This paper on railroad mergers was my English research project in my Junior year of high school. This is very informative paper, and I have added a few relevant pictures to it.
Railroad Mergers in the 20th Century
by Robert West
Freight railroads in the United States have been proposing mergers since the beginning of this century. While many of the mergers of the past were intended to ensure the survival of the railroads, the mergers of today make successful railroads even more successful.
In 1887, Congress passed the first of many laws regulating the railroads. The Interstate Commerce Act was intended to limit the power of America's railroads. The Interstate Commerce Commission (ICC) was created to act in the best interest of the economy and the public's safety. One of the ICC's duties was to approve merger proposals. (Hollingsworth/Whitehouse, 1977)
At the beginning of the 20th century, the Sherman Anti-Trust Act of 1890 was used to prevent railroads from being able to merge. The law was used against James J. Hill's control of the Great Northern, Northern Pacific, and Burlington railroads in 1904. In 1912, the law was used again to stop Edward H. Harriman's control of the Union Pacific and Southern Pacific railroads. This law also prevented other mergers from being attempted. (Blaszac, 1997)
The Transportation Act of 1920 assigned the ICC to create a plan to merge America's railroads into several large, competitive routes. The railroads, however, often disagreed with the plan and proposed their own mergers. Some of these mergers were approved by the ICC, but others were not. (Blaszac, 1997)
The Transportation Act of 1940 was essentially the opposite of the Transportation Act of 1920. This new law left the merger proposals up to the railroads. If the railroads proved that the benefits of the merger would outweigh any monopolistic results and gained the approval of the ICC, the Sherman Act could not prevent the merger. (Blaszac, 1997)
Many of the mergers resulting from the Transportation Act of 1940 were what are called "parallel" mergers. A parallel merger is a merger in which railroads from the same area of the country are combined into one single railroad. Some parallel mergers included the Norfolk and Western and the Virginian in 1959, the Erie Lackawanna in 1960, the Seaboard Coast Line in 1967, and the Burlington Northern in 1970. (Blaszac, 1997)
The ICC was not concerned with these parallel mergers ending competition between railroads because other forms of transportation had taken the railroads' place. Shipping and trucking companies were threatening the railroads' survival, and some railroads, beginning with the New Haven in 1961 and later including the Boston and Maine, the Erie Lackawanna, the Lehigh Valley and the Reading, were forced into bankruptcy. (Hollingsworth/Whitehouse, 1977)
In 1968, the Pennsylvania Railroad, the New York Central, and the New Haven merged to form Penn Central. The railroad suffered from unsatisfied customers, bad track, and over 22 derailments every day. It was also unable to achieve the profitability and savings it had expected. (Blaszac, 1997) Penn Central was forced to declare bankruptcy on June 21, 1970. (Hollingsworth/Whitehouse, 1977)
In response to Penn Central's bankruptcy, the government passed the Rail Revitalization and Regulatory Reform Act of 1975. (Hollingsworth/Whitehouse, 1977) This law merged Penn Central with five other bankrupt railroads to form the Consolidated Rail Corporation, later called Conrail, in 1976. Conrail, like the national passenger railroad Amtrak that was created in 1971, was funded by the federal government. Other railroads were unable to make a profit from trackage rights (the ability to operate on another railroad's tracks) over Conrail. As a result, Conrail had little competition and had become successful by 1983. The government began looking for a way to make Conrail a privately owned railroad. Congress first considered selling Conrail to another railroad, but eventually it was decided to make Conrail an independent company. The government's stock was sold to the public in March 1987. (Blaszac, 1997)
The parallel railroad mergers of the 1960s and 1970s, such as those that created Penn Central and Conrail, were intended to ensure the survival of America's railroads. On the other hand, the mergers of the 1980s and 1990s have been used to make successful railroads more successful. This change has been made possible by changes in the government's regulation of railroads.
One of the primary results of the government's reform of railroad regulations was the Staggers Act of 1980. The Staggers Act stated that rail service and rates would be determined by competition and the free market. This meant that railroads could set their own rates and could set them to compete with other railroads. (Blaszac, 1997) Also in 1980, interstate trucking was deregulated. Railroads were now able to compete with the cost of shipping by truck as well as other forms of transportation, such as barges and pipelines. (Frailey, 1995)
The ICC changed its policy for approving mergers in the 1980s. Instead of approving parallel mergers as it had before, it now began approving "end-to-end" mergers. End-to-end mergers combine two or more railroads from different areas of the country into a single railroad serving a larger area. These mergers expanded railroads into areas they had not been able to reach before. (Blaszac, 1997)
Another change was the replacement of the Interstate Commerce Commission with the Surface Transportation Board (STB) in late 1995. (Blaszac, 1997) The STB seems to have a different stand on mergers than the ICC had. Since the STB was created, mergers have reduced the number of major railroads in the United States from seven to four.
In 1978, Southern Pacific started a series of mergers in the East. Southern Pacific attempted to buy Seaboard Coast Line. Seaboard Coast Line was not interested in merging with Southern Pacific and joined with Chessie System to form the CSX holding company in 1980. The railroads themselves merged in 1986. In 1982, the Norfolk and Western merged with the Southern Railway to form Norfolk Southern. This made Norfolk Southern, CSX, and Conrail the three major Eastern railroads. (Blaszac, 1997)
Mergers occurred in the West as well. Burlington Northern purchased the Frisco in 1980. Union Pacific merged with the Missouri Pacific and the Western Pacific in 1982, and purchased the Missouri-Kansas-Texas in 1988. After a failed attempt to have a parallel merger with Santa Fe in 1986, Southern Pacific merged with Rio Grande in 1988. In 1995, Union Pacific merged with the Chicago and North Western in 1995. This left only four major railroads in the West. (Blaszac, 1997)
These new mergers made the railroads more successful. Rail productivity increased by 157 percent from 1983 and 1993. Revenue increased by 32 percent and prices dropped 40 percent. (D'Aulaire, 1995) As compared to 1980, railroads deliver 31 percent more ton-miles (one ton moved one mile), make 1.5 times as much money, and pay their employees twice as much. (Frailey, 1995) During the week of December 27, 1997, railroads moved 9 percent more carloads than the same time one year earlier. (Railway Age, 1998) When adjusted for inflation, the average railroad rate dropped 46.4 percent between 1982 and 1996. Without the inflation adjustment, the rates still dropped 15.6 percent. (Surface Transportation Board, 1998)
Recently, a number of large mergers have taken place. The first of these mergers was the Burlington Northern merging with the Santa Fe to form the Burlington Northern and Santa Fe Railway or BNSF. The railroads merged on December 31, 1996, after their holding companies had merged on September 22, 1995. (Blaszac, 1997)
On September 11, 1996, Union Pacific merged with Southern Pacific to form the largest railroad in America, having 36,500 miles of track. (Blaszac, 1997) As part of the merger agreement, BNSF purchased 335 miles of Union Pacific track and gained trackage rights to an additional 3,500 miles. (Keefe, 1995) The merger, however, brought some problems for Union Pacific. A lack of locomotives and employees caused trains to be backed up in Texas in late 1997. The problem spread across the railroad causing problems for shippers throughout the West. In addition, the Federal Railway Administration (FRA) held a safety inspection on the Union Pacific due to a number of railroad accidents resulting in deaths. The FRA found that Union Pacific's employees were not getting enough sleep and were not given adequate safety training. (Lynch, 1997) The FRA fined Union Pacific $131,000 for safety violations. (Oregonian, 1998) Union Pacific also lost $1 billion in lost business due to its service problems and cost the national economy $4 billion. (White, 1998) Problems similar to these forced Penn Central into bankruptcy in 1970, however, Union Pacific had managed to solve most of the problems it had faced within a year.
Despite the problems Union Pacific faced due to its merger with Southern Pacific, other railroads are still pursuing mergers. Norfolk Southern and CSX tried to outbid each other's offers to merge with Conrail. (Blaszac, 1997) They eventually decided to split the railroad in two. Norfolk Southern will receive 58 percent while CSX will get 42 percent. (Trains Magazine, 1997) Also, on March 25, 1999, the Surface Transportation Board approved a merger of the Canadian National and the Illinois Central. (Surface Transportation Board, 1998)
Statistics have shown that rail service has improved and railroads have become more successful since the mergers of the 1980s. Also, the fact that Union Pacific has survived its merger problems and that other railroads are still pursuing mergers in spite of those problems proves that mergers bring success. The new mergers will undoubtedly make the railroads involved become more successful and future mergers may result in true transcontinental railroads successfully competing with each other for business.
Blaszak, M. (1997, April). Megamergers to the far horizon. Trains, pp. 36-46.
Carving up Conrail. (1997, June). Trains, pp. 26-27.
D'Aulaire, P. & E. (1995, June). Smithsonian, pp. 37-49.
Frailey, F. (1995, November). Colossus of Roads. Trains, pp. 42-53.
Hollingsworth, J. & Whitehouse, P. (1977). North American Railways, Bison Books. pp. 20-21, 33-35.
Industry Indicators. (1998, February). Railway Age.
Keefe, K. (1995, December). Carving up the West. Trains, pp. 16-18.
Lynch, J. (1997, October 12). Service Derailment. Oregonian.
Rail rates continue multi-year decline. (1998, February 26). Surface Transportation Board.
Surface Transportation Board, in open voting conference, approves common control of Canadian National and Illinois Central. (1999, March 25). Surface Transportation Board.
Union Pacific will face loss, fine. (1998, February 27). Oregonian.
White, M. (1998, December 6). One year after debacle, Union Pacific gains ground. Oregonian.
Since I originally wrote this, Union Pacific has continued to work past the problems caused by the merger with Southern Pacific, Conrail was successfully split between Norfolk Southern and CSX, and Canadian National expanded even more with the purchase of the regional Wisconsin Central in October 2001.
© Robert D. West: 1999, 2003.