Conrail
Conrail, formally the Consolidated Rail Corporation, was the primary Class I railroad in the Northeastern United States between 1976 and 1999. The trade name Conrail is a portmanteau based on the company's legal name. It continues to do business as an asset management and network services provider in three Shared Assets Areas that were excluded from the division of its operations during its acquisition by CSX Corporation and the Norfolk Southern Railway.
The federal government created Conrail to take over the potentially profitable lines of multiple bankrupt carriers, including the Penn Central Transportation Company and Erie Lackawanna Railway. After railroad regulations were lifted by the 4R Act and the Staggers Act, Conrail began to turn a profit in the 1980s and was privatized in 1987. The two remaining Class I railroads in the East, CSX Transportation and the Norfolk Southern Railway, agreed in 1997 to acquire the system and split it into two roughly-equal parts, returning rail freight competition to the Northeast by essentially undoing the 1968 merger of the Pennsylvania Railroad and New York Central Railroad that created Penn Central. Following approval by the Surface Transportation Board, CSX and NS took control in August 1998, and on June 1, 1999, began operating their respective portions of Conrail.
The old company remains a jointly owned subsidiary, with CSX and NS owning respectively 42% and 58% of the company's shares, corresponding to how much of Conrail's assets they acquired. Each parent, however, has an equal voting interest. The primary asset retained by Conrail is ownership of the three Shared Assets Areas in New Jersey, Philadelphia, and Detroit. Both CSX and NS have the right to serve all shippers in these areas, paying Conrail for the cost of maintaining and improving trackage. They also make use of Conrail to perform switching and terminal services within the areas, but not as a common carrier, since contracts are signed between shippers and CSX or NS. Conrail also retains various support facilities including maintenance-of-way and training, as well as a 51 percent share in the Indiana Harbor Belt Railroad.
History
Context: 1973–1976
In the years leading to 1973, the freight railroad system of the Northeastern United States was collapsing. Although government-funded Amtrak took over intercity passenger services on May 1, 1971, railroad companies continued to lose money due to extensive government regulations, expensive labor costs, competition from other transportation modes, declining industrial business and other factors.The largest railroad in the region, Penn Central, declared bankruptcy in 1970, after less than three years of existence. Formed in 1968 by the merger of the New York Central Railroad and Pennsylvania Railroad, the PC was created with almost no plans to merge the varied corporate cultures, and the resulting company was a hopelessly entangled mess. At its lowest point, PC was losing over $1 million a day and trains were becoming lost all over the railroad.
In 1972, Hurricane Agnes damaged the rundown Northeast railway network and threatened the solvency of other railroads, including the somewhat more solvent Erie Lackawanna. In mid-1973, officials with the bankrupt Penn Central threatened to liquidate and cease operations by year's end if they did not receive government aid by October 1. This threat to US freight and passenger traffic galvanized Congress to quickly create a bill to nationalize the bankrupt railroads. The Association of American Railroads, which opposed nationalization, submitted an alternate proposal for a government-funded private company. Judge Fullam forced the Penn Central to operate into 1974, when, on January 2, after threatening a veto, President Richard Nixon signed the Regional Rail Reorganization Act of 1973 into law. The "3R Act," as it was called, provided interim funding to the bankrupt railroads and defined a new Consolidated Rail Corporation under the Association of American Railroads' plan.
The 3R Act also formed the United States Railway Association, another government corporation, taking over the powers of the Interstate Commerce Commission with respect to allowing the bankrupt railroads to abandon unprofitable lines. The USRA was incorporated on February 1, 1974, and Edward G. Jordan, an insurance executive from California, was named president on March 18 by Nixon. Arthur D. Lewis of Eastern Air Lines was appointed chairman on April 30, and the remainder of the board was named on May 30 and sworn in on July 11.
File:Conrail FSP.jpg|thumb|300px|The 1975 Final System Plan left major parts of the Erie Lackawanna Railway and Reading Company out of Conrail
Under the 3R Act, the USRA was to create a "Final System Plan" to decide which lines should be included in the new Consolidated Rail Corporation. Unlike most railroad consolidations, only the designated lines were to be taken over. Other lines would be sold to Amtrak, various state governments, transportation agencies, and solvent railroads. The few remaining lines were to remain with the old companies along with all previously abandoned lines, many stations, and all non-rail related properties, thus converting most of the old companies into solvent property-holding companies. The plan was unveiled on July 26, 1975, consisting of lines from Penn Central and six other companies—the Ann Arbor Railroad, Erie Lackawanna Railway, Lehigh Valley Railroad, Reading Company, Central Railroad of New Jersey and Lehigh and Hudson River Railway. Controlled railroads and jointly owned railroads such as Pennsylvania-Reading Seashore Lines and the Raritan River Railroad were also included. It was approved by Congress on November 9, and on February 5, 1976, President Gerald Ford signed the Railroad Revitalization and Regulatory Reform Act of 1976, which included this Final System Plan, into law.
The EL had been formed in 1960 as a merger of the Erie Railroad and Delaware, Lackawanna and Western Railroad. It too was bankrupt, but was somewhat stronger financially than the others. It was ruled reorganizable under Chapter 77 on April 30, 1974, but on January 9, 1975, with no end to its losses in sight, its trustees reconsidered and asked for inclusion. The Final System Plan assigned a major section of the EL, from northern New Jersey west to northeast Ohio, to be sold to the Chessie System, which would help spur competition in Conrail's territory. Chessie, however, could not reach an agreement with EL labor unions, and in February 1976 announced that it would not be buying the EL section. The USRA hurriedly assigned large amounts of trackage rights to the Delaware and Hudson Railway, allowing it to compete in the Philadelphia, Pennsylvania, and Washington, D.C., markets.
The State of Michigan decided to keep operational the full Ann Arbor Railroad, of which Conrail would run only the southernmost portion. Michigan bought it and the whole line was operated by Conrail for several years until it was sold to a short line.
Operation: 1976–1986
Conrail was incorporated in Pennsylvania on October 25, 1974, and operations began on April 1, 1976. The federal government owned 85%, with employees owning the remaining 15%. The theory was that if the service was improved through increased capital investment, the economic basis of the railroad would be improved. During its first seven years, Conrail proved to be highly unprofitable, despite receiving billions of dollars of assistance from Congress. The corporation declared enormous losses on its federal income tax returns from 1976 through 1982, resulting in an accumulated net operating loss of $2.2 billion during that period. Congress once again reacted with support by passing the Northeast Rail Service Act of 1981, which amended portions of the 3R Act by exempting Conrail from liability for any state taxes and requiring the Secretary of Transportation to make arrangements for the sale of the government's interest in Conrail. After NERSA was implemented, Conrail, under the aggressive leadership of L. Stanley Crane began to improve and reported taxable income between $2 million and $314 million each year from 1983 through 1986.Conrail's government-funded rebuilding of the dilapidated infrastructure and rolling stock it inherited from its six predecessors succeeded by the end of the 1970s in improving the physical condition of tracks, locomotives and freight cars. However, fundamental economic regulatory issues remained, and Conrail continued to post losses of as much as $1 million a day. Conrail management, recognizing the need for more regulatory freedoms to address the economic issues, were among the parties lobbying for what became the Staggers Act of 1980, which significantly loosened the Interstate Commerce Commission's rigid economic control of the rail industry. This allowed Conrail and other carriers the opportunity to become profitable and strengthen their finances.
The Staggers Act allowed the setting of rates that would recover capital and operating cost by each and every route mile the railroad operated. There would be no more cross-subsidization of costs between route-miles. Finally, where current and/or future traffic projections showed that profitable volumes of traffic would not return, the railroads were allowed to abandon those routes, shippers and passengers to other modes of transportation. Under the Staggers Act, railroads, including Conrail, were freed from the requirement to continue money-losing services.
File:CR 18065 IN Porter.jpg|thumb|Conrail transfer caboose 18065 brings up the rear of a local freight passing Porter, Indiana, in the early 1990s
Conrail began turning a profit by 1981, the result of the Staggers Act freedoms and its own managerial improvements under the leadership of L. Stanley Crane, who had been chief executive officer of the Southern Railway. While the Staggers Act helped immensely in allowing all railroads to more-easily abandon unprofitable rail lines and set their own freight rates, it was under Crane's leadership that Conrail truly became a profitable operation. Soon after Crane took office in 1981 he shed another 4,400 miles from the Conrail system in the following two years, which accounted for only 1% of the railroad's overall traffic and 2% of its profits while saving it millions of dollars in maintenance costs. NERSA relieved Conrail of its requirement to provide commuter service on the Northeast Corridor, further improving its finances.
In 1984, the government put its 85% share up for sale. Bids were received from Alleghany Corporation, Citibank, an employee buyout, Guilford Transportation Industries, Norfolk Southern Railway and a consortium headed by J. Willard Marriott. On February 8, 1985, Secretary of Transportation Elizabeth Dole announced Norfolk Southern Railway as the successful bidder.
After considerable debate in Congress, the Conrail Privatization Act of 1986 was signed into law by President Reagan on October 21, 1986. However, in August 1986, Norfolk Southern had withdrawn its bid citing Congressional delays and taxation changes. The government decided that its interest in Conrail would then be sold by the then-largest initial public offering in US history. The sale was effective from March 26, 1987, when Conrail's stock, worth $1.65 billion, was sold to private investors.