Railyard Rumbles

By Stephen Koepp

The U.S. Government bought itself a lot of headaches during the 1970s when it created Conrail, the freight rail system in the East, and Amtrak, the national passenger railroad. At the time, the entire rail business was chugging toward the scrap pile. More than a decade of refurbishing and streamlining, however, has given railroading a shiny new look. Amtrak and Conrail, stoked by $18 billion in subsidies, have rebuilt their equipment and images.

Now the U.S. faces what may be an even tougher task than running a railroad: getting out of the business. In an effort to uncouple itself from Conrail and Amtrak, the Reagan Administration is causing a commotion among the country's railroads and many of the people who use them.

Transportation Secretary Elizabeth Dole set off howls of protest last week when she announced that the winner of a lengthy bidding battle to buy 85% of Conrail is Norfolk Southern railroad of Norfolk, Va. (The remaining 15% is owned by Conrail employees.) The $1.2 billion purchase would unite two of the three dominant eastern railroads and forge the largest U.S. freight line, with 34,000 miles of track. The third big railroad, CSX, which runs the Chessie and Seaboard lines, complained that the merger would create a giant that would flatten rivals like pennies on a rail. Some companies who ship by train agreed, contending that fewer railroads would mean higher rates. Railroad unions declared that the consolidation would cost thousands of jobs.

The Administration can also look forward to an uphill grind in removing itself from the passenger-railroad business. The fiscal 1986 budget that President Reagan sent to Congress last week proposes to cut all Government subsidies for Amtrak. The move would save $717 million next year and, according to Dole, about $8 billion over the next decade. It would also probably bring an end to passenger trains on such long-haul routes as Chicago- San Francisco and New York-Savannah.

The Administration argues that Amtrak is a prime candidate for the ax because it carries only 2% of long-haul passenger traffic (vs. 86% for airlines and 12% for buses). Moreover, Dole maintains, the railroad is a gravy train for middle- and upper-income passengers. A survey of riders in the Northeast showed that 55% had incomes of $30,000 or more.

While the Administration admits that long-haul service may end, it believes that the most vital sections of the rail line would survive. Says Dole: "There may be a considerable amount of interest on the part of local and state authorities to pick up the service." The most likely region to keep its trains rolling would be the 455-mile Northeast corridor between Boston and Washington, where 120-m.p.h. Metroliners and other trains carry more than half of all Amtrak riders.

The Administration's proposal drew instant fire from passengers and Amtrak officials. "It's really ridiculous," said Ross Capon, executive director of the National Association of Railroad Passengers. Amtrak executives argued that shutting down the 23,600-mile system could cost more than running it, at least in the short term. The line has $3.1 billion in assets, including train cars and stations, that Amtrak officials say would be worth almost nothing if passenger service becomes extinct. In addition, more than 25,000 workers would demand some $2.1 billion in severance pay.

The debate about Amtrak's future comes along just when the railroad is picking up steam. The Government created the line, officially named the National Railroad Passenger Corporation, in 1970 to give America's struggling railroads a break. While hauling freight is potentially profitable, carting people around has long been a money-losing business. Amtrak's infusion of federal cash helped turn the line from an ancient, rusty clunker into a relatively sleek machine.

Travelers noticed. The railroad carried 19.9 million passengers in 1984, a gain of about 5% from the previous year. Business on scenic trains like the California Zephyr, which snakes through the Rockies, has been growing about three times as fast. As a result, the railroad's revenue is covering an increasing portion of expenses. Even so, the Government picks up more than 40% of the real cost of an Amtrak traveler's ticket.

By comparison, Conrail has made a full-throttle recovery. Formed in 1976 from the bankrupt Penn Central and six other failed lines, the Consolidated Rail Corporation cost the Government about $7 billion before it began turning a profit in 1981. The line earned an estimated $500 million in 1984, up from $313 million in 1983. To reach that goal, Conrail cut its work force from 100,000 to 39,000, trimmed track mileage from 17,500 to 14,000 and turned over passenger lines to state authorities in New York, New Jersey, Connecticut and Pennsylvania. The company won major concessions from union workers, who earn an average of $40,000 a year.

The Transportation Department received 15 bids for Conrail and last September narrowed the candidates to three: Norfolk Southern, the Alleghany Corp. of New York City and an investor group led by Hotelier J. Willard Marriott Jr. Two weeks ago, all 19 of Conrail's unions voted to recommend the Alleghany bid because the firm promised a more lucrative wage- and-job-protection package.

Dole chose Norfolk Southern because it was the only railroad among the finalists and boasts a $1.2 billion cash hoard. "It has excellent management," said Dole at a press conference announcing the sale last week. "Norfolk Southern certainly offers what it takes to ensure that this railroad will be strong forever."

Opponents vow to fight the plan in Congress, which must approve the sale. Chairman Hays Watkins of rival CSX promises that the sale "will be resisted by every resource at our command and in every forum where the challenge can be brought." Conrail Chairman L. Stanley Crane, a retired president of Southern Railway who took over in 1981, opposes the sale to any of the bidders because he thinks the asking price is too low. He wants instead to sell the company through a public stock offering. Republican Senator John Heinz of Pennsylvania agrees with that plan because it would preserve jobs in his state, where Conrail repair shops are located. Says Heinz: "The choice of Norfolk Southern is extremely controversial and may result in a legislative stalemate."

No matter what happens to Conrail in Congress, it has already had an important impact on the transportation industry. As an underdog living on borrowed time, Conrail gave a competitive push to the freight business. Says Jeffrey Stone, a transportation analyst for New York City's Wertheim investment firm: "Conrail has been the driving force behind railroad innovation." The once moribund company now markets its services with a plucky, I-think-I-can spirit engendered by Crane. The firm offers, for example, money-back guarantees for on-time delivery and financial help in building access tracks to new plants.

Inspired partly by Conrail, the rail-freight business has made a sharp comeback since the 1970s, when it was in such bad shape that critics like Ecologist Barry Commoner predicted that the entire industry would have to be nationalized at a cost of perhaps $100 billion. Railroading's once declining share of U.S. shipping has stabilized at about one-third. The industry's revenues reached $30 billion in 1984, an increase of 12% over the previous year.

The biggest boost came from deregulation in 1980. Until then, the trucking industry had been luring business away from trains by underbidding the railroad tariffs enforced by the Interstate Commerce Commission. The Staggers Rail Act, named for Democratic Representative Harley Staggers of West Virginia, gave railroads almost complete freedom to set prices. By offering lower rates, notably discounts for high-volume shippers, the railroads began pulling business back from trucks.

Freight railroads have changed many of their old, entrenched ways. The geographically fragmented industry, for example, has embarked on mergers that have left it dominated by a few sprawling lines. The merger proposed for the East last week has a counterpart in the West, the planned junction of the Southern Pacific and the Santa Fe. Other giant lines include the Burlington Northern and Union Pacific. Rail freight moves faster and more efficiently when it travels on the same company's line from start to finish. Experts believe that the giants in the East and West will eventually join to form transcontinental lines.

Railways have also pushed into the air and sea to become full transportation companies. CSX in 1984 acquired control of a barge company, American Commercial Lines. Norfolk Southern has made a $315 million bid to buy North American Van Lines, and already owns about 18% of Piedmont Aviation, a fast- growing regional airline.

The railroads have also tried to tailor their equipment to customers' needs. In the past, railroads hauled mainly bulk commodities such as coal and grain. Now railroads are shipping an increasing amount of specialized goods with equipment like the Vert-A-Pac Car, which carries 30 compact autos nose down.

The industry built of iron and steel is showing an affinity for the silicon chips of high technology. Railroads are the third-biggest private users of computers, after airlines and banks. At Burlington Northern operations headquarters, a battery of terminals has replaced a 65-ft. wall display that was formerly used for monitoring the whereabouts of locomotives. Southern Pacific, which developed the Sprint long-distance telephone service and sold it in 1983 to GTE for $740 million, is currently developing another advanced communications system. In a venture with Santa Fe and Norfolk Southern, the company is creating a coast-to-coast fiber-optics network called Fibertrak that can simultaneously carry 300,000 voice and computer-data transmissions and will be laid down next to the railroad tracks.

With their born-again efficiency, U.S. freight railroads no doubt will be profitably hauling goods into the 21st century. But the day of judgment for the passenger train has arrived. Unless Congress decides to help keep Amtrak rolling, the only long-haul rail passengers left in America may be the hobos who ride the boxcars.

With reporting by B. Russell Leavitt/Norfolk and John E. Yang/ Washington