Penn Central Transportation Company - Background of The Merger

Background of The Merger

The Penn Central (PC) was created as a response to challenges faced by all three railroads in the late 1960s. The northeastern quarter of the United States, these railroads' service area, was the most densely populated region of the U.S. While railroads elsewhere in North America drew a high percentage of their revenues from the long-distance shipment of commodities such as coal, lumber, paper and iron ore, Northeastern railroads traditionally depended on a much more heterogeneous mix of services, including:

• Commuter rail service
• Passenger rail service
• Railway Express Agency freight service
• Break-bulk freight service in boxcars
• Consumer Goods and perishables, such as fruit and dairy products

These labor-intensive, short-haul services were all vulnerable to competition from automobiles and buses (for the first two services) and the trucking industry (for the remaining three), particularly where facilitated by four-lane highways. In 1956, Congress had passed the Federal-Aid Highway Act of 1956. This law authorized construction of the massive Interstate Highway System, which provided an economic boost to the trucking industry.

Another problem was the inability to respond to market conditions. At the time, American railroads were overregulated by the ICC, which did not allow the companies to change the rates it charged both shippers and passengers. Reducing costs was the only way to survive and become profitable, but the ICC capriciously restricted what cost-cutting could take place. A merger seemed to be a promising way out of a difficult situation.

The NYC and PRR had been significant archrivals for some time. West of the Allegheny Mountains, the two systems duplicated each other at almost every major point; east of those cites, the two hardly touched. Both railroads had physical plant not being utilized to capacity (NYC was in better shape, however); both had a heavy passenger business; neither was earning much money. Talks of a merger had been announced in 1957.

The initial industry reaction was utter surprise. "Who? Why?" Every merger proposal for decades had tried to balance the NYC against the PRR and create two, three, or four more-or-less equal systems in the east. Traditionally, the PRR had been allied with the Norfolk and Western Railway (N&W) and the Wabash Railroad; the NYC with the Baltimore and Ohio Railroad (B&O), the Reading Railroad and the Delaware, Lackawanna and Western Railroad (DLW). Any remaining players were swept up with the Erie Railroad and the Nickel Plate. In addition, tradition favored end-to-end mergers rather than those of parallel railroads.

Planning and justifying the merger took nearly a decade, during which time the eastern railroad scene had changed dramatically, in large measure because of the impending merger of the NYC and PRR. The Erie merged with the DLW to create the Erie Lackawanna Railway in 1960, the Chesapeake and Ohio Railway acquired control of the B&O, and the N&W took in several roads, including the Nickel Plate and the Wabash. Despite this, the merger was finalized on February 1, 1968, with the NH being tacked on the following January.