Penn Central Coal Train - The W1nners' Club

The Penn Central Transportation Company, commonly known as Penn Central, was headquartered in Philadelphia, Pennsylvania and operated from 1968 until 1976.

It was created by the 1968 merger of the Pennsylvania and New York Central railroad companies. By 1970 however, the company had filed for what was at the time, the largest corporate bankruptcy in U.S. history.

The Penn Central company was created in response to the challenges being faced by all the railroad firms in the late 1960s. Labour intensive, short-haul services in particular were vulnerable to stiff competition from cars, buses and the trucking industry, especially since the proliferation of the country’s vast interstate highway system.

The railroad industry at the time was also heavily regulated and was as a result, unable to alter the rates it charged shipping customers and passengers. Reducing costs was therefore the only way to become more profitable, but government regulation and agreements with the labour unions heavily restricted which cost-cutting measures could be implemented. Furthermore, the decline of manufacturing and the opening of the Saint Lawrence Seaway, alongside a sharp drop in demand for anthracite coal that was on the whole, the main reason why many of the northeast US railroads existed, all contributed to the urgent need for restructuring that was required by the industry.

It was widely held that the only way to survive was to merge with other complementary railroad companies which would in theory generate economies by eliminating redundant track, staff and reducing taxes – in turn saving tens of millions of dollars each year.

Merger

The New York Central commenced talks with the Pennsylvania Railroad in the early 1960s, and on 1st February 1968, the resultant Penn Central company was formed.

The Penn Central was the USA’s largest corporation and had over $5 billion in assets, 20,000 miles of track, 180,000 employees, and projected earnings of $17 billion in 1968. In the eyes of the general public and Wall Street, Penn Central was a bastion of modernity and stability. The reality however was much different. The newly merged Penn Central was little better off than its constituent parts had been beforehand. On the new company’s first day of operation, it only had $13.3 million in cash reserves. Everything else the company owned existed on paper.

Attempts to integrate operations, personnel and equipment were unsuccessful due to a violent clash in corporate cultures, incompatible computer systems and generous union contracts that loaded the Penn Central with staff it didn’t need and as a result, all of the proposed cost savings that were intended never materialized.

The New York Central had a culture of openness where ideas were freely exchanged and managers didn’t operate in a top-down fashion. At the Pennsylvania Railroad however, there was a clearly defined hierarchy and management was often slow to embrace new ideas and technologies. The merger was intended as a joining of forces between two equals, yet it was ultimately the Pennsylvania Railroad management that eventually dominated the new Penn Central company. The merger was effectively an acquisition of the New York Central by the Pennsylvania Railroad and the NYC management team was subordinate to the PRR management team.

As track conditions deteriorated, the new company’s trains had to run at reduced speeds which caused delays in freight shipments. Staff as a result were forced to work extensive amounts of overtime which caused operating costs to soar even further. Derailments and wrecks also became commonplace and the overall operation of the merged railroad became extremely difficult. Trains could not be routed properly because the separate NYC and PRR computerized routing systems were incompatible. Train cars were often routed to the wrong destinations, or dispatchers could not easily locate the cars once they were sent out into the system.

Penn Central’s poor shipment of potato freight resulted in large amounts of produce rotting before it could be brought to market. In the winter of 1969 for example, the majority of the state of Maine’s potato harvest froze in Penn Central’s Yard but the computer system could not locate the cars. Many potato farmers in Maine went out of business, whilst those who survived the loss of their crop stopped shipping potatoes by rail, thus ending a profitable market for Maine’s railroads.

Bankruptcy

The Penn Central burned through enormous amounts of cash in order to operate from the off. The revenues it generated were not sufficient to cover its operating expenses, but this fact was hidden by the optimistic statements from the management team. In order to operate and keep up its appearances, the Penn Central borrowed money from Wall Street banks and financial firms to prop itself up. Reports filed in 1968, 1969 and 1970, obscured the company’s dire financial status and at the end of the first year of trading, the Penn Central had racked up losses of $150 million.

The next two years were worse still and Wall Street became increasingly alarmed by the situation. The banks began to refuse to lend the company any more money and the Penn Central Board of Directors were forced to file a motion in the Federal bankruptcy court in June 1970.

The American financial system was shocked upon hearing that after only two years of trading, the Penn Central Transportation Company had gone bankrupt.

In our opinion, trying to bring two established entities together and hoping that they will integrate is one of the biggest challenges facing businesses today. Here at The W1nners’ Club we recently hired a new cleaner and the person in question has so far had 3 sick days, gone home early four times due to a sick pet and has taken 2 weeks of pre-booked holiday in the first bloody month!

It’s safe to say that we might end up in the same boat as Penn Central if we don’t get rid of the individual in question as quickly as possible!!

 

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