ON APRIL 1, 1976, Consolidated Rail Corp. - Conrail - came into existence.
Born out of the once unthinkable bankruptcies of most of the Northeastern and Midwestern railroads in the late 1960s and early 1970s, Conrail was created by the federal government by combining the most useful and viable assets of a once-great railroad system. The lessons of Conrail may be a useful model in considering what to do about the Big Three automakers.
In 1968, the mighty Pennsylvania Railroad and New York Central Railroad merged to form the Penn Central, with more than 100,000 employees. The merger was a desperate attempt to save a railroad colossus that was plummeting toward oblivion.
Plagued by ruinous labor agreements, overwhelming debt, lack of investment, untenable cross-subsidization of passenger rail, an antiquated regulatory regime and incompetent management, the merger was dead on arrival. What to do?
Many of the same issues and arguments heard today about whether to bail out the Big Three or let them fail were made back in 1970. The federal government, under a Republican president, allowed the bankruptcies to happen, but in a creative and managed fashion.
In 1973, Congress passed the 3R Act, creating a new agency, the United States Railway Association, under the supervision of the Department of Transportation. Conrail was invented as a government-created for-profit corporation.
The government owned 85 percent of the stock, the rest was owned by employees. Non-competitive labor agreements were taken over and guaranteed by the government. Loans were provided, but targeted to reinvestment in rail equipment and infrastructure, and regulatory changes were made to help spur Conrail to success.
At the time of Conrail's creation, it was losing $1 million a day. By the early 1980s, under the leadership of visionary business executives like Ed Jordan and Stanley Crane, and with the help of careful deregulation, targeted tax incentives and direct government investment, Conrail began to turn things around.
In 1986, in what was then the largest IPO in history, Conrail paid off its loans to the government and became a publicly traded company again. By the late 1990s, Conrail proved so profitable and valuable that it became the subject of a fierce bidding war, and was eventually sold and split up for $10.5 billion to CSX and Norfolk Southern. By the time of the split, Conrail was earning $1 million a day.
What we can learn from the Conrail experience is that a "bailout" is just a slogan. The government can make profitable investments directly into industry and that industry can succeed again with proper intervention.
So what should we do about the Big Three? If you follow the Conrail model, have a government-managed bankruptcy. Make sure investors, suppliers, employees and the public are protected. Make appropriate targeted investment loans.
Consider combining the three companies into a single Concar, or U.S. Car, shed non-performing assets and provide employee protection as necessary. Provide tax and investment oversight requiring that Concar move toward the energy-efficient green economy critical for the U.S. to remain a leader in the world.
We know already that GM has done a terrific job marketing new smart cars worldwide. The ability and know-how are there.
But the current condition of the companies caused by years of legacy costs and mismanagement are now too large for the private market to handle on its own or for a simple bankruptcy to cure.
Today, the railroad industry is experiencing a renaissance as a fuel-efficient, low-environmental-impact option compared to trucks. Conrail, which still exists as a small joint venture owned by CSX and NS, operates the rail freight assets in New Jersey, Philadelphia and Detroit. It has seen a boom in international container traffic that promises to continue well into the future.
With proper management and government investment, the Big Three - or perhaps Big One, can once again become the pride and envy of the industrial world. *
Jonathan Broder is the general counsel of Conrail. The opinions expressed here are his own and do not represent the position of Conrail, CSX or Norfolk Southern.