Financial Analysis: The Erie-Lackawanna By The Numbers

The following charts help to explain the difficulties that the Erie-Lackawanna Railroad (and later Railway) underwent during its 15 year history.

FIRST CHART: How was business?

The first chart gives two different gauges regarding the EL's overall freight business. It charts the number of carloads that the EL handled per year (green line), and the number of revenue ton-miles of traffic on the line each year (maroon / yellow line). The carloadings chart shows a continual decline throughout the EL's history. But then again, during this time freight cars got bigger; two 60 foot cars could do the work that once required three 40 foot cars. And even if the there was a decline in the amount of freight handled, a railroad could still prosper if it was hauling the remaining traffic over longer distances. The ton-mile statistic takes this into account. For the EL, ton-miles bounced around for the first three years, then started on an upward trend during the William White chairmanship. Ton-miles peaked for the EL in 1969, when traffic was gained because of the disruptions caused by the ill-fated Pennsylvania - New York Central merger. However, from 1970 on, the ton-mile numbers show that the EL was in a decline, one that it could not break out of.

SECOND CHART: What price could the EL charge?

The next question to ask is, how much did the EL charge per ton-mile of freight hauled, and what were the trends in that regard? The Second Chart shows the average price the EL charged for its services, in terms of pennies per ton-mile. The top line shows the average amount per year that the EL was charging. As can be seen, the average charge declined a little during the 1960s, then started going up significantly during the early 1970s. However, if you adjust the amount for price inflation (as to maintain constant buying power), you can see that the EL underwent a fairly steep decline in the prices it charged up to about 1970. After that, real-dollar rates went up, but never got back to the level of 1961. What caused this decline? To some degree it was due to strict regulation by the Interstate Commerce Commission, which made it difficult for all railroads to adjust prices to meet market conditions. Another factor would have been traffic mix; the EL was probably losing the traffic that it could charge the highest rates for, i.e. perishibles and manufactured goods, and was substituting "dead freight" like chemicals and lumber, which it had to charge lower rates for. But one of the largest factors was probably truck competition. Due to the new Interstate highways and growing truck sizes, truck service was getting better and better throughout the 60s and 70s. In the face of what truck transportation offered, i.e. faster deliveries, increased reliability, and decreased loss and damage, the railroads probably tried to hold on to as much volume as they could by keeping their prices low. In 1974 and 1975, as oil prices shot up and then a general wave of price inflation swept the country, the EL was able to raise its rates; but in the face of declining traffic levels caused by the ensuing recession, overall revenues continued to decline -- see the next chart.

THIRD CHART: How much revenue did the EL take in each year?

As can be seen, actual revenues trended upward throughout the EL's history. However, it is best to consider the actual purchasing power of these revenues, again by adjusting for price inflation. In terms of constant real dollars (green line), the EL's revenues basically held steady until about 1968, and headed into decline thereafter. In 1975, a steep revenue decline was experienced, both in terms of nominal dollars and inflation-adjusted dollars. Any chance of escaping dissolution into Conrail was lost.

FOURTH CHART: What about the debt problem that supposedly cursed the EL?

The EL started out on merger day with over $320 million in long term debt, and peaked at around $380,000 in 1970 (gray line). During the first few years of its existence, the EL had about $10 million of long-term borrowings to be paid back each year (red line). After 1967, however, the chickens of debt were coming home to roost. Debts coming due shot up to about $80 million in 1970; and this was after the payback of about $15 million of bonds in late 1969, which pushed the EL's net working capital into the red. A corporation usually handles its debt retirement obligations by dedicating part of its operating cash flows to depreciation accounts. If the company puts aside enough cash against the depreciation charges on its books, it can meet its obligations. However, like any family going through hard times, a corporation that is losing money doesn't put enough aside; it needs whatever cash it has just to stay alive. In such instances, the company seeks to "roll over" its obligation, in effect asking for more time to pay. But creditors don't like to do that when the debtor is obviously in financial trouble. In the EL's case, the ultimate answer was bankruptcy (in 1972). Overall long-term debt went into a decline after 1970, meaning that creditors were no longer willing to loan the EL additional sums needed for major capital improvements like CTC/TCS, modern hump yards, line realignments, grade reductions, and updated repair facilities. (However, lines like the EL could and did keep their locomotives and rolling stock up to date via leasing arrangements). Thus, the EL could not significantly improve its operating efficiency and thus could not compete with improving forms of freight transportation.

FIFTH CHART: How much money did the EL earn or lose?

As the chart shows, in most years, the EL lost money. Losses in the early 1960s gave way to a small profit in 1965, a record $7.1 milliion profit in 1966, and a $3.76 million profit in 1969. Unfortunately, these few profitable years were eclipsed by the years of loss, which increased to a record $94.4 million in 1975. Obviously, the EL started going into a tailspin in 1970, well before Hurricane Agnes and the recession of 1974. As various railroad analysts have noted, the failure of the Penn Central merger doomed all of the northeastern lines, as the major shippers in the east re-oriented themselves away from rail transport in general, and adjusted their production and distribution systems towards trucking (and to a lesser degree, waterways and air freight).

SIXTH CHART: How much did the EL shrink over the years?

The whole purpose of the EL merger was to serve the same customers with less track and manpower, by eliminating parallel facilities and jobs that the Erie and Lackawanna otherwise needed to maintain. In terms of track, however, the EL did not shrink too much over the course of its existence. Route miles (gray line) declined from 3,292 in 1960 to 2,911 at the end of 1975, a 12% decline. However, the EL did a bit better in terms of reducing overall track, including yards, sidings and multi-track main lines (red line). That figure went from 7,266 in 1960 to 6,026 in 1975, a 17% decline. The biggest declines took place during the William White years (1963 - 1966), and after Hurricane Agnes (1972 - 1973).

SEVENTH CHART: How about employees?

The EL did make significant progress in reducing employment. The 22,195 employee roster at the time of the 1960 merger was cut by more than 50%, to 10,874 in 1975. The stall from 1961 to 1962 indicates that early EL management did not fully appreciate the need for rapid cost-cutting and the fierce fight for survival that the EL was facing. Had William White been called in in 1961, would it have made a difference?