Transportation Secretary Elizabeth Hanford Dole's plan to get the federal government out of the railroad business is parked on a congressional siding, awaiting maintenance.
The proposed sale of the federal government's 85 percent share of Consolidated Rail Corp. to Norfolk Southern Corp. for $1.2 billion has been delayed by governmental inertia, a rival offer from investors organized by Morgan Stanley & Co., and opposition from Conrail's management, Conrail's unions, several other railroads and a handful of states.
According to interviews with many of the key players, one possible result is that nothing will happen; Conrail will remain a ward of the government at a time when there is a bipartisan consensus that the government doesn't run railroads very well.
However, Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, said that, if the sale to Norfolk Southern "should be done, it should be done well. I don't see any urgent need for prodigious haste." Several studies of the proposal are under way by Dingell's committee, which any Conrail deal must pass enroute to its destination.
For the sale to go through, "It is clear that several elements have got to fall in place," Dole said in an interview. Norfolk Southern must reach agreements with its labor unions and with midwestern railroads afraid of being eaten alive by a giant Norfolk Southern/Conrail merger, she said. Further, Norfolk Southern must agree to give up some of Conrail's tax deductions, she said.
"The outstanding issues are exclusively in the hands of Norfolk Southern," Dole said. "The day I held a press conference to name Norfolk Southern as a prospective bidder, I handed a little railroad engine to Bob Claytor Norfolk Southern Chairman Robert B. Claytor . At that point I think the burden shifted" from the Transportation Department to Norfolk Southern.
It was seven months ago today, that Dole announced the selection of Norfolk Southern from among 15 bidders. "My aim in selling the railroad has been to select the buyer which will leave Conrail in the strongest financial position after the sale, best preserve service to Conrail's shippers, and, consistent with these two criteria, give the taxpayers the best rate of return possible," she said then. "There can be no doubt that the Norfolk Southern bid fully meets these criteria."
Norfolk Southern, a Norfolk-based transportation conglomerate, has "deep pockets." Dole demanded a financially strong Conrail buyer to assure that the federal government never again would have to bail out the Northeast, as it did nine years and $7 billion ago when it organized Conrail from the wreck of the Penn Central.
A Norfolk Southern/Conrail merger would create the nation's largest railroad system and reduce the number of major roads east of the Mississippi from three to two, a fact that has stirred fears of monopoly in the minds of some shippers.
Conrail is making money, $209.5 million in the first six months of this year. However, the Federal Railroad Administration and other analysts project that, over the long run, Conrail cannot continue to be profitable in a declining Northeast without tying itself to some other line.
That argument sold well in the Senate Commerce Committee, which already has approved the sales legislation. "If we can get a bill passed in the Senate, that puts the House on stage center and increases the pressure to act," said Sen. John C. Danforth (R-Mo.), Commerce Committee chairman. "I think that's going to happen. Almost everybody believes that Conrail should be sold and that now is the right time to sell it."
Danforth would not predict when the issue will reach the Senate floor. That lack of a timetable is bad news for Norfolk Southern officials who said in a recent interview that a victory in the Senate would be a great help to them in "regaining momentum."
Not the least of the reasons that momentum has been lost in recent weeks is Thomas A. Saunders III, managing director of Morgan Stanley & Co. Inc. Saunders put together an investment group that has offered the same $1.2 billion for the government's 85 percent share of Conrail and plans to resell it to the public over five years.
Saunders is a super salesman who throws numbers and financial projections about with the abandon of a car salesman. His Virginia accent is a match for all the charm and gentility the charming and genteel Norfolk Southern lobbyists can muster.
If Morgan Stanley's investors buy Conrail, there would be no need to worry about a giant eastern rail monopoly because Conrail would stand alone, Saunders reminds. Conrail's valuable tax credits would not be used to reduce the taxes due by Norfolk Southern, so the government would come out ahead. Conrail's management, which has done so splendidly, would continue managing. Investors would make money. The public, which paid so much in tax dollars to save the Northeast, would get a chance to reap the benefit by investing in Conrail's stock.
The problem with the Morgan Stanley plan, according to the Transportation Department, is that by the time the original investors take their profit, Conrail will be in much weaker financial condition because of the high dividends it will have to pay to keep its stock attractive for resale.
"Morgan Stanley is haunted by two ghosts," said Federal Railroad Administrator John H. Riley. "One is the Penn Central, which paid good dividends up to the time of its demise . . . the other ghost is recognition that Morgan Stanley is a weaker long-term guarantee than Norfolk Southern."
Saunders counters: "Dividend policy is set by a board, based on payout ratios as a percentage of income and a percentage of cash flow. The fact is that the dividend policy that has been suggested for Morgan Stanley's Conrail is more conservative than the Norfolk Southern dividend policy."
He pointed to a recent study by the United States Railway Association, which said "Conrail's future viability as an independent entity is reasonably assured."
Riley responds that the USRA study was assessing the prospects for a stand-alone Conrail, not a publicly held Conrail under pressure to produce enough profits to satisfy investors.
Conrail's management and most of its unions have signed up with Morgan Stanley: no mergers, no threatened job losses through closed yards and offices. The governors of Maryland and Ohio also have backed it. Several other states, with various degrees of enthusiasm, have supported a "stand-alone" Conrail, without necessarily endorsing Morgan Stanley.
Morgan Stanley was a close observer of the Conrail game prior to Norfolk Southern's selection, because it had worked for Conrail as a financial adviser. Saunders said he became convinced that Conrail "is a viable company" and organized his investors on that conviction coupled with the opportunity to make a few dollars.
Despite his charm, Saunders has a way to go before his plan will sell politically. Most observers think that he cannot win, but he possibly can block Norfolk Southern. That would satisfy one of his investors, Richmond-based CSX Corp., Norfolk Southern's arch rival and presently the biggest eastern railroad company.
CSX Chairman Hays Watkins warned Dole in November 1984, three months before she picked Norfolk Southern, that "an exclusive takeover by Norfolk Southern strikes at the vital interests of CSX and will be resisted by every resource at our command and in every forum where the challenge can be brought."
Saunders agrees that he does not have the votes in the Senate right now. However, he said, labor's recent response, a growing list of newspaper editorial endorsements and Conrail's continued financial performance have buttressed his position.
"The question is, will all these developments force the Senate to say it is not appropriate to push this thing through on a quick and dirty judiciary review," Saunders said.
Although the Senate Judiciary Committee held brief hearings, it did not have jurisdicton over the Conrail legislation. Nonetheless, the question of Norfolk Southern/Conrail's bigness will continue until or unless Conrail can strike deals with regional railroads that consider themselves threatened. They're going to want assurance of a competitive chance on rates charged for shipments over more than one railroad and other arcane freight rate-setting questions.
A recent study by Interstate Commerce Commission staff members detailed to the House Energy and Commerce subcommittee on transportation reported that, in the absence of agreements, there would be significant diversions of traffic to Norfolk Southern/Conrail from lesser roads.
The ICC staff also said that proposed divestitures of part of Norfolk Southern/Conrail's routes to two other railroads would not necessarily make those railroads strong enough to compete effectively.
Rep. James J. Florio (D-N.J.), subcommittee chairman, said "the ICC report clearly raises questions . . . The Justice Department has said that it would be a violation of antitrust laws to allow Conrail to be acquired by Norfolk Southern without viable divestitures, and the ICC says, based on information it has, these are not viable divestitures.. . . That, I think, is an insurmountable problem the Republican members of our committee have."
Norfolk Southern says negotiations are continuing with the Chicago & North Western and the Illinois Central Gulf, which, along with the Grand Trunk Western, are the three roads that would be affected the most. Norfolk Southern has reached agreements with the Kansas City Southern and the Soo/Milwaukee Road. All are midwestern grain-shipping roads that could suffer substantial diversions in traffic from a Norfolk Southern/Conrail merger.
Riley pointed out that diversions are not necessarily bad for the consumer: They may mean more efficient, less costly shipments. However, they also may mean reduced employment either on specific railroads or in certain congressional districts.
Dingell also has been asking many antitrust questions of the Justice Department, which still is reviewing those and other Conrail-related issues while Treasury continues to ponder tax questions.
Labor is another issue. Although Conrail's unions have nominally endorsed Morgan Stanley or, at a minimum, a stand-alone Conrail, labor's leadership is all over the lot, according to House and Senate sources of both parties.
However, Morgan Stanley has offered labor seats on the Conrail board and Norfolk Southern has not, and Transportation Department officials have said for months that Norfolk Southern was going to have to improve its labor package to win.
J. Paul Molloy, an attorney/lobbyist working for Norfolk Southern, said, that, as a practical matter, cutting a final deal with labor is not possible at this point. "There is only so much money in the whole package, made up of lots of different things," he said. "Part of it is the purchase price, part of it is tax consequences, part is solving problems at the state level. . . . It's probably too early to fine-tune that allocation. As the process goes along, we're sure the House will want to take a hard look at what interests will be dealt with in this transaction. We have not found anyone anxious to resolve that allocation problem at this point in time."
Meantime, the clock ticks on. Claytor has said that Norfolk Southern's interest is not indefinite, that if there is no progress by the end of the year, Norfolk Southern may withdraw its bid. He has not defined progress.
Meanwhile, Conrail Chairman L. Stanley Crane, the man who managed the railroad to respectability and who has fought hard to keep it independent, told Florio's subcommittee on July 31:
"In my personal opinion, the worst thing that could happen . . . is to have us stay in limbo for an extended period of time. Both our shippers and our employes, I believe, would find it very difficult to continue to operate over an extended period of time not knowing what the future of Conrail is."