The Erie Lackawanna Railroad, Part II
Brian Trumbore
President/Editor, StocksandNews.com

The more I get into the history of the Erie Lackawanna Railroad, the more I realize it's a good case study for not just the railroad industry, but also all business in general.

Last week we explored the origins of the Erie Railroad and the creepy characters that flocked to it in the boom of the 1850s and 60s. This time we are advancing one hundred years, as the Erie had finally reached profitability, after its bankruptcy back in 1877.

Up front, I would like to acknowledge author H. Roger Grant and his book "Erie Lackawanna: Death of an American Railroad, 1938-1992." It is the major source for all that follows.

Throughout most of the 1950s, the Erie held its own, which wasn't too hard a thing considering that the nation's economy was doing quite well. Then in 1955 the Erie and Lackawanna (formerly the Delaware, Hudson & Lackawanna Railroad) began to coordinate service. Both were primarily freight lines (passenger traffic was secondary) and ran basically parallel tracks in large swaths of their operations, so an eventual merger made sense. For those of you who have used the PATH trains ("Hudson & Manhattan," back in the 50s) to travel between New Jersey and Manhattan, the Erie and Lackawanna combined operations on October 13, 1956 (in case you want to celebrate that anniversary with a glass of champagne each year). The Erie moved its main operations to Hoboken from Jersey City (Pavonia), where the Lackawanna already had its hub.

It was in September of 1956 that formal merger talks began and a third line was initially involved, the Delaware & Hudson, which operated primarily in New England and Canada. But the D&H withdrew from talks in April 1959 (these guys were moving slow) and both Erie and Lackawanna were mighty upset. Said one official, "It's like your nice, rich uncle deciding to leave you out of his will?You know that you're going to have to be on your own." The E&L proceeded with talks nonetheless.

But as the two were discussing their union, overall, there were big changes taking place in the U.S. economy. Railroads were losing freight traffic to airlines, barges, pipelines and trucks, the latter particularly as the interstate highway system was built out. The share of intercity freight that went by rail dropped from 68% in 1944 to 44% in 1960. Intercity passenger traffic plunged from 74% to 27% over the same period. Meanwhile, dieselization and other advances in technology were reducing the need for many jobs, and this caused labor strife. Not a great need for firemen, for example.

Merger talks between the Erie and Lackawanna ground on, and by 1959 the red ink was beginning to pile up with a softening national economy. Finally, on October 17, 1960, the Erie- Lackawanna was formed (it then kept the hyphen until 1963, in case you were interested).

But wait, hold on a second. The E-L was seeking to eliminate 1,600 jobs and transfer another 1,700 over a 5-year period, but the Brotherhood (of all railroad-related unions) was none too pleased. [It should be noted, however, that the unions had very attractive severance packages as part of the labor negotiations of the 1940s.] The court ruled that the company could not abolish any jobs or transfer workers until further hearings were held, so the merger, while official, really wasn't.

Then the Supreme Court stepped in, ruling in January 1961 that the new operation could indeed combine its workforces, but the Supremes had a change of heart and issued a restraining order in February. Then in May, the robed ones ruled that, yes, the merger could go through and yes, the Erie-Lackawanna could reduce its workforce because of the adequate compensation provisions in the Brotherhood's contracts. So it turns out that according to the courts the merger was finalized in June 1961.

Well, both parties probably wish it hadn't been, because in '61 the new entity lost a staggering $26.5 million. All Eastern railroads combined, for that matter, lost $100 million that year. The Erie-Lackawanna followed up this miserable performance with another $16.6 million loss in 1962, thanks to a still soft national economy and the aforementioned general patterns in both commercial and passenger traffic.

In addition, by the early 60s you had a large decline in hard- and soft- coal traffic because of the development of alternative fuel sources. This had been a huge revenue generator for the rails since the beginning, while at the same time the grain export rail traffic was suffering due to the opening of the St. Lawrence Seaway in 1959. Another contributing factor to the diminishing influence of the rails was the fact that Europe's recovery from World War II was now in full swing and the U.S. was importing more goods, which meant that export tonnage was dropping.

But the E-L still should have been doing better than it was, though CEO Milton McInnes was moved to say, "If you merge two losers, you get a bigger loser."

And a good example of the culture clash that existed, at least from an accounting standpoint, is the following description of how some corporate practices differed between the two railroads, as stated by Curtis Bayer, a former purchasing agent for the Lackawanna, in a 1962 industry speech.

"To begin: In the one company the monthly inventory balance statement was prepared in its entirety by the Accounting Department [Lackawanna].
"In the other company this statement was prepared in the Stores Department [Erie].

"In the one company the preparation of vouchers covering invoice payments for materials purchased, was jointly done by both the Stores and Accounting Departments [Lackawanna].
"The Purchasing Department of the other company carried out this function [Erie].

"In one company credit memorandums were held in the Purchasing Department to be deducted from the next invoice of the supplier concerned [Lackawanna].
"In the other company the Stores Department issued collection bills against credit memorandums received [Erie].

"One company's Accounting Department priced the charge-out tickets received for materials issued [Lackawanna].
"In the other company the Stores Department priced the charge- out tickets [Erie].

"In the one company invoices received were forwarded to the department receiving the materials for certification or approval [Lackawanna].
"In the other company all departments receiving materials prepared a receiving record which was forwarded to the Stores Department for matching with the invoice covering such material [Erie].

"Both companies followed an entirely different policy for placing a value on secondhand and repaired materials. In this way they were as far apart as the poles."

Oh, Mr. Bayer went on and on in similar fashion, but I think you get the point. As he argued these dissimilarities should have been considered before the merger. Because they weren't, the difficulties only escalated.

As for the executives themselves, however, they had it good. Real good, to say the least. In interviews that author H. Roger Grant conducted with various officials, including the aforementioned Bayer, the following picture emerges.

"The Erie created a pleasant environment for its executives. 'If you played the game, you had a comfortable job.' Examples abound. Top employees enjoyed club memberships that were gratis, whether or not these perks fostered business. The treasurer, Jasper Van Hook, for one, belonged to a prestigious Cleveland country club, but he never entertained anyone who generated income for the railroad. Excessive drinking and gambling routinely occurred in office cars, even during inspection trips. Attendants 'pulled the blinds and the good times began?not a great idea if the point was to see the property.' Apparently few officers paid for their meals. '(They were) just put on Uncle Erie's tab.' The head of the dining car service for years sent turkeys at Thanksgiving and Christmas to officials and then billed the company."

Darn. I wish I was an exec with the railroad back then. Sounds like a helluva good time, don't you think? Of course it's also similar to what goes on in Corporate America today. The more things change, the more they stay the same.

We'll try and wrap up the story of the Erie-Lackawanna next week.

Merry Christmas.

Brian Trumbore