Wedding Bells

One of the best-kept secrets in U.S. business history burst into the open last week. After months of top-level discussion that leaked neither to Wall Street, the U.S. Government or even many of their own officers, the Pennsylvania Railroad and the New York Central--the nation's two biggest railroads--announced that they are considering a merger that would be the biggest corporate marriage ever. Said Pennsy President James M. Symes and Central President Alfred E. Perlman: "Preliminary studies and discussions indicate that substantial benefits to all concerned may result from such a merger."

A merger of the two lines would make the united road the eleventh largest U.S. company, with combined assets of more than $5 billion. The Pennsylvania's 9,963 miles of road, running from the mid-Atlantic states westward to St. Louis and Chicago, and the Central's 10,600 miles, reaching northward to Boston, Albany and Quebec and westward to Chicago and St. Louis, serve the nation's most highly industrialized area. The lines own millions of dollars in property (including Grand Central station and a huge chunk of Park Avenue real estate, Pennsy's Pennsylvania Stations in New York and Philadelphia), employ 184,000 workers, last year transported 80 million passengers and hauled 378 million tons of freight.

Peculiar Problems. But despite such impressive foundations, both roads are in serious trouble. Both have been hard hit by rising costs, declining revenues, and the heavy inroads of competition from trucks, airplanes and buses. In addition to competing with "subsidized" forms of transportation, said Symes and Perlman, their roads have suffered from "long delayed and inadequate rate increases, refusal to permit abandoning of unprofitable and unpatronized trains and facilities, inadequate payment for carrying mail, discriminatory excise taxes, excessive state and local taxes, unfair assessments for highway crossings, and other artificial burdens."

Some cynics professed to see in the merger proposal a dramatic attempt to get the railroads' case for higher rates and other changes before the public, but the move was nonetheless a good indication of the unhealthy state of the two roads involved. Many other U.S. railroads are doing well financially (see box), but they are not afflicted with the peculiar problems of the Central and Pennsy: short-haul runs that require numerous stations and facilities and heavy and unprofitable commuter loads in populous big-city areas.

Into the Red. When Central's Chairman Robert R. Young came to the road* in 1954 after a bitter proxy battle, he was sure he had the cure for those ailments. He introduced time-and labor-saving centralized traffic control, installed pushbutton freight yards and increased dieselization. Last year he announced the beginning of a $500 million capital-improvement program, and early this year confidently crowed that Central's stock soon would be up to $100 and paying $8 a share. The stock climbed briefly, but Young saw his hopes dashed as Central's financial position deteriorated and the stock fell to around $18.

Despite modernization, cost cutting, the organization of a profitable trucking business, and a 15% fare increase for its New York lines last May, Central slipped into the red in August. Its earnings for the first nine months this year are down to $8,700,000 from last year's $28,172,000 and the road failed to pay its last quarterly cash dividend. President Perlman told a TV audience early this year that Central could not stay alive much longer without help.

Pennsylvania is in equally poor shape. Its nine-month earnings slipped to $19,581,000 from $31,291,000 last year--and more than $17 million of its earnings came from nonconsolidated subsidiaries and affiliates. Pennsy last month put off declaring its quarterly dividend till some time this month. Both roads lose $50 million apiece yearly on their passenger service, have been further weakened by a recent decline in carloadings (see State of Business). The plain fact is that the Central and the Pennsy have become marginal operators that run on so narrow a margin of profit that they are hard-pressed to weather even the slightest downturn in business.

A merger could cut costs by consolidating facilities that duplicate each other, particularly in the New York and Chicago area, eliminating overlapping passenger services, uniting management, pooling maintenance forces and equipment. What the roads hope to determine in forthcoming studies is whether these savings would be great enough to produce a healthy combined road, instead of two sick ones.

Trouble Ahead. If the two roads decide to merge, they must travel a path littered with obstacles. Wall Street last week was skeptical about the prospects of a full merger, thought that the Central and Pennsy would have a better chance to work out a deal to eliminate duplicate trackage and terminal facilities. Labor unions are sure to object bitterly to any merger, with the cut in workers that would follow. So is the competitive trucking industry. Politics is also a consideration: shortly after the roads' announcement, Senator Estes Kefauver, chairman of the Senate Antitrust and Monopoly Subcommittee, told reporters he thought the merger "would be a bad thing."

Biggest obstacle of all is the Interstate Commerce Commission, which will have to decide whether the merger would be "consistent with the public interest"--specifically, whether it would constitute a threat to competition under the antitrust laws. Though ICC recommended national consolidation for railroads in the 1920s, and since then has permitted the merger of several smaller roads, it has never had to decide on a merger of such size and impact. But unless something is done to cut costs and give the roads relief, it seems inevitable that everyone will have to pay in increased freight rates, higher fares and poorer service.

* The Central itself is the product of some 500 mergers. It grew out of New York's first railroad, the Mohawk and Hudson, gradually absorbed smaller roads during the 19th century, in 1914 reached its present status through a merger with several lines running between New York and Chicago.

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