Conrail: What should Uncle Sam do with it? Offer stock to the public
THE critical issue in the current debate over Conrail's future is: Can Conrail be financially viable as an independent railroad? The answer is undeniable: Conrail, one of three large, profitable railroads in the Eastern half of the nation, can continue to be profitable and independent in the long term. The cycle of crises that engulfed Eastern railroads for 25 years is over. Independent parties agree that Conrail can operate profitably as a stand-alone company. The US Railway Association (USRA), which monitors Conrail for Congress, reports that from 1984 through 1988, Conrail would earn net income of nearly $1.4 billion.
Many economists are now more optimistic. Both Conrail and Norfolk Southern -- to which the Department of Transporation wants to sell Conrail -- have achieved financial success by making difficult, pragmatic business decisions. They have eliminated unneeded facilities and jobs, changed track and operational configurations to better match traffic flows, and invested in assets that offer the best return. Both railroads must continue to take these steps as economic conditions require. There is no more magi c in a Conrail/NS combination than in a stand-alone Conrail. But Conrail has achieved and maintained viability in a ``trial by fire'' environment. NS never has had this experience. Nonetheless, if bad times do come to Conrail, will NS really be there with its financial deep pockets to see Conrail through?
The deep-pockets argument is open to question for another reason -- NS's past record of operations in the Northeast. When Norfolk & Western's subsidiary, Dereco Inc., owned the former Erie Lackawanna (EL) and Delaware & Hudson (D&H) Railroads, N&W did not reach into its deep pockets. EL went bankrupt and was included in Conrail only because N&W refused to rescue it; D&H, technically insolvent, was sold.
The Department of Transportation and NS contend that if NS acquires Conrail, the impact on employment will not be dramatic. This is contrary to our industry's experience after mergers have taken place.
Rail labor officials and others have estimated railroad job losses at 10,000 or more if NS acquires Conrail. Who is right? Can we afford to find out?
Conrail's solid commitment to the Northeast and the Midwest -- the focal points of our very existence -- stimulates competition. We must respond to the needs of the industries in that area or we will not carry their freight.
Conrail provides aggressive competition against NS for freight worth $500 million in revenue. The DOT/NS plan would replace this competition with GTI and Pittsburgh & Lake Erie (P&LE), two financially and operationally weak regional carriers, which would be expected to compete against the $7 billion NS/Conrail behemoth by using poorly maintained, low-traffic lines acquired from NS.
John H. Burdakin, president of Grand Trunk Western Railroad, told Congress that plan was ``incapable of rendering long-term viable competition.'' Other railroads, including Chicago & North Western and Illinois Central Gulf, also oppose NS's plan.
One other disturbing aspect of the NS plan is NS's ability to use Conrail's tax and financial benefits to shelter non-Conrail income from federal taxes. The Congressional Budget Office concluded in a preliminary report that the NS plan would deprive the government of about $400 million in tax revenue, compared with Conrail remaining independent.
Today, Conrail is highly respected by shippers. Distribution magazine readers in 1984 voted Conrail the best railroad in the country overall, and eighth best among all transportation companies. NS was not among the top 40.
Morgan Stanley & Co. and other investors propose an alternative to selling Conrail to NS: They would make Conrail a publicly owned corporation by purchasing the goverment's share of Conrail and reselling it to the public.
Labor supports such a public stock offering. The Railway Labor Executives Association, composed of the leaders of 19 labor organizations representing Conrail employees, has endorsed the Morgan Stanley proposal as the best way to return Conrail to the private sector.
No company -- not Conrail, not NS -- can predict the future with certainty. But in responding to a dynamic environment, a company can maintain viability for the long term.
Conrail's solid record of performance in the face of adversity, and our successful approach for remaining financially robust, proves we don't need an outside ``overseer'' to make our aspirations for the company materialize. We've already done more than anyone ever expected could be done. Congress should preserve Conrail as an independent, effective, progressive force in the freight transportation marketplace. The Morgan Stanley plan to return Conrail to the private sector will help achieve that goal.
L. Stanley Crane is chairman and chief executive officer of Consolidated Rail Corporation.