MARCH 31, 1997
Conrail and Amtrak are both railway companies created when the federal government merged a number of smaller, failing railways. In the two and half decades since this action, the companies have gone in very different directions. Conrail was recently at the center of a $10 billion merger battle. Amtrak, on the other hand, is looking to cut huge losses by slashing service to 42 cities, including Las Vegas, Little Rock and Dallas. Charlayne Hunter-Gault looks at the reasons why.
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The House Transportation and Infrastructure Committee's rail subcommittee
Federal Railroad Administration
TOM BEARDEN: Conrail, the largest freight railroad in the Northeast and the key transportation player for the last few decades, is about to disappear. Conrail was created in 1973, formed by the government from six railroad companies in the Northeast that had gone bankrupt. Conrail lost a lot of money over the next seven years. But soon after the government loosened regulations on the freight train industry in 1980, Conrail's financial picture began to improve. Deregulation allowed trains to compete more successfully with the trucking industry.
By 1981, Conrail no longer needed federal funding. In 1987, it went public. At the time it was the largest initial public stock offering in the country's history, but success brought suitors like CSX, a Richmond, Virginia-based line and the nation's third largest railroad. In October, Conrail announced that it accepted a friendly merger with CSX that would bring in $8.4 billion in cash and stock, but Norfolk Southern, another large Virginia-based railroad, didn't want a competitor taking over the profitable Northeast Corridor, so it countered with a $2 billion higher bid all in cash.
During the months that followed, Conrail's shareholders and the federal government, among others, expressed concern about the original CSX offer. And that left open the door for the deal that was announced with CSX. CSX would buy Conrail for the same price Norfolk Southern was offering. Then it would turn around and sell Norfolk Southern about half of Conrail's coveted eastern routes. Both carriers would then have access to the jewel in the crown--New York's highly active ports and train lines. As a result of their merger, there will now be two major railroad companies in the East--CSX and Norfolk Southern--and two in the West--Burlington Northern and Union Pacific. With so few big players remaining, the old dream railroad executives had of a transcontinental railway line under one company may be within reach. But first and foremost the merger needs the approval of the federal government before the next step can even begin to be considered.
CHARLAYNE HUNTER-GAULT: On the other side of the track and the story is Amtrak, the national passenger service. Hemorrhaging from losses, the beleaguered company announced today the closing down of one major line, with potentially more cutbacks to come. Passenger rail service reached its peak in the 1940s. That's when trains were the main mode of travel from Los Angeles to New York and points in-between. Passenger rails were consolidated over the next 20 years, and some shut down.
In 1971, the government stepped in and created Amtrak, the nation's only passenger rail service provider connecting places like Dodge City, Kansas, to Chicago, Illinois. But in recent years Amtrak has been eliminating unprofitable routes. Today the line to go is the Gulf Coast Limited, connecting Mobile, Alabama, to New Orleans, Louisiana. Service on four other routes could be dropped as early as May 10th. On top of that, some 42 cities and 400,000 passengers are in jeopardy of losing all passenger rail service completely. Those cities include Little Rock, Arkansas; Dallas-Ft. Worth; Laramie, Wyoming; Las Vegas, Nevada; and Worcester, Massachusetts.
For more on this story of success and failure we have William Withuhn, the rail transportation curator at the Smithsonian Institution, and Rip Watson, a rail industry reporter for the Journal of Commerce. Thank you both for joining us. Starting with you, Mr. Watson, how bad is the Amtrak side of the story?
RIP WATSON: Journal of Commerce: Amtrak is facing a crisis of immeasurable proportions at this time. Amtrak has no other form of funding, other than the federal government. And because of that, they really must get money from Congress. Their funding expires on September 30th, this year. And the company needs to be re-authorized for funding by Congress. And Congress has allowed for approximately $400 million over the next several years. In the Clinton administration's proposal, however, Amtrak faces strong opposition in Congress.
CHARLAYNE HUNTER-GAULT: Why is that? How did they get into such bad shape?
RIP WATSON: Why did--Amtrak reached its difficult position now because it has never had a dependable funding source. It has also reached a difficult position it's in now because airlines and the personal travel that people make in automobiles have proved to be both cheaper and more efficient for many Americans to take.
CHARLAYNE HUNTER-GAULT: But Mr. Withuhn, this problem with the passenger rail service really, for all of Amtrak's problems, pre-dates Amtrak , does it not?
WILLIAM WITHUHN, Smithsonian Institution: Oh, indeed it does. I mean, there are people who would argue that passenger trains have lost money since about 1915, but really railroads were the only way to travel until the early 50's any long distance, and just a combination of people voting with their accelerator pedals and really then the advent of the airlines after World War II have really taken away what had been the rail passenger.
CHARLAYNE HUNTER-GAULT: And the--you've seen this decline. You have these books that you brought here that showed the magnitude of the decline, right?
WILLIAM WITHUHN: It's kind of interesting just to note that this is a guidebook basically to the rail passenger service of 1930. And you see inside are just all these wonderful trains that used to run coast to coast in every part of the country. Today the Amtrak schedule certainly looks more attractive, but in the national timetable, in the Northeast timetable, you can see by their thickness, is quite a contrast.
CHARLAYNE HUNTER-GAULT: And it's most other modes of transportation that are more efficient and faster?
WILLIAM WITHUHN: Well, I think really the Model-T went into production about 1913. Americans loved their automobile. There was really no going back to a former era of dependence on the railroad.
CHARLAYNE HUNTER-GAULT: But didn't people love trains too?
WILLIAM WITHUHN: Well
CHARLAYNE HUNTER-GAULT: I know I did.
WILLIAM WITHUHN: I think Americans have a kind of a love affair with trains. They obviously built our country in the 19th century and really helped develop and populate most of the great middle of the country. But really as the automobile and roads improved, railroads really ran passenger trains at a loss, and the long accumulating losses finally came, you know, came to a point where something had to be done. In 1971, the railroads agreed that the government could take over the passenger trains and the freight railroads would then only charge a rental cost for the direct cost of allowing these passenger trains to run.
CHARLAYNE HUNTER-GAULT: Mr. Withuhn, is there an argument, given all of that, for Amtrak continuing, and is it possible that it could survive?
RIP WATSON: It is possible that Amtrak could survive. This battle has been fought many times before in Congress. And Amtrak has emerged from each battle dated to the Reagan administration. What Amtrak needs to do to make that survival happen is build a coalition between the Northeast, where half of its passengers and half of its trains operate, and the rest of the country which has far fewer trains and much more geography. Amtrak also needs to sign a permanent direction. It has moved over the years its routes and train frequencies to change from year to year, and I think some people have come confused by that. The train might only operate three days a week in some locations now; whereas, a few years ago there were four trains every day.
CHARLAYNE HUNTER-GAULT: What's going to happen? I mean, some 42 cities are going to be cut from the system, as I just said. The rail passenger system, and 400,000 passengers, why haven't all these people who depend on trains for--
WILLIAM WITHUHN: Sure. They're just going to have to find other modes. I think one thing needs to be said in perspective, is that the primary funding source for Amtrak, of course, is the purchaser of tickets. Amtrak actually recovers more in ticket revenue in the total budget than any other rail passenger system in the world. We should be proud of what Amtrak can accomplish with its limited resources. As Rip has rightly pointed out, their real struggle is with the capital budgeting required to maintain their equipment at a high standard, so that the toilets work and the food is good in the diner, and you have a comfortable ride, and the air conditioning works.
CHARLAYNE HUNTER-GAULT: And that's got to be worked out between Congress and--
WILLIAM WITHUHN: Well, it's just that equipment wears out. If you're going to have a quality railroad system, you need to pay for it. I think the American taxpayers and the riders of Amtrak would very much like to have a good passenger system, and it's simply a shame to let it kind of bumble along with about 75 or 80 percent of its funding need and expect it to run at 100 percent of capacity.
RIP WATSON: Amtrak has made some progress in reducing its deficit, but it still is going to have to make more progress in order to become self-sufficient. It claims it can do that by the year 2002.
CHARLAYNE HUNTER-GAULT: All right. Now, the Conrail--the freight story is just the opposite of that. It's a success story. What's the difference?
RIP WATSON: The difference in the freight railroads is that the freight railroads have had tremendous latitude to reduce their services and to reduce their--the employment that they have. The freight railroads, for example, Conrail once had nearly 100,000 employees. It now has roughly 22,000. The freight railroads--
CHARLAYNE HUNTER-GAULT: And the Congress won't let Amtrak do that, right?
RIP WATSON: Congress--
CHARLAYNE HUNTER-GAULT: Reduce its workload.
RIP WATSON: True. Congress has said we would like to make sure that there are trains running through our district. And the decisions are often made on the basis of politics, as opposed to being made on the basis of financial wisdom.
CHARLAYNE HUNTER-GAULT: In other words, cut his train out in his district but don't cut out mine. Is that what they call the political train?
RIP WATSON: Could be.
WILLIAM WITHUHN: I would say if you look at Amtrak management closely and how they run each of the individual trains, and how they run service in the Northeast corridor, and so on, they run a very efficient system. It's a well-managed system. I think they get every value they can out of the money that's invested. But it's like trying to pay off a $100,000 mortgage when the total amount of money you're going to get in the life of the mortgage is only $80,000. I mean, where's the other 20 million going to come from?
CHARLAYNE HUNTER-GAULT: Right. We've slipped back to Amtrak. But let's go back to the freight system. Now, this merger of CSX and Conrail, what kind of impact is that going to have on the nation's freight system and on the people, you know, ordinary people, does it have an impact?
WILLIAM WITHUHN: Well, of course, one of the things we like to joke about in the railroad business is the only time anybody notices a freight train is when it's blocking your highway or something has happened to cause a delay in your own travel plans. But I think the most immediate effect frankly will be to see fewer 18-wheelers on I-95 going up and down the East Coast. That'll be--
CHARLAYNE HUNTER-GAULT: You mean, you think there will be more consumers or passengers--not passengers but businesses turning to rail?
WILLIAM WITHUHN: Yes. There are some operational bottlenecks that really have prevented the railroads and long distance trucking companies from working together to get more of these rigs off the highways and onto those trains that haul trailers. Most of the other regions of the country have put a tremendous amount of the truck traffic onto railroads, onto these piggyback trains, and we haven't had that benefit in the East.
CHARLAYNE HUNTER-GAULT: Does this have an impact on the--on people in the same way say that the passenger service does? I mean, the positive side of it.
RIP WATSON: Amtrak is a very visible way for people to move from point A to point B. Freight railroads are almost an invisible mode of transportation for the general public, as Bill was saying. But there is extremely strong connections between what freight railroads deliver and what the general public uses. Freight railroads deliver more than half of the coal that's burned in power plants, that provide electricity for homes. Freight railroads move a large amount of agricultural products that are turned into cereal and food products, and they move a tremendous amount of chemicals that are used for packaging.
CHARLAYNE HUNTER-GAULT: So what lies ahead? I mean, with these big mergers, are we going to see 21st century style robber barons, or what?
RIP WATSON: That's a tough question. You could make a very good case that the railroad executives who have made--brought the company this far have done a great job in the financial--on the financial side. Will there be ones in the future? I think it remains to be seen. Today's railroad business executive is much like one in any other industry in the country. Railroads are going through the same kind of mergers that the utility industry is; that the banking industry is; and as a result, those people are forced to operate in the world like everyone else.
CHARLAYNE HUNTER-GAULT: All right. Well, we have to leave it there. Thank you, both of you.