Turning the Corner

Reprinted from MODERN RAILROADS RAIL TRANSIT, January 1977

Contributed to the RITS Web Site by George F. Davison, Jr.

 Experts said Rock Island was dead. But a determined trustee, management and employees are proving them wrong.

 In just a few weeks now, the Rock Island Railroad's headquarters staff will move from its ancient offices on six floors of LaSalle Street Station to 1 /2 floors in the McCormick Building on Michigan Avenue in Chicago. The Rock's new headquarters, says Vice President Staff John D. Mitros, are not only the most modern railroad offices anywhere but are also "as technologically advanced and modern as the offices of any business."

 Equipped with the latest in IBM, Xerox and Lanier technology and Herman Miller furniture, the new offices are arranged in an "open landscape format" with related functions (not "departments") close together. Such functional groups are served by a central word-processing unit and central files. The individual modules can easily be rearranged as functional requirements change. Rock's offices at LaSalle Street Station occupied 160,000 sq ft and had more than 150 private offices. The new headquarters have 20 private offices and 28,000 sq ft. "The new setup also houses a more effective, more responsive bureaucracy," claims Mr. Mitros.

 Not at all incidentally, the new setup will save the Rock in excess of $2 million annually.

 It's also a very visible indication of just how far back from the brink of dissolution Rock Island has come in the last two years. Early in 1975, it looked as though there soon wouldn't be a Rock Island. With the economy in recession, its traffic was plummeting and its already serious financial bleeding had become a hemhorrage. It had failed to get a loan from the U.S. Railway Association. Projections showed it would soon run out of cash to pay wages and buy diesel fuel.

 On March 17, 1975, Rock Island's directors voted to petition the U.S. District Court for Section 77 reorganization. Going into reorganization alleviated the immediate cash problem, but didn't stop the bleeding.

 But the Rock's new trustee, William Gibbons, and its management headed by President John Ingram, believed the road could be saved. They undertook desperate, even brutal measures to stop the cash drain. By April, U.S. Judge Frank McGarr was able to order the road to continue operating. In July, the Rock's cash flow turned positive. The bleeding had stopped; and Messrs. Gibbons and Ingram could begin thinking and planning for rebuilding and, presumably, an eventual reorganization of the line.

 By the end of 1976 the Rock could point with justifiable pride to progress in the huge task of physical rehabilitation-all of it achieved with no federal money:

 * Some 400 mi of the Rock's Memphis-Tucumcari line have been completely rebuilt with funds generated within the railroad itself. More than a million dollars a month is going into this program, which is continuing in 1977.

 * Similar rehabilitation work is underway on the Rock's main line between Chicago, Kansas City, Herington and Ft. Worth. This work is being financed by a loan of $17~!2 million secured by trustee certificates guaranteed by the U.S. Department of Transportation.

 * The road has acquired 56 new GP-38 locomotives by lease; more than a third of its total motive power fleet is now either new or rebuilt, as is about 12 percent of the car fleet.

 Flirting with profits

 Meanwhile, the Rock's financial results are beginning to look quite a bit better. On an ICC basis, the line lost $14.4 million in the first nine months of 1976, compared with a $35.8 million loss in the same period of 1975. If, however, one excludes the costs of the Rock's major rehabilitation programs, the railroad's net loss in the first nine months of 1976 is $3.6 million.

 Furthermore, the improvement appears to be continuing. In the third quarter, for example, the Rock had an ICC-basis loss of $3.9 million after rehabilitation expenses totaling $5.9 million. On a depreciation basis the Rock's results for the third quarter would have been a net income of $2.9 million, which is no doubt why Rock Island, like Conrail, ICG and C&NW, has now adopted depreciation accounting. It is likely the results for all of 1976 will show a deficit, on the ICC basis, of less than the nine month loss. On a depreciation basis, the loss will be quite a bit less-and in the view of one Rock Island officer, there is an outside chance the railroad may be in the black for the first time in a decade.

 What drove the Rock Island into bankruptcy and near collapse in the first place?

 Essentially, Rock Island always had many miles of light-density, granger lines. Its service is especially important to states like Iowa, Kansas and Oklahoma, which are blanketed by Rock Island main and branch lines. On its through routes, such as Chicago-Kansas City, Chicago-Omaha, and Kansas City-Houston, it faces severe competition from other railroads. In most cases, the Rock's is not the shortest route - but it does have the advantage of very easy grades. In fact, the Rock nas no main-line ruling grade above 1.2 percent.

 During its previous reorganization, which ended in 1948, the Rock had been physically improved and had benefitted from heavy wartime traffic. But, faced like other railroads with postwar inflation and truck competition, its net income peaked in 1953 and declined steadily thereafter. From 1966 on, it dropped deeper and deeper into the red.

 In 1964, Rock Island and Union Pacific applied to the ICC for permission to merge. That application triggered the years of intra-industry fighting and bureaucratic stalling that finally ended with ICC's approval of the merger in late 1974. By that time it was too late: Rock Island was near collapse. UP no longer wanted to merge.

 New leadership

 Mr. Ingram came aboard as president on Nov. 1, 1974. His railroad experience had equipped him to grapple with many of the problems he found. Starting his career as a brakeman (on the Long Island Rail Road), he rose through various operating and marketing assignments on the New York Central, Southern and Illionis Central. Then he became Federal Railroad Administrator, which post he left to head the Rock Island. He has a reputation for being able, innovative, hard-driving, tough and often abrasive.

 To help with the task of turning the Rock around, Mr. Ingram brought to the Rock Island three executives who had served with him previously.

 They are Dr. Paul H. Banner, executive vice president, from Southern; John D. Mitros, vice president staff, from ICG; and Chris Knapton, vice president public and government affairs, from the FRA.

 With very little cash in the till and unpaid bills piling up, it was obvious that the Rock had to get back to fundamentals-fast.

 The first step was the adoption of "Ingram's Two Laws." The first Law: Don't spend more than you take in. The second law: Go back and read law number one. "There are no exceptions here," says Mr. Ingram. "You do not have an operating property if the bills that come in every day exceed the revenue that is generated every day."

 Getting the Rock's outgo in line with income required immediate and drastic surgery. First came a sharp cutback in operations. Freight train miles were cut 28 percent; switch engine hours 19 percent. Trains were lengthened. Most Rock Island through freights today average 80 to 125 cars. Scheduled speeds were cut.

 Large cuts in employment were made. In the year ending February 1976, when industry employment as a whole dropped 4 percent, the Rock cut its total force more than 25 percent. Management employees were cut even more, by 29 percent. The road discovered that some functions previously thought essential could be dispensed with. Though drastic, the force reductions were not made haphazardly. The managerial reductions, for instance, were tied in large part to a functional restructuring. Where there had previously been 14 vice presidents, there are now seven-and their titles clearly tell what they do.

 Staff, organization, and expense were also scrutinized with a merciless focus on function. Organizational relationships and the nomenclature with which functions were identified in the railroad's heirarchy were studied and changed. Insurance coverage and premium/collection ratios were examined. An intense examination of the road's thousands of contracts was undertaken.

 The number of company automobiles were reduced from 537 to about 300. The number of officers with expense accounts was reduced from 1311 to 300. All changes have been monitored and closely audited. Savings in such areas have come to several million dollars yearly.

 Losing traffics

 Important improvements were also possible in the marketing/sales/traffic functions. Dr. Banner discovered that much traffic was being carried at a loss-due to low rates or in some cases excessive circuity. For instance, traffic was being solicited between Arkansas points and St. Louis. To get from Arkansas to St. Louis on the Rock you have to go via El Reno and Kansas City. "We're better off on business like that to get a short haul and turn the traffic over to a connecting line," Dr. Banner points out.

 Dr. Banner also discovered that the net contributions of several sales offices were less than the cost of running the offices. Over-all, sales offices were reduced from 56 to 38-though a couple of them have been re-opened recently The entire piggyback department was abolished and its functions taken over by sales and operations. Even so, the Rock is now carrying more flatback traffic than before-at a profit.

 Rebuilding under way

 In total, the efforts of the Rock team to pare expenses have saved the road $75 million a year - or about 24 percent of 1974 operting expenses. As a result even at present reduced carloading levels, the road is generating something like $1.5 million a month of funds that are being plowed back into rehabilitation programs. Perhaps the most dramatic measure of this achievement is that the Rock can now be profitabIe at 60,000 carloads per month. The break-even point formerly was 90,000. Should carloadings increase to substantially above present levels the Rock could conceivably become a highly profitable railroad.

 But to get more traffic the Rock must be able to improve its service. That means better equipment, better track.

 Initially, the main thrust was to improve the car and locomotive fleets. So far, the Rock has acquired new or rebuilt some 2900 cars - about 11 and1/2 percent of its total fleet. And for 1977, it's planning to acquire some 2700 cars of various types. One-third of the motive power fleet has also been rebuilt or replaced. Included are 56 new GP-38 locomotives-which now carry names such as Loyal Shipper and Dewey Bartlett to honor people and groups that helped the Rock in its efforts to survive and rebuild.

 Now the emphasis is on track rehabilitation. "If we're to stand tall we've first got to bend down and fix our tracks," John Ingram has said.

 Rock Island hopes to finish rebuilding to Class IV (60 mph) standards the entire Memphis-Tucumcari line this year. The rebuilding is just that. Two large tie, surfacing and rehabilitation gangs, with 40 men and 13 machines each, are pushing this work. It includes re-ballasting, tie replacement and surfacingincluding through all turnouts and highway crossings. At the same time, bridges and stations are being repaired and painted. In addition, a large rail gang is installing both new and secondhand continuous welded rail. The Rock's 1976 new rail program totaled 100 miles. "That hasn't happened since the '50's," notes William C. Hoenig, chief operating officer. Tie installation has totalled 850,000.

 "A normal program for this railroad should be about 100 mi of new rail and 750,000 ties," says Chief Engineer Tom Schmidt who is managing the rehabilitation program. "We are shooting for a level of 900,000 to 1 million ties for a few years to catch up."

 Help from friends

 When it looked as though the Rock might stop running, the shippers and communities it serves began to realize just how essential it really is. And they rallied to aid the line, as did political leaders in some of the Rock lsland states.

 Some of this help has gone well beyond writing letters to Congressmen, helpful though that tactic is. For example, the town of Atlantic, Iowa, in a one-week campaign, raised $100,000 which was loaned to the Rock to pay for repairs to 57 covered hopper cars. And in Muscatine, Iowa, a local development corporation advanced funds to enlarge the Rock's yard there.

 The Rock is also benefitting from Iowa's state railroad program. More than 250 miles of Rock Island branch lines in that state have been or will be rebuilt under the Iowa plan, with the state, shippers and the railroad sharing the cost. (In this case, shippers have loaned the Rock its share.)

 Of course, the Rock could not have survived without the support and hard work of its employees. With the cooperation of the operating organizations, it has operated short trains with three-man crews in certain grain-gathering operations and in services designed to attract overhead traffic on the Memphis-Amarillo and Kansas City- Tucumcari lines. Managers are exploring with the employees and their union representatives other changes that could have an important impact on the road's ability to rebuild.

 "Our people are doing a good job," sums up Trustee Gibbons. And Mr. Gibbons himself must be counted among the Rock's most valuable assets. For him, trusteeship is a full-time, sometimes seven-days-a-week job.

 Sell off?

 One of his first moves was to ask other railroads if they had any interest in acquiring parts of the Rock. The Denver & Rio Grande Western expressed some interest in acquiring Rock's Colorado Springs/Denver to Kansas City/Omaha line. So far, nothing has come of that; but closer to producing definite action is Southern Pacific's interest in the Santa RosaKansas City line. Recently, it was reported that decision was near on the offer SP had made for the line. But, of course, any agreement would have to run the gauntlet of ICC scrutiny and the likely opposition of other railroads.

 Should other carriers eventually acquire these east-west segments, the Rock would become more of a northsouth granger railroad. (Important exceptions would be the Chicago-Kansas City/Omaha main line and the Tucumcari-Memphis line which is part of the shortest transcontinental route.)

 "We are a low-density railroad," says John lngram. "Our philosophy is to figure out how to run a low-density railroad profitably. We don't have to be the biggest."

 Though open to merger proposals, Messrs. Gibbons and Ingram are concentrating on rebuilding the Rock as it exists today. After all, waiting for a merger that never came is what got the line into its present trouble.

 "The Rock Island's value will be based on its strength," Mr. Ingram emphasizes. "That's not inconsistent with merger. It's also good for providing rail service and employee jobs."

 The Rock's achievements to date have won the grudging admiration of some competing roads, which two years ago were only too ready to see the Rock fold so they could take over its more profitable segments. As one operating man commented, "I would never work for that s.o.b. Ingram, but I have to admire the job he's doing."

 But Industrialist Henry Crown isn't impressed. Mr. Crown, a director who holds one-third of the Rock's bonds and about 10 percent of its common stock, insists that the road can't be reorganized in a reasonable time. He has fought every move by Mr. Gibbons to invest money in rehabilitation.

 Continued rebuilding could restore the Rock to a fully competitive position in about five years, Mr. Gibbons believes. Until then it won't be possible to answer for certain the question of whether the road can be reorganized on a private-enterprise basis.

 Trustee Gibboins, President Ingram, and 8200 dedicated managers and employees are working hard to prove that it can. The outcome will tell a lot about the future of private enterprise railroading.

Accompanying photographs:

Trustee Gibbons and President Ingram
Map of Track Improvements (Enlarged)
Ingram in Staff Meeting
New GP-38s