washington and cal.ed for a secret meeting of Government leaders. TIME Correspondent Mark Sullivan reports that a powerful lineup attended: Attorney General John Mitchell, Treasury Secretary David Kennedy. Defense Secretary Melvin Laird and White House Aide Peter Flanigan. By a quirk of fate, the meeting took place on May 26, the day that stock prices plunged to the year's low so far. Saunders could hardly have picked a more opportune moment to ask for a handout. "The Penn Central is in a state of financial crisis," he said. "Two hundred million dollars of its commercial paper has recently matured or will mature in the next few months, and in the present circumstances of the company the paper cannot be refunded. The Penn Central Rail Road will have to file a petition of bankruptcy in early June."

Shaken by the disclosure, Nixon's lieutenants agreed to keep the railroad from going broke. Says one official who was not wholly in accord with the decision: "They said, 'My God, if the Penn Central goes, the public will think 1929 is here. We can't let it happen.' "

After the commitment was made, Department of Transportation officials began asking questions on Wall Street about why the railroad faced such a calamity. Bankers said bluntly that they had lost confidence in management and would lend the company no more money until Saunders was deposed. The bankers said the same to some directors, who were disturbed that Saunders had not conveyed to them the full extent of the road's financial plight. At a special White House meeting on Memorial Day, DOT men suggested to Treasury officials that Penn Central might wriggle out of its financial hole if management was changed. But the Treasury had committed itself to helping the railroad, and it stuck by that promise. Says one unhappy official: "We played the chess game backward."

Shock in the Boardroom. Ironically, it was after Saunders had negotiated the multimillion-dollar rescue that the Penn Central's directors finally agreed he must go. At last week's meeting, Saunders reported on his Washington negotiations, and then the board asked its officer-directors to leave the room. When they were called back, Saunders and Bevan were asked to resign--which they did. Perlman was relieved of his duties, but will remain a director until his employment contract expires in November. "Saunders was absolutely shocked," says one associate. "He looked a broken man. It's a terrible blow to his pride." And to his pocketbook, for he was paid $236.972 while the Penn Central was rolling in the red last year.

The board promoted President Paul A. Gorman, 62. to chairman and chief executive. Missouri-born Gorman has spent almost all of his business life in the Bell System and was president of its Western Electric manufacturing arm until he was brought in by Saunders as the Pennsy's $250,000-a-year president last December. His main job now, besides eliminating losses, will be to recruit a team of younger railroad executives, probably including a successor. "We can make a decent return on our freight business," says Gorman, "if we can just get unshackled from our passenger service." But he adds: "Our service has to improve."

A Need for Subsidy. Can a telephone man patch up the palsied Pennsy? Most rail experts argue that no managerial master strokes will be enough unless the Government subsidizes passenger service, as governments of almost all industrial countries do. "The Penn Central is required to run those trains." Perlman told TIME Correspondent Roger Beardwood last week. "There is no chance of their ever making money. We cannot charge an economic fare, because the ICC won't let us, and the commuter wouldn't pay it if we did. He would take to the highways."

Perlman figures that the crisis will become "a blessing in disguise, because it has shocked the Government into realizing that we are not a rich railroad any more. If we can get the Government to absorb passenger losses and lend us money to improve our equipment, we can survive."

Having lunged to the aid of the Penn Central, the Government now seems headed for a quasi-nationalization of the nation's railroads. Legislation that sailed through the Senate and seems assured of success in the House would create a semipublic, Government-subsidized agency, the Rail Passenger Corp. (Rail-pax), to take over long-haul passenger service from railroads that want to give it up. Railpax would start operations in March 1971. Most of its directors would be named by the President; the Transportation Secretary would establish the routes, and the corporation would set standards of service.

Merely relieving the railroads of their obligation to carry people will not solve their other problems. The Missouri-Kansas-Texas line scrapped its last passenger service four years ago, for example, but today is in worse financial shape than ever. The U.S. lines suffer from featherbed union rules,-encrusted managements, outmoded facilities and overlapping trackage. Three separate rail networks compete for the slight business in the Michigan Peninsula above Grand Rapids. Detroit and Toledo, only one hour apart, hardly require the linkage of four different lines. Five railroads connect Dallas and Kansas City. To survive and prosper. U.S. railroads may have to shuck off most unprofitable routes and concentrate on long-haul freight traffic, as moneymaking Western lines already do.

High Cost of Help. Above all, the nation needs to devise a balanced national transportation policy, equalizing subsidies and favors among railroads, airlines, barge, ship, truck and bus lines. The Government may have to invest in new technology for trains, as it has for jet planes and atomic energy, agriculture and medicine. The railroaders themselves need to try all kinds of new methods to gain business. Several roads have plans to remove mounting loads of city garbage and haul it to rural dumps at costs no higher than those of today's disposal methods. Unions have to be persuaded to give up make-work practices. Last week, as part of an 18-month experiment aimed at attracting more freight traffic, the United Transportation Union agreed to eliminate some restrictive job rules on the Illinois Central.

The hastily patched-together plan to rescue the Penn Central raises crucial questions about the fundamental rela tionship between Government and business. Washington can scarcely be expected to bail out every big company that runs into difficulties because of a money shortage, managerial incompetence or ill-advised decisions. What if an airline or another defense contractor pleads for emergency help? The Government itself is pinched for cash. If it shells out large subsidies, the federal budget will plunge deeper into deficit, stoking the inflationary fires. If the Government gives more loan guarantees to straitened companies, Washington will take on vast new powers as the arbiter of just who should get credit. And if the Government acts to guarantee a corporation, Washington will naturally want a voice in the business.

For all its commitment to private enterprise, the U.S. may have no practical alternative to Government operation of most rail passenger service. But if Washington moves to involve itself much further in the problems of other businesses, it will basically change the American economy in ways as yet unforeseen.

*After the color of each line's boxcars. -Example: an engineer of a Penn Central Metroliner collects 4Vi days' pay or $111, for each six-hour round trip of 452 miles between New York City and Washington. The stipend is based on a rule dating from the days of steam power that defines 100 miles as a day's work.

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