No Way to Run a Railroad: The Untold Story of the Penn Central Crisis by Stephen Salsbury

Summary
  1. Behind the scenes look at what really happened in the collapse of one of America’s largest business failures, the bankruptcy of Penn Central in 1970. Because railroads are America’s oldest large scale business, organizations observing what has happened to them has great value in understanding fundamental issues facing American businesses in the 1980s.
Key Takeaways
  1. David Bevan, CFO, warned the chief executives of the merging companies, the Pennsylvania and the New York Central, of many of the troubles which eventually came to fruition. The leaders did not fully appreciate the terrible result from the inadequately planned merger and huge capital expenditures involved
  2. This greatest bankruptcy in world history, one that lead to government entrance into what had previously been a privately owned industry, illustrates ills to which very large corporations are sometimes prone: ineffective top managers, unchecked by knowledgeable representatives of stockholders on the Board of Directors; lack of proper information through accounting of what was going on in the operations; government interference with corporate efforts to find new avenues to profit; and over optimism regarding future expenses in relation to sales
  3. Railroads in the early to mid 1900s had become slow, bureaucratic, and became less profitable because of it. Some suggested that new technology and business practices were the way to go but others saw mergers as the solution to all problems. However, they did not associate mergers with any managerial reforms
  4. Reasons for failure: managerial structure and practices were backward when compared to other large American enterprises; no planning before the merger at crucial operating or managerial levels; it failed operationally; top management rejected advanced planning and modern concepts of business management (budgeting and forward financial planning); diversification did not cause the bankruptcy
  5. Railroads were innovative and revolutionary when they first began, from finance and cost accounting methods, to trade unions, to creating legal corporate entities, to new managerial styles, but they began to ossify in the mid 1900s. Because the capital requirements were so large they cannot be financed as the textile industry had been, by single individuals or small group, and needed investment bankers, stock exchanges and even a financial press. They fostered all these things
  6. One of the mistakes made by the Penn Central top management, which escalated operational confusion, was the failure to decide whether to operate the consolidated railroad on a centralized or decentralized basis
  7. Due to monopoly concerns, railroads were often hindered from investing or helping build other transportation industries. The Pennsylvania was instrumental in founding the predecessor of TWA but was not allowed to move much further than that.
  8. Bevan, Saunders and Perlman were not able to work together effectively although they had great pedigrees and track records. The differing opinions on innovation versus lowering capital expenditures were too great and none realized how small their margin for error truly was. The current management was reluctant to change their managerial and financial/accounting practices and the only thing more painful than changing is the pain that comes from not changing
  9. Railroads most efficient at moving bulky, low value commodities great distances and worst in light weight, high value products. The expansion of trucks and roads ate away at the transportation of high value products from rails
  10. Railroad’s meager earnings and high operating costs meant the stock market weren’t a great option so if they wanted money, they had to sell bonds or issue equipment trusts. Their debt grew to all time highs and low operating profits made paying them off increasingly difficult and any long term planning or investing very hard to do. Bevan had a very tough time in reducing the Pennsylvania’s debts and updating its accounting and managerial practices
  11. After the collapse, Bevan was made the scapegoat and his ties with an investment fund he founded with others called Penphil and his association with Executive Jet Aviation were studied but in the end he was not deemed to have done any wrong
What I got out of it
  1. The Penn Central was the largest business failure in the US up to that time. In retrospect, it is clear that it had very poor returns relative to the industry and coupled with inadequate cash and large debt loads, it’s bankruptcy should not have been a total surprise. Different approaches to management (centralized vs decentralized), top officials leaving, government favoring other modes of transportation, accounting and data processing taken from Bevan and given to Perlman, breakdown of reliable information about the general state of the railroad, there was no margin for error and Saunders (the CEO) never appreciated that fact fully, all contributed to its downfall