How did RRs survive so long being broke?

[carajul]

How did the NE RRs even make it to C-day in 1976? They were flat broke for a decade. In the case of the LVRR, they didn't make a profit since 1957. How did you go from 1957 to 1976 with no money? Or did they just make barely enough to get by? I understand they still had money coming in but just more going out. Was the amount of $ they took in enough to scrimp and squeeze by?

[econandon]

How did the NE RRs even make it to C-day in 1976? They were flat broke for a decade. In the case of the LVRR, they didn't make a profit since 1957. How did you go from 1957 to 1976 with no money? Or did they just make barely enough to get by? I understand they still had money coming in but just more going out. Was the amount of $ they took in enough to scrimp and squeeze by?

The railroads found all kinds of ways to "squeeze blood from a stone". The most notorious case of this is probably the PRR selling their New York passenger station (upon which was constructed the fourth incarnation of Madison Square Garden). I don't know the specific methods each railroad employed, but they would have delayed their maintenance schedules, mortgaged some of their property, negotiated new contracts with their unions, and requested ICC permission to abandon service.

While these tactics would have worked in the short run, they are also fatal if they continue for too long. According to Wikipedia, here are the dates that each railroad went into receivership:

• Jersey Central - March 22, 1967
• Penn Central - June 21, 1970
• Lehigh Valley - July 24, 1970
• Reading - November 23, 1971
• Erie Lackawanna - June 26, 1972

There is a reason that you frequently hear the term "bankruptcy" accompanied by the word "protection". When an entity declares bankruptcy, this kicks off legal proceedings that seek to conserve the existing capital (physical assets) in order that the company can be reformed as a profitable institution. Usually this means discharging some debts and modifying other contracts. The alternative of liquidation would not have been feasible for a "public utility" like the railroads.

In the case of the railroads, the problem was so large that the Congress eventually had to get involved. I would recommend The Men Who Loved Trains for a description of the period between 1972 and 1976, during which time the reorganization of the Northeast's railroads took place.

Note also that it took until 1983 for the newly-slimmed Conrail to start turning a profit (thanks largely to the regulation-loosening Staggers Act of 1980).

[hutton_switch]

Another thing that helped the financially-ailing railroads along during part of that time were the mail contracts the railroads had with the Post Office to carry mail.

[cjvrr]

Well the airlines seem to be doing the same thing now....

As has been stated above. From the beginning, the railroads seemed to have a knack for being built, going bankrupt, being bought for pennies on the dollar by a new entity, getting mortgages, selling stock to generate cash, etc.

Some went totally out of business when they could no longer shift debt and monies around, such as the NYO&W. Others liquidated when profits started to slip (Lehigh and New England). Those that remained into the Conrail era had limped along for years. Remember too that many NJ railroads were mandated to run money losing passenger trains (some on parallel lines) well into the 1960s and later without subsidies. The economic engine of the NYC metro area with the many factories and industrial uses seemed to sustain the railroads or at least keep them afloat post WWII. However once the industries started moving from this area for cheaper labor, cheaper taxes, etc. It seems the railroads slipped into the red and continued that downward spiral more quickly.

Thats my take on it anyway....there are many more specifics if you look at the history of each line. I too highly recommend "The Men Who Loved Trains" it is an excellent review of the condition of the railroads at that time.

[Mr. Ed]

It's all in the wording. If you hear the word lose os lost, you automatically think that that item or in this case that sum of money was lost. But in accounting, the word lost means they made less than they did the year before. Look at the automakers. Year after year they say they lost millions of dollars. So then how can they stay open by constantly losing money? Because they really didn't lose money, they just made less than they did before.

Later!
Mr. Ed

[econandon]

There is a nice summary of railroad bankruptcy in a 90 year-old novel titled The Driver:

"You can't shut up a busted railroad like a delicatessen shop. Bankrupt or not it has to go on hauling freight and passengers because it's what we call a public utility. A railroad may go bust but it can't stop. ...

When you are bankrupt you put yourself in the hands of the court for self-protection. Then your creditors can't worry you any more. A railroad in receivership doesn't have to pay what it owes, but everybody who owes it money has got to pay up because the court says so. It goes along that way for a few months or a year, paying nothing and getting paid, until it shows a little new fat around its bones and is fit to be reorganized. ...

then it is purged of sin and gets born again with a new name. The old Great Midwestern Railroad Company becomes the new Great Midwestern Railway Company, issues some new securities on the difference between r-o-a-d and w-a-y, and sets out on its own once more. The receiver is discharged. The stockholders elect a president, maybe the same one as before or maybe not, and the directors begin to hold meetings again."

The Driver is another book that I would recommend, if you are interested. The plot centers on a few men who run a late 19th century railroad, with detailed passages about its operation and financing. Although it is a work of fiction, it was written by a financial journalist named Garet Garrett - lending credibility to its depictions of business practices.

The protagonist appears to be based on E.H. Harriman. The events described occur in the aftermath of the Panic of 1893 (which in real life was partially caused by the failure of the RDG). In addition to describing late 19th century business practices, the book serves as a nice primer on history of that time. The author also fictionalizes minor episodes of American history (such as the breakup of the Iowa Pool), which the historically-astute may enjoy.

I will say two things against the novel. The first three paragraphs of Chapter IV make very little sense (and almost ruin the book IMO). Second is that some readers may be offended by the author's attempt to write in dialect (such as a banker character whose style ov speeking ees wreeten like dees).

[Ken W2KB]

It's all in the wording. If you hear the word lose os lost, you automatically think that that item or in this case that sum of money was lost. But in accounting, the word lost means they made less than they did the year before. Look at the automakers. Year after year they say they lost millions of dollars. So then how can they stay open by constantly losing money? Because they really didn't lose money, they just made less than they did before.

Later!
Mr. Ed

I don' think that's quite right. Loss means on the income statement that expenses exceeded revenues. Nothing to do with trends. Companies can spend years in decline with losses; (1) some expenses against income such as depreciation are paper expenses, not real in the cash flow sense, and (2) the capital account gradually becomes impaired.

[Jtgshu]

Also, keep in mind, while the commuter operations cost the railroads dearly, they did provide them one thing - a steady cash flow. It cost them money to get that cash, but in the end, cash was cash. I remember reading stories about how the only way they would make payroll was the cash receipts from the commuter trains.....

a LOT of things have changed since then - of course deregulation was huge, the shrinking of the workforce, in both mechanical and transportation - 5 man crews down to 2-3 man crews, a standardization of parts of equipment for locomotives (well, not in the sense you might think, as there were many different models still), with basically just two builders, and similar parts and knowledge - a 567 is similar to a 645 which is simlar to a 710. Parts might not be interchangeable, but you can look at one and look at the other and basically figure out what is what. Not having Alco, Baldwin, steam, 1st generation stuff that didn't MU or work together with other locos, improvements in track and track equipment, etc..the list can go on and on. but all these things have helps railroads be what they are today, as be as wildly successful as they are, where just 30 years ago, the entire industry was on the brink.

it can really be looked as a "chicken vs. egg" debate - did the changes (some of which are listed above) come as a result of the spectacular failures in the industry several decades ago, or would nothing have happened if there wasn't those "bad old days" - no need to improve if things are just hunky dory.. and we ALL know the railroad really doesn't like change...........

[GSC]

Two good books on this subject are, "Wreck Of The Penn Central", and on a much smaller operation, "The Tuckerton Railroad", by John Brinckmann. Each goes into much detail about what caused the various downfalls that led to their end. "Tuckerton" has great detail on year-by-year finances of the little line, showing almost by the penny just what happened and how they held on.

"Loss" is nothing more than accountant-speak. If my business made $220,000 last year, and $200,000 this year, I can claim a "loss" of $20,000, even though I still made $200K. (No, I didn't make that much, I just used it as an example) I can weep and gnash my teeth to the IRS on how I "lost" $200K. (Sometimes it even works)

[econandon]

Two good books on this subject are, "Wreck Of The Penn Central", and on a much smaller operation, "The Tuckerton Railroad", by John Brinckmann. Each goes into much detail about what caused the various downfalls that led to their end. "Tuckerton" has great detail on year-by-year finances of the little line, showing almost by the penny just what happened and how they held on.

"Loss" is nothing more than accountant-speak. If my business made $220,000 last year, and $200,000 this year, I can claim a "loss" of $20,000, even though I still made $200K. (No, I didn't make that much, I just used it as an example) I can weep and gnash my teeth to the IRS on how I "lost" $200K. (Sometimes it even works)

I concur regarding The Wreck of the Penn Central (by Joseph R. Daughen and Peter Binzen). I recommend that this book be accompanied by No Way to Run a Railroad by Steven Salsbury. In my mind, the books go hand-in-hand.

Check out Google Books for bibliographic information, purchase links, and some limited content previews. Here is the page for each book:
The Wreck of the Penn Central
No Way to Run a Railroad
The Tuckerton Railroad (no content preview)

[michaelk]

It's all in the wording. If you hear the word lose os lost, you automatically think that that item or in this case that sum of money was lost. But in accounting, the word lost means they made less than they did the year before. Look at the automakers. Year after year they say they lost millions of dollars. So then how can they stay open by constantly losing money? Because they really didn't lose money, they just made less than they did before.

Later!
Mr. Ed

I don' think that's quite right. Loss means on the income statement that expenses exceeded revenues. Nothing to do with trends. Companies can spend years in decline with losses; (1) some expenses against income such as depreciation are paper expenses, not real in the cash flow sense, and (2) the capital account gradually becomes impaired.

Two good books on this subject are, "Wreck Of The Penn Central", and on a much smaller operation, "The Tuckerton Railroad", by John Brinckmann. Each goes into much detail about what caused the various downfalls that led to their end. "Tuckerton" has great detail on year-by-year finances of the little line, showing almost by the penny just what happened and how they held on.

"Loss" is nothing more than accountant-speak. If my business made $220,000 last year, and $200,000 this year, I can claim a "loss" of $20,000, even though I still made $200K. (No, I didn't make that much, I just used it as an example) I can weep and gnash my teeth to the IRS on how I "lost" $200K. (Sometimes it even works)

I own my own business. And although I've had 3 different accounts, read the IRS publications as much as a human can, and even took a semester of accounting at community college so I can understand it is still a complex subject.

But Ken is basically correct- - "loss" has nothing to do with the year before. A loss basically means that you had more "expenses" then "income".

Key things is "expense" <> money you pay out. And "income" <> money you receive. Only certain things are expenses and only certain other things are income. Some "expenses" don't even require you to give anyone money- like Ken explained with depreciation. (also everything that a CPA would call an "expense" is not necessarily a deducible expense for the Tax man- and some things that a CPA wouldn't call an expense the IRS will permit you to deduct as an expense)

any normal person would assume that if i start the year with zero dollars in my business' checking account and end the year with $10 in checking that I had a $10 profit. Survey says... you would be wrong. Similarly if I start the year with zero in checking and owe nothing on my credit line but end the year with nothing in checking and owe 1,000 on my credit line I didn't necessarily have a loss. (Even assuming "cash" accounting- which is what most normal people "think" how things should be done.)

Some simplistic examples:
----I receive 100k from my customers over the year and deposit it in the bank. I pay my vendors 10k for parts and services that i needed to run my business (mostly these are expenses). And then I buy a new cargo van for 30k with cash from my checking account. I would have 60k in my checking account at year end. Buying the van is not an expense (it's capital spending or an 'investment'). So even though I have 60k in checking I actually made closer to 90k as "profit". My "profit" is WAY higher than my money in the bank at the end of the year. On Paper I look great- even though I'm going to run out of money after doing this a few years.

---The next year I get 100k in again, pay the same10k for parts and services. leaving me 90k in the bank. But this year I dont buy any vans- I still own the one from last year so my actual "profit" is probably something like 85k- because without doing anything except living another year i get the "depreciation expense" on the cargo van. So my profit is LOWER than the amount of money I have left in the bank.

-- want to complicate that some more- buy the same van but this time get a loan. You maybe pay $500 a month to the bank in the loan payment. But that payment has nothing to do with how much I can deduct. I still get the depreciation expense. AND I can deduct the interest part of the loan payment. But still this never exactly equals what I pay the year in payments- some years I have an "expense" that is more than I pay the bank and some years it is less.

--- How about my business is doing well and i want to hire a helper and buy another van. I ask my brother in law to "invest" in the business and give me $50k to have a cushion to buy a second van and g hire a helper. I put the 50k in the bank. It's NOT income. it doesn't at all count against my "profit" or "loss". Say I pay my helper 20k a year. I could have a loss each year but since i have that 50k in the bank I can still afford to pay my helper for a couple years.


The point I'm making is that "profit" or "loss" is not perfectly related to what the cash situation is. That is more of something called "cashflow" (which itself is yet another inigma.

So you can "lose" money for many years and still have money in the bank to pay your bills. (just focusing on the simplistic examples above and say you have a giant business that has piles of vehicles, with tons of investors, tons of loans- like a Railroad or an airline- and having a loss or profit really isn't at all related to what you have in the bank at any one point in time)

if If I want to further complicate things I can tell you about accrual accounting- basically you are assigned the expense or income at the time it occurs- NOT when you pay the bill or receive the cash. (say you buy gas on your credit card in december but dont pay the bill till January- the expense accrued in December so counts on that years profit and loss even though you paid for it the following year) . With that you can "lose" tremendous amounts of money because you accrue expenses way before you pay them- so you have tons of money in the bank but you "lost" money.

As JT alluded- to keep running all you need is cash- whether are not you are earning a profit or have a loss is pretty much a non-factor if you can keep operating. If you have cash in the bank to pay the people you currently NEED to keep going then you can putter along for some time.

[econandon]

MichaelK -

I agree with what you wrote, but I want to expand on two points.

Key things is "expense" <> money you pay out. And "income" <> money you receive. Only certain things are expenses and only certain other things are income.

Here you are using "<>" to signify "not equal to". I mention this to clarify for those who may not have seen this symbol combination before, though they may be more familiar with the symbol ≠.

So you can "lose" money for many years and still have money in the bank to pay your bills. (just focusing on the simplistic examples above and say you have a giant business that has piles of vehicles, with tons of investors, tons of loans- like a Railroad or an airline- and having a loss or profit really isn't at all related to what you have in the bank at any one point in time) ...

As JT alluded- to keep running all you need is cash- whether are not you are earning a profit or have a loss is pretty much a non-factor if you can keep operating. If you have cash in the bank to pay the people you currently NEED to keep going then you can putter along for some time.

This passage gets at the heart of the matter.

Let's say you are a railroad in the 1950s or 1960s that is experiencing its first quarterly "loss". At first you have enough cash on hand that you can cover the deficit. After a few quarters of consecutive losses, you have to take out a loan against future earnings. The losses continue, then you petition the ICC to abandon the least-profitable lines, in order to save money on maintenance and so that you can use the rail elsewhere. Next you mortgage real estate or your motive power in order to get immediate cash. Maybe you even merge with your bitterest rival in the hope that you can reduce costs enough to become cash-positive.

So throughout this period, you are able to find ways of keeping enough cash on hand. But as I wrote above, "these tactics ... are also fatal if they continue for too long".

Although you have been able to cover your cash position, each loan or mortgage casts the company further and further into debt. These obligations pile up, so that eventually all your cashflow is devoted to debt service + covering payroll. Even if you still have property to mortgage, no bank will lend you money because your debt ratio has become so high. The firm's position is just too risky.

In some cases, an unforeseen event (such as Hurricane Agnes) changes the equilibrium. In other cases, the math of accruing debts simply becomes unavoidable. The firm is forced to seek bankruptcy protection. The court-appointed "receiver" determines that your creditors will only get 50 cents on the dollar (aka 50%) of the money you promised to pay them. The receiver also modifies some of the contracts you made with your workers. This is how your costs are reduced, while shippers & passengers continue to pay for the services you provide.

Through this painful process the capital (the right of way, the steel rails, and other related property) is conserved, and eventually the firm is able to turn a profit again. In most cases, however, it does not usually take 30 years + 6 railroad bankruptcies + several acts of Congress to restore profitability.

[econandon]

For some perspective on how bad things had gotten by the 1970s, you may wish to watch this video: http://www.lubetkin.net/blog/2008/12/pe ... movie.html (28 minutes 29 seconds).

I won't comment here, because the video is already discussed in the Penn Central forum.

[Passaic River Rat]

The original question is a politically interesting one in the era of the so-called "Occupy Wall Street" movement. I am not asserting anything or ascribing motives to anyone. Just realizing that the subject could be politicized by someone who wanted to say the old railroad claims of financial loss were not genuine because they continued to operate as long as they did.

[kilroy]

The railroads also spent a lot of time in "bankruptcy protection," which changes a lot of rules. This allows them to continue operating as the mortgage holders can't seize their collateral (builidngs, locomotives, etc.). Your old liabiliites are frozen and you don't necessarily pay on them (you can pick and choose to some extent what you want ot pay). This improves the cashflow and allows the railroad to meet payroll and current expenses.