Conrail Agrees to Split-Up Deal
Conrail and CSX Corp. on Friday announced a deal that would allow CSX and Norfolk Southern Corp. to divide Conrail between them, a plan that would greatly increase rail freight competition in the Northeast and could ultimately remove some truck traffic from interstate highways.
Months of negotiations and regulatory proceedings lie ahead, but CSX Chairman John Snow and NS Chairman David Goode have agreed on the general outlines of the plan. It would split Conrail roughly in half, with both of its buyers gaining high-capacity freight routes into New York from the South and West.
Over the long run, the plan has the potential to lower freight rates markedly--and thus have a stimulating effect on the Eastern economy--because there will be a sudden infusion of competition into the New York area, where Conrail in effect holds a rail freight monopoly.
Norfolk Southern and CSX both have ambitious plans to battle for north-south “intermodal” traffic--truck trailers or marine containers that can ride the rails. Less than 1% of truck trailers now move by rail along the East Coast, by far the lowest percentage of any region. In contrast, railroads estimate that more than 95% of long-distance trucking between Chicago and California moves the bulk of the distance by rail, with trucks providing the final link between freight yard and customer.
In the north-south Eastern freight corridors, such traffic has been harmed by the fact that NS and CSX do not go into New York and must exchange freight with Conrail at Philadelphia or Hagerstown, Md. Conrail has had little economic incentive to dedicate scarce New York terminal capacity to traffic from the south when it can earn more money with longer-distance runs to Chicago and west. Railroads also are notoriously inefficient when they exchange freight, inevitably adding unacceptable delays.
Shippers in the New York area and the port of New York are potential big winners. In fact, one question is whether the likely lower freight rates and more competition into New York will hurt the port of Baltimore.
After a merger, large parts of the New York-New Jersey industrial area would be opened to a free-for-all in which NS, CSX and probably other, smaller railroads would be allowed to serve all shippers even if they do not own a spur line into some particular destination.
Conrail stockholders will get $115 a share, up 64% from the $70 price Conrail’s shares were worth when the battle for its control began Oct. 14. CSX said it will immediately begin negotiations with Norfolk Southern on a final plan, which will be presented jointly to the federal Surface Transportation Board for approval.
The agreement was a bitter ending for Conrail management and Conrail Chairman David LeVan, who had fought to sell the railroad whole to CSX but then encountered a well-funded hostile offer from Norfolk Southern. Soon pressure from big Conrail shareholders, customers, federal regulators, Western railroads and eventually CSX executives themselves forced Friday’s deal.
How many of Philadelphia-based Conrail’s employees would lose their jobs was unclear. In two recent rail mergers, about 5% of employees lost jobs, mainly those in clerical positions. Other types of employees may be unaffected. Railroads are growing, and operating employees such as engineers are in demand.
The agreement would bring full circle a spectacularly successful federal bailout: the creation of Conrail from the lines of the Penn Central and other bankrupt Eastern railroads on April 1, 1976. Over the years, Conrail made itself a lean money-making machine that eventually was sold to the public and then became a takeover target.
