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

We now wrap up our story of the Erie Lackawanna (EL) railroad, with the tale of the 1960s and 70s. While the operation was far from America's largest, the problems it encountered were little different from other railroads and in the retelling of this story there are echoes of today's Corporate America.

From 1959 to 1962, the EL's operating revenue dropped from $226 million to $210 million, while long-term debt hit $322 million. The cost of operations in New Jersey and New York City were huge, and the company probably should have cut the lines off at Port Jervis, NY (across the New Jersey border).

In the early 60s, the EL was going to the Interstate Commerce Commission (ICC) for loan guarantees, though it was either turned down outright or received far smaller amounts than desired. [Similar to the problems with the major airlines these days.] The debt was coming due and taxes had to be paid. Consequently, one of the things that suffered was maintenance, which would have an adverse effect down the road.

Meanwhile, as I noted in our last installment, both the Erie and Lackawanna lines derived most of their revenue from freight traffic, but they nonetheless had extensive passenger service into New York and New Jersey. For its part, between 1928 and 1931 the Lackawanna had spent $11 million to electrify most of its tracks, but the revenue and efficiency gains were quickly offset by the introduction of both the Holland Tunnel and George Washington Bridge, which were built around the same time. Both the Erie and Lackawanna (remember, this was pre-merger) lost a lot of midday and casual travelers to auto traffic upon completion of these projects.

Except during World War II and the fuel shortages of that time, rail passenger traffic continued to decline. In 1947 the Lackawanna, for example, served 38,000 each weekday, but by 1957 that total was 27,000 as the introduction of local shopping centers also contributed to the surge away from the rails. By the mid-50s, the Erie was losing $2 million on passenger traffic and the Lackawanna $3 million. Of course operating costs were rising all the time folks were fleeing.

And then there was the issue of property taxes. Particularly in New Jersey, this was a huge problem in the 50s / 60s, just as it is today, for that matter. Railroads were assessed at 100% of true value, while other real estate was assessed at around 28%. For example, the Lackawanna paid $2.5 million in taxes in 1958 to Hudson County (Hoboken and Jersey City), leading one railroad official to say "confiscatory taxes have steadily depleted Lackawanna's cash and resources as tribute."

At least Lackawanna's top management lived in New Jersey and could put pressure on the politicians, while Erie's was in Cleveland. New Jersey Governor Robert Meyner had proclaimed, "The railroads cannot continue to take the stand that they should operate passenger services at a profit. They assume the obligation of carrying both passengers and freight in their respective franchises. The level of freight rates has been set to allow for passenger income losses." Great.

By early 1966, though, the EL's chairman, William White (who had taken over in 1963), threatened to discontinue passenger service in both New Jersey and New York unless he got some tax relief, for starters, because the railroad couldn't handle its debt load, let alone come up with the $80 million needed to modernize the service by replacing the equipment and rehabbing facilities. The New Jersey Board of Public Utilities did grant some tax concessions and allowed the EL to shut down train service to some outlying or little served communities, which led to a reduction in the number of trains by 30-50% per day. The Erie, which had lost $17 million in 1963, made $8 million in '65 and appeared to be on the right track?pun intended.

In fact, things looked so rosy that Value Line, the financial newsletter, commented thusly on the financial picture in early 1966: "This is not an impressive profit by most standards, but for Erie it is nothing less than sensational when one realizes that this was the first March quarter in which the company had earned a profit since 1957." William White and his fellow officers rightly garnered the credit.

But White suddenly died of a heart attack in April 1967, a real blow to the railroad, and one year later Jack Fishwick was appointed chairman. Fishwick was the president of Dereco, Inc. a holding company that was the creation of Charles Bergmann, a leading bond trader on Wall Street. The name stood for Delaware & Hudson, Erie Lackawanna, Reading, and Jersey Central (though the leading line and parent was Norfolk & Western).

Erie would make money in 1968 and 1969 and it redeemed a lot of debt as well, thanks in large part to a surge in freight revenues. But then EL lost $11 million in 1970 as freight traffic suddenly dried up due to the merger of the New York Central and Pennsylvania Railroads. The new 'Penn Central' pushed around the smaller rails like EL.

Erie Lackawanna also wasn't helped by a 1967 decision by the Post Office Department to cancel contracts for Railway Post Office service on intercity trains, which had helped support passenger service. Yes, passenger service continued to bleed for the EL and in 1970, after 87 continuous years, the Erie even had to discontinue The Lake Cities train between New York and Chicago.

Of course it didn't help that by the early 1970s the nation's economy was hitting a Greenspan-like "soft spot" and for marginal borrowers like the EL a full-blown credit crunch was underway. After a small gain in 1969, the railroads of the "Eastern District" in the U.S. lost a staggering $376 million in At the same time wages were continuing to rise, up 25% for the 3-year period between 1968 and 1971. It was a recipe for disaster, and then Agnes hit.

It was June 1972 when an erratic storm developed near western Cuba and swept across Florida. After dumping lots of rain on the southern states on the 18th and 19th, Hurricane Agnes appeared to lose much of its punch. But, instead of breaking apart or heading out to sea like 95% of the storms of this ilk, Agnes intensified as it plodded up the coast. By the evening of June 20, a cold front combined with the storm to flood southern New York State and northern Pennsylvania. And then Agnes just hung around, like the relative that won't leave, for three days. The human toll was some 118 dead, while property damage exceeded $1.5 billion.

All of the railroads, who could ill afford such a disaster, were impacted, including the Penn Central, Lehigh Valley, and Reading, but it was the Erie Lackawanna that took the biggest direct hit. Portions of roadbed along 200 miles of the main line were washed out. Some of them were 4,000-feet long, while 16 of its bridges were either damaged or destroyed. The main line wouldn't reopen for three weeks and it was far longer for the rest of the network.

The loss for the already fragile EL was about $11 million and on June 26 it was forced to seek protection in the bankruptcy courts. By April 1, 1976, the Erie Lackawanna ceased operations as an independent rail line as it was folded into the "quasi-public" Consolidated Rail Corporation, "Conrail," while the next 16 years saw various court fights over the surprisingly considerable estate.

Lastly, some of us who rode the Erie Lackawanna in the 70s, or for decades earlier, will always remember the old 1920s-style cars with the wicker seats. Our particular line into New York wasn't modernized and we had to put up with these non- airconditioned sardine cans. Many a dry cleaning bill was unnecessarily high in the summertime, as you can imagine. Come to think of it, we all should have been part of the bankruptcy proceedings!

Wall Street History will return January 10.

Source: "Erie Lackawanna: Death of an American Railroad, 1938-1992" H. Roger Grant

Brian Trumbore