Norfolk Southern Corporation

1838–1955

Norfolk Southern Corporation (NS) is a holding company that owns and operates one of the nation's biggest railroad systems, the Norfolk Southern Railway Company. Its lines run through 22 states, mostly in the South and East, and extend into Ontario, Canada, covering approximately 21,600 miles of rail. About one-third of its rail was acquired in a takeover of lines formerly owned by Conrail. Norfolk Southern also operates a coal, natural gas, and timber company through its subsidiary, Pocahontas Land Corporation. Most of Norfolk Southern's revenues come from the transportation of coal, coke, and iron ore. The railway's predecessors date back to the 1830s.

19th Century Roots

Norfolk and Western Railway Company was the result of numerous mergers. It started as a ten-mile line, City Point Railroad, which served two small Virginia towns beginning in 1838. William Mahone orchestrated the company's first mergers. He was elected president of a successor, the Norfolk and Petersburg Railroad (N&P) in 1860. He joined the company in 1853 as chief engineer and was the innovator of a roadbed through swampland that continues to hold up under the huge tonnages of coal traffic. After the Civil War, N&P linked up with South Side Railroad and Virginia & Tennessee Railroad, forming Atlantic, Mississippi & Ohio Railroad (AM&O). In 1870 this line extended from Norfolk to Bristol, Virginia. The combined railroads were damaged during the war and reconstruction was slow and expensive. One-half of the railroads in the South failed between 1873 and 1880. Mahone borrowed heavily and three years after the crash and financial panic of 1873, the company was put into receivership by its creditors. A private Philadelphia banking firm--E.W. Clark and Company--purchased the AM&O in 1881, changing its name to Norfolk and Western Railroad Company.

A partner in the firm, Frederick Kimball, took charge of Norfolk and Western, merging it with the Shenandoah Valley Railroad. Kimball's interest in minerals led to lines being built with access to coal deposits, although at this time the railroad was mainly an agricultural line, cotton being its primary freight. Four years later, the coal handled by Norfolk passed the one-million-ton mark. Within a decade, coal would account for the line's greatest traffic.

Henry Fink became president when the company emerged from bankruptcy in 1896 as Norfolk and Western Railway Company (NW). For the next three decades, NW expanded aggressively. Building through West Virginia, north to Ohio and south to North Carolina, NW established its trademark route. Between 1895 and 1905 railroads across the nation consolidated and improved operations. In 1904 Lucius Johnson became president of NW.

War Years

During World War I, traffic was heavy and equipment condition and upkeep suffered from material shortages. Government control of the railroads took place in 1917 and was relinquished in 1920. For the next ten years, NW consolidated its strength as a coal carrier. The early 1920s saw increased Interstate Commerce Commission (ICC) involvement in the industry and increased union activity. The drive for greater efficiency and reduced costs, as well as the company's coal revenues, helped NW through the Great Depression, but unprofitable branch lines were abandoned and equipment purchases were delayed.

With the start of World War II, NW rebounded. Traffic volume reached a peak in 1944. Robert H. Smith assumed the presidency in 1946. Between 1945 and 1950, $14 million was spent on improvements. During this same time, diesel locomotives were becoming an indelible presence in the industry. Although NW had great investments in coal-burning power and steam engines, the greater economy and efficiency of diesel were decisive; the company ordered its first diesel engines in 1955.

Between 1945 and 1950, $14 million was spent on improvements.

1827–1982

Mergers Through the 1980s

The 1950s were marked by union battles, the abandonment of steam power, and a decline in coal traffic, but growth nonetheless. Stuart Saunders became president in 1958. A lawyer, he stepped up the company's mergers through complicated transactions, beginning with Virginian Railway in 1959. In 1964 NW acquired two railways: Wabash, Nickel Plate, Pittsburgh & West Virginia and Akron, Canton & Youngstown. With this, NW became a Midwestern presence, providing service between the Atlantic, the Great Lakes, and the Mississippi River. Saunders expected expansion to reduce the company's reliance on coal as a revenue source.

Following the flurry of merger activity in the 1960s, the ICC authorized rights to NW in 1971 for portions of the tracks of the Atchison, Topeka & Santa Fe Railway. NW began merger talks with Southern Railway in 1979. The year before the consummation of the NW-Southern merger in 1982, NW acquired the Illinois Terminal Railroad.

Like NW, Southern Railway was the result of many railroad lines combined and reorganized--nearly 150 lines. The earliest of these lines was the South Carolina Canal & Rail Road Company, a nine-mile line chartered in 1827. It was the first regularly scheduled passenger train in the United States in 1830. It was also the first to carry U.S. troops and mail. Within three years, it was 136 miles long, the longest in the world.

Prior to the Civil War, rail expansion crossed the South. By 1857 Charleston, South Carolina and Memphis, Tennessee were linked by rail, but growth was stopped by the Civil War. With the devastation of the southern economy and railroads by the war, rebuilding of the industry was slow. Repairs and reorganization took place during the postwar period, and new railroads were built along the Ohio and Mississippi rivers.

Southern Railway (SR) was formed in 1894, when the Richmond & Danville merged with the East Tennessee, Virginia & Georgia Railroad. The company's first president was Samuel Spencer. Its line spread over 4,400 miles, two-thirds of which SR owned. The Alabama Great Southern Railway, and the Georgia Southern and Florida were also under SR's control. Over the span of Spencer's 12-year presidency, SR acquired many more lines and equipment, and revenues went from $17 million to more than $153 million. The company shifted from dependency on tobacco and cotton to more involvement with the South's industrial development. By 1916 SR had an 8,000-mile line over 13 states, establishing its territory for the next half century.

Fairfax Harrison became president in 1913. World War I traffic was substantial but was offset by inflation, and the postwar boom period helped pay for repairs and equipment replacement delayed by the war. In 1922 SR invested $77 million in improvements. The stock market crash of 1929 came two months after SR moved into lavish new headquarters. Many U.S. railroads were forced into bankruptcy in the early 1930s. SR operated at a loss for the first time in 1931 and began amassing debts. The company did not show a profit again until 1936.

Under Ernest Norris, SR recovered, paying its debts to the Reconstruction Finance Corporation in 1941. That same year SR purchased its first diesel equipment, and World War II began. Wartime traffic led to increased efficiency and safety. By 1951 SR owned a fleet of almost 850 diesel-electric units that drove nearly 92 percent of its freight service and 86 percent of its passenger service. SR became the first U.S. railroad to convert entirely to diesel-powered locomotives in 1953, closing the era of the steam locomotive.

1933–1987

SR prospered as a result of dieselization. The southern economy led the nation in growth in the late 1950s. SR took advantage of this growth by acquiring railroads and gaining access to developing industrial areas beginning with the 1952 purchase of the Louisiana-Southern Railway. In 1957 it acquired the Atlantic & North Carolina Railroad and in 1961 the Interstate Railroad, which brought SR to new coal fields in southwest Virginia. In 1963 the Central of Georgia merged with SR.

W. Graham Claytor became president in 1967, instituting the streamlined management and tough budgets that saw the company through the 1974 recession. An unrelated company called Norfolk Southern Railway was acquired in 1974, adding 622 miles of line in an area marked for economic growth. At this time, SR was thriving. There was a 70 percent increase in revenue between 1974 and 1978. In 1979 Harold Hall became president and later ushered the company through its merger with Norfolk and Western. SR was considered one of the best managed railroads in the industry. In 1980 the company enjoyed its fifth consecutive year of record profits.

At the time of the merger, both NW and SR were among the most profitable firms in the industry. Between 1971 and 1981, net income at NW had increased fivefold. At SR it had tripled. Prior to merging, both railroads had added many miles and much time to their transportation routes to avoid using each other's tracks; the amount of overlap was small but affected operations significantly. In some cases three days of transportation time was added just to circumvent ten miles of track operated by the other system. SR operated a 10,000-mile line between Washington, D.C., New Orleans, Louisiana, Cincinnati, Ohio, and St. Louis, Missouri. NW had a 7,000 mile line between Norfolk and Kansas City.

In 1980 Chessie System Inc. and Seaboard Coast Line Industries, Inc. merged, forming CSX Corporation. This provided some impetus for the Norfolk Southern merger. Equally compelling was the complementary territories and corporate objectives of NW and SR. Norfolk Southern, incorporated in 1980 and completing its acquisition of the railroads in 1982, became the lowest cost, highest profit corporation in the industry. Merging also made NS the nation's fourth largest system in terms of track line. Robert Claytor, who had been president of NW, became the first chairman of Norfolk Southern Corporation. Huge assets and conservative investments kept NS sound in 1982, when the steel and coal businesses slowed, but NW's revenues dipped as a result. It was expected that SR's merchandise traffic would help offset NW's coal business if it slowed, and vice versa. Both slumped, however, in the early 1980s.

Acquisitions in the 1980s

With an eye toward becoming the country's first integrated transportation company, NS moved to purchase North American Van Lines, Inc. (NAVL) in 1984. The acquisition was completed in 1985. NAVL was known mostly for its household moving, which, however, constituted only one-third of its revenues. Other services offered include commercial transport, moving general commodities from manufacturer to distributor, and transporting high-value products such as computers. NAVL was founded in Ohio in 1933, moved to Indiana in 1947, and was purchased by Pepsico in 1968. The purchase of NAVL by NS for $369 million put the recent industry deregulation policy of the ICC to the test. NS became the dominant railroad in trucking, developing a transportation system that provided both motor carrier and rail service.

In the mid-1980s, NS aggressively pursued the purchase of Consolidated Rail Corporation (Conrail) from the U.S. government. Conrail was founded in 1976 from six bankrupt northwestern railroads and subsequently became profitable. The purchase would have made NS the nation's largest railroad, but after several years of negotiations, it fell through. The unsuccessful bid to take over Conrail, however, resulted in 1986 in a profitable cooperation between the two companies, including an interchange agreement that allowed NS and Conrail to offer competitive services over the same areas.

In the mid-1980s NS's principal revenue-producing commodities, aside from fuel, were paper, chemicals, and automobiles. In 1985 NS had revenues of $3.8 billion and was the most profitable railroad in the nation. In 1987 Arnold McKinnon succeeded Robert Claytor as CEO and chairman and Harold Hall became vice-chairman.

1988–1999

The company further profited from its investments in Santa Fe Southern Pacific and Piedmont Aviation, both of which it sold later at huge profits. By 1988 coal and merchandise traffic began to increase after a long slump. McKinnon worked on cutting costs and smoothing the way for increased intermodal traffic, traffic that shifts easily between railroad and highway. Only six percent of NS's business in 1988, intermodal traffic posed great growth potential.

With the recession in 1989, automobile and steel industries suffered, as did housing and, therefore, lumber shipments and coal. The decline in industrial freight shipments hit railroads hard. NS's revenues were down by about three percent because of traffic declines early in 1989. At the same time fuel prices and insurance costs rose.

Growth in the 1990s

Although heavy freight and merchandise revenues remained lower in 1990, increased shipments of coal, coke, and iron ore helped the company offset losses. Profits dipped in 1990, the result of higher fuel costs and the expense of employee layoffs and early retirements. At the end of 1990, NS restructured its rail operations, changing Southern Railway's name to Norfolk Southern Railway Company and transferring ownership of Norfolk and Western to it. The company spent $20 million in the early 1990s to improve its routes for double-stacked containers and vied with the trucking industry for freight. NS entered a joint venture with Conrail in 1993 to run a hybrid truck and rail service. It used vehicles called Road-Railers, which could convert quickly from truck to rail car, and ran these on a network that joined Chicago, Atlanta, and Harrisburg, Pennsylvania. NS also acquired more varied business in its home southern territory as auto companies built new plants. Toyota expanded a plant in Georgetown, Kentucky, and BMW built a new factory in Greer, South Carolina, in the early 1990s, giving NS a lucrative new product--automobiles&mdashø ship.

NS was a remarkably stable and profitable company despite the downturn in coal exports, and it was known for its low costs and efficient management. Much of its profits came from running the easy downhill route from the coal mines in the Appalachians down to the port of Hampton Roads, Virginia, where waiting tankers took its freight abroad. One snag on its profitability, however, was its trucking unit, North American Van Lines, which continued to do poorly. The company sought to sell off two of its trucking unit's divisions in 1993, after trucking operations came in with a loss of close to $40 million in 1992. The rest of its trucking operations was sold off in 1998.

Meanwhile, NS began merger talks with its old friend Conrail. Conrail controlled 12,200 miles of rail, particularly in the industrial Northeast and Midwest. Heavy traffic between Chicago and Philadelphia and from East St. Louis to Boston gave the firm much of its profits. When Conrail and NS began to talk in 1994, Conrail was valued at around $4 billion. Negotiations between the two companies broke down in the summer of 1994, however, apparently because Conrail wanted a price substantially higher than that market value. After talks between the companies broke off, Conrail's CEO James Hagen told Forbes magazine in a November 21, 1994 interview, "We don't need a merger." Yet two years later, in November 1996, Conrail was on the verge of accepting a merger offer from rival railroad CSX. NS topped CSX's bid, offering $9 billion for the company that had been too expensive at more than $4 billion in 1994. In March 1997 a new deal was cemented, involving all three companies: CSX bought Conrail for $10.3 billion and then sold half of Conrail's routes (58 percent of the company) to NS for $5.9 billion. This led to what one analyst, transportation curator of the Smithsonian Institution William Withuhn called "the most complicated merger in history," according to a Wall Street Journal article from June 10, 1998. Norfolk Southern and CSX had to divide up the thousands of miles of Conrail track, despite daunting physical and administrative problems. The two companies spent more than a billion dollars each expanding tracks, terminals, and equipment, and had other headaches such as working their computer systems into Conrail's. The breakup of Conrail was carefully plotted, yet myriad problems led to delays. By January 1999 NS was paying out approximately $1 million every day in interest costs on the roughly $6 billion it had borrowed for its share of Conrail. Finally, the merger was physically complete on June 1, 1999 when Conrail's rail lines went into use by its respective owners. The many expenses incurred by the merger were expected to dampen income for that year, but to NS it seemed a wise long-term investment. The company was now about evenly matched with CSX, splitting the eastern United States between them, just as two other railroads dominated the West. NS was convinced it would be a stronger company with Conrail's addition, as the expanded mileage opened many more markets to it.