Bankruptcy of Penn Central

Last updated July 18, 2024

American railroad company Penn Central Transportation Company declared bankruptcy on June 21, 1970, two and a half years after its formation by the merger of the New York Central Railroad and the Pennsylvania Railroad. At the time, this was the largest bankruptcy in American history.^[1] Penn Central was responsible for a third of the nation's passenger trains and much of the freight rail in the Northeastern United States, and its failure would have devastating impacts on the Northeast's economy.

Factors leading to the bankruptcy included incompatible corporate cultures among the merger partners, excessive and duplicative rail assets, the departure of industries from the Rust Belt, and the Interstate Commerce Commission–mandated absorption of the bankrupt New York, New Haven and Hartford Railroad at the end of 1968.^[1]

Along with other failed railroads in the Northeast, Penn Central was absorbed by government-formed Conrail in 1976, with a mandate to profitably operate the assets of its bankrupt predecessors. Redundant or unprofitable assets were abandoned or sold, and Conrail succeeded in turning a profit.^[2]

Background

The Penn Central merger combined two historical rivals with incompatible corporate cultures.

Northeastern United States railroads New York Central Railroad and Pennsylvania Railroad decided to merge in the early 1960s, with both companies' stockholders voting in favor of a merger on May 8, 1962. Despite their long history of rivalry and direct competition, and both companies maintaining profitability, the economic conditions of the 1960s convinced both railroads that they needed to merge to survive. Both the NYC and the PRR stressed at Interstate Commerce Commission hearings that without merging, they would be unable to continue profitable operations and, in the words of New York Central president Alfred E. Perlman, "their ability to compete ... [would] continue to decline to the point of ineffectiveness".^[1]^[3]

Beginnings of Penn Central

The Penn Central Company came into existence on February 1, 1968, with the Pennsylvania Railroad absorbing the New York Central and adopting the new name, which was subsequently changed to the Penn Central Transportation Company on October 1, 1969.^[1] From the beginning, issues complicated the new company. The forward-looking NYC leadership, which had worked to build a modern railroad and included many younger people, clashed with the traditionalist Pennsylvania Railroad management. When it became clear that the PRR management style would be continued by Penn Central, disaffected NYC employees jumped to other companies.^[1] Even Penn Central's executives could not work together—chairman of the board Stuart Saunders, from the PRR, allegedly referred to president Alfred E. Perlman from the NYC as "the worst enemy I've ever had in my life; he's cost me untold millions of dollars."^[4]

As traditional rivals that competed for the same traffic, the PRR and NYC had duplicate routes between the same markets. Sufficient freight traffic once existed to justify operating all of these lines, but the deindustrialization trends gripping the Rust Belt meant this was no longer true. These underutilized lines still cost the company money in maintenance and property taxes.^[1] In a retrospective article in 2023, author Georgy Drury summarized the situation by saying, "The PC merger was like a late-in-life marriage to which each partner brings a house, a summer cottage, two cars, and several complete sets of china and glassware—plus car payments and mortgages on the houses."^[1]

For its first year, Penn Central posted a modest loss of $2.8 million. Unfortunately for the company, its losses grew exponentially, such that 1969 saw a loss of close to $83 million, and the railroad closed out 1970 with nearly $326 million in deficit.^[1]

Bankruptcy

Penn Central's only hope of avoiding bankruptcy was government intervention, and the Nixon administration had contemplated a $200 million bailout via the Defense Production Act, reassigning funding intended for the United States Navy—this was to be followed by a $750 million general bailout for troubled railroads. This ran into opposition among the United States Congress, and the United States Department of Transportation refused to go along with the larger bailout, forcing the plan to be scrapped. Left with no alternatives, Penn Central declared bankruptcy on June 21, 1970.^[5]

Government intervention

The federal government was ultimately forced to intervene out of economic necessity and in response to public demand. Penn Central was responsible for extensive intercity and commuter passenger train service, and despite industrial decline also carried significant quantities of freight. One of the first interventions was the formation of government-controlled Amtrak on May 1, 1971, which relieved Penn Central of the responsibility to operate unprofitable intercity passenger services.^[1]

In 1974, the Penn Central reorganization court came to the conclusion that Penn Central was impossible to reorganize. Under the authority of the Regional Rail Reorganization Act of 1973, the government created the United States Railway Association with a mandate to develop a comprehensive plan to preserve rail transportation in the Northeast. The USRA responded with its Final System Plan, which created a government-owned railroad called the Consolidated Rail Corporation, or Conrail, which was to absorb much of Penn Central's rail assets, plus those of six other bankrupt railroads. The new company began operations on April 1, 1976.^[1] Where possible, Conrail sold off rail lines to other, profitable railroads, and abandoned lines that had no hope of economic viability.^[2]

Legacy

Despite the Conrail takeover, Penn Central continued to exist, though it was no longer running trains. The revived Penn Central Corporation held significant real estate assets, ranging from the oil industry to hotels and amusement parks, along with more than 5,000 miles (8,000 km) of former rail lines not included in Conrail or sold to other companies.^[6] Penn Central Corporation evolved into a financial services company and renamed to American Premier Underwriters in 1994.^[7]

Conrail was jointly purchased by eastern railroads CSX Transportation and Norfolk Southern Railway in 1999, with three shared assets areas operated by Conrail Shared Assets Operations, a subsidiary of CSX and NS.^[2]

Notes

1 2 3 4 5 6 7 8 9 10 Drury, George (May 1, 2023). "Penn Central history remembered". Classic Trains Magazine. Retrieved August 12, 2023.
1 2 3 "Conrail history remembered". Classic Trains Magazine. April 7, 2022. Retrieved August 12, 2023.
↑ United States Securities and Exchange Commission 1972, pp. 16–17.
↑ United States Securities and Exchange Commission 1972, pp. 23–24.
↑ "$200 Million Rescue Attempt Fails". The Vancouver Sun. TPS. June 22, 1970. p. 22.
↑ "Penn Central is Alive, and Well, on its Own". Spartanburg Herald. UPI. October 25, 1978. p. A3.
↑ "Companies betting on name game". The Albany Herald. Associated Press. August 7, 1994. p. 2D.

Related Research Articles

The Penn Central Transportation Company, commonly abbreviated to Penn Central, was an American class I railroad that operated from 1968 to 1976. Penn Central combined three traditional corporate rivals, all united by large-scale service into the New York metropolitan area and New England and Chicago. The new company failed barely two years after formation, the largest bankruptcy in U.S. history at the time. The Penn Central's railroad assets were nationalized into Conrail along with the other bankrupt northeastern roads; its real estate and insurance holdings successfully reorganized into American Premier Underwriters.

Metro-North Railroad, trading as MTA Metro-North Railroad, is a suburban commuter rail service operated by the Metropolitan Transportation Authority (MTA), a public authority of the U.S. state of New York. Metro-North serves the New York Metropolitan Area, running service between New York City and its northern suburbs in New York and Connecticut, including Port Jervis, Spring Valley, Poughkeepsie, Yonkers, New Rochelle, Mount Vernon, White Plains, Southeast and Wassaic in New York and Stamford, New Canaan, Danbury, Bridgeport, Waterbury, and New Haven in Connecticut. Service in Connecticut is operated under contract with the Connecticut Department of Transportation. Metro-North also provides local rail service within the New York City boroughs of Manhattan and the Bronx.

The Pennsylvania Railroad, legal name The Pennsylvania Railroad Company, also known as the "Pennsy", was an American Class I railroad that was established in 1846 and headquartered in Philadelphia. It was named for the commonwealth in which it was established. At its peak in 1882, the Pennsylvania Railroad was the largest railroad, the largest transportation enterprise, and the largest corporation in the world.

<span class="mw-page-title-main">New York Central Railroad</span> American Class I railroad (1853–1968)

The New York Central Railroad was a railroad primarily operating in the Great Lakes and Mid-Atlantic regions of the United States. The railroad primarily connected greater New York and Boston in the east with Chicago and St. Louis in the Midwest, along with the intermediate cities of Albany, Buffalo, Cleveland, Cincinnati, Detroit, Rochester and Syracuse. New York Central was headquartered in New York City's New York Central Building, adjacent to its largest station, Grand Central Terminal.

The New York, New Haven and Hartford Railroad, commonly known as The Consolidated, or simply as the New Haven, was a railroad that operated principally in the New England region of the United States from 1872 to December 31, 1968. Founded by the merger of the New York and New Haven and Hartford and New Haven railroads, the company had near-total dominance of railroad traffic in Southern New England for the first half of the 20th century.

MARC is a commuter rail system in the Washington–Baltimore area. MARC is administered by the Maryland Transit Administration (MTA) and operated under contract by Alstom and Amtrak on track owned by CSX Transportation (CSXT) and Amtrak. In 2023, the system had a ridership of 3,860,600, or about 10,800 per weekday as of the first quarter of 2024, less than pre-COVID-19 pandemic weekday ridership of 40,000.

The Erie Lackawanna Railway, known as the Erie Lackawanna Railroad until 1968, was formed from the 1960 merger of the Erie Railroad and the Delaware, Lackawanna & Western Railroad. The official motto of the line was "The Friendly Service Route".

The Lehigh Valley Railroad was a railroad in the Northeastern United States built predominantly to haul anthracite coal from the Coal Region in Northeastern Pennsylvania to major consumer markets in Philadelphia, New York City, and elsewhere.

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 SEPTA Regional Rail system is a commuter rail network owned by SEPTA and serving the Philadelphia metropolitan area. The system has 13 branches and more than 150 active stations in Philadelphia, Pennsylvania, its suburbs and satellite towns and cities. It is the sixth-busiest commuter railroad in the United States. In 2016, the Regional Rail system had an average of 132,000 daily riders and 118,800 daily riders as of 2019.

Englewood Station or Englewood Union Station in Chicago, Illinois' south side Englewood neighborhood was a crucial junction and passenger depot for three railroads – the Chicago, Rock Island and Pacific Railroad, the New York Central Railroad, and the Pennsylvania Railroad – although it was for the eastbound streamliners of the latter two that the station was truly famous. Englewood Station also served passenger trains of the New York, Chicago and St. Louis Railroad, which operated over the New York Central via trackage rights.

The Indiana Northeastern Railroad is a Class III short line freight railroad operating on nearly 130 miles (210 km) in southern lower Michigan, northeast Indiana and northwest Ohio. The Indiana Northeastern Railroad Company began operations in December 1992 and is an independent privately owned company. As of 2017 the railroad hauled more than 7,000 carloads per year. Commodities moved by the railroad include corn, soybeans, wheat and flour. It also handles plastics, fiberboard, aluminum, copper, coal, perlite, stone, lumber, glass, rendering products, as well as agricultural fertilizers and chemicals.

The Pioneer Valley Railroad, founded in 1982, is a Class III short line freight railroad operating the former Conrail trackage in the western part of Massachusetts in towns of Westfield, Holyoke, and Southampton. The railroad has been owned by the Pinsly Railroad Company since its founding, with headquarters in Westfield, Massachusetts.

James Miller Symes, was the 13th president of the Pennsylvania Railroad.

The Vineland Secondary is a rail line owned, operated and maintained by Conrail Shared Assets Operations for the use of CSX Transportation and Norfolk Southern Railway. It begins at Pavonia Yard in Camden and heads south, with a spur serving the Port of Camden. At Woodbury it junctions with the Salem Branch and Penns Grove Secondary, and continues to Millville, passing through namesake Vineland. At its southern end it connects to the OmniTRAX-owned Winchester and Western Railroad. The line is used exclusively for freight, however, the northern portion is planned to be used for the proposed Glassboro–Camden light rail line.

The Lehigh Line is a railroad line in Central New Jersey, Northeastern Pennsylvania, and the Lehigh Valley region of eastern Pennsylvania. It is owned and operated by the Norfolk Southern Railway. The line runs west from the vicinity of the Port of New York and New Jersey in Manville, New Jersey via Conrail's Lehigh Line to the southern end of Wyoming Valley's Coal Region in Lehigh Township, Pennsylvania.

The Cleveland Line is a railroad line owned and operated by Norfolk Southern Railway (NS), in the U.S. states of Ohio and Pennsylvania. The line runs from Rochester, Pennsylvania, to Cleveland, Ohio, along a former Pennsylvania Railroad line.

The Baltimore, Chesapeake and Atlantic railroad, nicknamed Black Cinders & Ashes, ran from Claiborne, Maryland, to Ocean City, Maryland. It operated 87 miles (140.0 km) of center-line track and 15.6 miles (25.11 km) of sidings. Chartered in 1886, the railroad started construction in 1889 and cost $2.356 million ($₂₀₂₄=79,895,000).

The Wilmington and Northern Branch is a partially-abandoned railway line in the states of Delaware and Pennsylvania. It was constructed between 1869 and 1870 by the Wilmington and Reading Railroad, a predecessor of the Wilmington and Northern Railroad. At its fullest extent it connected Reading, Pennsylvania, with Wilmington, Delaware. The Philadelphia and Reading Railway leased the line in 1900. With the Reading Company's bankruptcy and the creation of Conrail in 1976 the line's ownership fragmented, and the section between Coatesville, Pennsylvania, and Birdsboro, Pennsylvania, has been abandoned.

References

United States Securities and Exchange Commission (August 1972). The Financial Collapse of the Penn Central Company: Staff Report of the Securities and Exchange Commission to the Special Subcommittee on Investigations (PDF) (Report). Retrieved August 12, 2023.