Rescue on the Rails

The Interstate Commerce Commission last week made a belated but decisive move to revitalize the faltering railroads of the Eastern U.S. By authorizing the profitable Chesapeake & Ohio to acquire control of the ailing Baltimore & Ohio, the commission opened the way toward an ultimate merger of these two big lines. This step, in time, could spur a consolidation of the nation's oversupply of competing independent railroads into a few strong regional groupings.

The ICC's 8-to-3 decision cheered most other Eastern railroad chiefs, who are pushing merger schemes of their own, all designed to cut costs by eliminating overlapping lines, yards, offices and work forces. "This is a great forward step." said Chairman James M. Symes of the Pennsylvania, which is driving toward merger with the New York Central. Stuart Saunders, president of the moneymaking Norfolk & Western, which is cooking up a merger with the Nickel Plate, said he was "very much encouraged."

Spending to Save. The clear design of C. & O. Chairman Cyrus Eaton, 79. and President Walter Tuohy, 61, is to merge their line with the B. & O., but not until they have restored the B. & O. to financial health. The B. & O. needs quite a bit of shaping up. Weighed down by $418 million in debt and strapped for cash to carry out overdue modernization programs, the once mighty B. & O. has watched its revenues melt from $465 million in 1956 to $351 million in 1961, and seen its long string of profits turn into a 1961 loss of $31 million. By contrast, the go-ahead C. & O. earned a solid $35 million last year.

With $232 million in loans from the C. & O. and its bankers, the B. & O. plans over the next five years to repair 9,000 old freight cars, buy 18,000 new ones, enlarge tunnels that are now too small to accommodate profitable piggyback traffic, improve its yards, and buy additional automated rail controls. Though the two roads plan to keep separate their rates, routes and sales forces, they will consolidate ticket offices and terminals in cities from Chicago to Washington. Best estimate of able B. & O. President Jervis Langdon, 57, is that all this will save the B. & O. $44 million a year, eliminate 730 (jobs.

It's a Natural. The Railway Labor Brotherhoods are expected to appeal against the consolidation, but the courts have seldom reversed the ICC in a merger case. About the only strong opposition to the move could come from the competitive New York Central, which not so long ago had designs on the B. & O. itself and complained that a C. & O.-B. & O. hookup would leave the Central "holding the bag out on a limb." (The Central started talking merger with the Pennsylvania in earnest only after the C. & O. and B. & O. refused to consider a threeway tie with the Central.)

If it chooses to fight, the Central could probably frustrate a future C. & O.-B. & O. merger: though the C. & O. already owns or has pledges for 61% of the B. & O.'s stock, the Central holds a crucial block of slightly over 20%--just enough to keep the C. & O. from getting the 80% ownership necessary to enjoy the tax shelter of the B. & O.'s back losses. The Central has refused to sell this block unless the C. & O. pledges to sell it back in the event the ICC disapproves the Central-Pennsy merger--a condition the C. & O. refuses to agree to.

But consolidation of the C. & O. and B. & O. will probably bring such strong competitive pressure on the Central and all other Eastern lines that the Government will ultimately find itself obliged to approve the Pennsy-Central merger anyway, and the Norfolk & Western-Nickel Plate union as well. Those three giant systems would control 90% of the rail traffic in the East.

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