Requiem for a Railroad
The Collapse of the Rock Island
Gregory L. Schneider
gschneid@emporia.edu
Why Did the Rock Island Fail?

--Conventional Wisdom:
– Rock Island management was incompetent and allowed the
railroad to decline;
– Selfish Rock Island bondholders (Henry Crown) refused to
reinvest in the property once merger was under way with UP;
– Rock Island looked to UP and SP to save the property;
– Interstate Commerce Commission (ICC) killed the railroad;
– Judge Frank McGarr killed the railroad in 1980 by his decision to
liquidate the property (Fred Frailey in Trains magazine this year)
– Rock Island could have been saved—some 5,000 miles of system
still in use;
– Labor Unions helped kill the Rock Island—strike in 1979 was
death knell
Challenges to Conventional Wisdom

--Rock Island story should be seen as a part of
railroad problem:
– Regulation was a serious issue and impacted what
management could do (or not do) and issues
regarding wages and rates
– Merger was opportunity for corporate diplomacy and
UP was isolationist
– Could the Rock Island survive a changed
transportation economy (highways, barges, airlines)?
– Government failure to bring prosperity to passenger
system and to northeastern railroads leads to only
solution: deregulation and rationalization of system
ACT ONE:
Merger
Success Story
Source: Classic Trains Magazine, Spring
2011; personal collection of author
Postwar Success
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1. Rock Island came out of 15 year reorganization in
1948
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2. Railroad had been rebuilt, was in good physical shape
with new streamliners and dieselization (by 1954)
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3. President John Dow Farrington was a good railroad
man and a builder (Armourdale Yard, KC; Silvis, Il.;
Samson of the Cimarron)
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4. Revenues in 1949 were $197 million with low
operating expense ratio
One Decade Later
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1. By 1959 railroads were suffering from competition
from trucking (LCL freight), interstate highways hurt
passenger trains, continued regulation by ICC, low
capital investment

2. Rock Island was still profitable, with peak of revenues
($219 million) against expenses of $172 million—net
income of only $8 million

3. problems on horizon: territory heavily dependent on
agriculture; increasing wages; little industry online;
regulation
Siding One: What’s the Matter with Regulation?

1. Interstate Commerce Commission created in 1887—
railroads had monopoly on transportation—powerless
until:

2. Hepburn Act (1906)—expanded power of ICC to set
maximum rates on railroads
3. Mann-Elkins Act (1910)—expanded rate powers of ICC
and created Commerce Court
4. WWI—railroads controlled by federal government
(USRA)—returned to private control following the war
Transportation Act of 1920

1. greatly expanded powers of ICC—how?
– Given power to set minimum rates through valuation of railroad
assets (allow a fair return on investment)—who says what that
is? ICC
– ICC given power to determine whether railroads can abandon
service, track
– Empowered ICC to regulate railroad securities
– Also created Railway Labor Board for labor issues
2. Authorized reduction in number of railroads and money from
rich to poor railroads—never enacted—still being discussed into
1970s
Merge or Die
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1. Railroads were hamstrung by regulations and inability
to attract enough capital investment—average rate of
return of around 4% in 1950s; 2% in 1970s
2. merger was one solution and beginning in 1959 the
merger era begins
3. Rock Island’s board seeks merger and studies begin
to merge with Milwaukee Road—rejected after several
studies
4. In 1963 the Union Pacific becomes the partner—
Southern Pacific joins—roads file necessary paperwork
with ICC in 1963—stock buyout of RI by UP
Source: UPI Photo, 11/15/1963 (author’s collection)
Bleak House
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1. Intervention by other railroads—7 railroads initially
oppose merger, joined by 5 others—why?
2. hearings delayed until 1965—finish in 1968—then . . .
A waiting game (48,000 pages of testimony, 200,000
pages of evidence, 247 days of hearings in total)—
longest and biggest case in ICC history
3. CNW tries takeover of Rock Island by offering stock
swap—Ben Heineman—further delays hearings
4. use of Rock Island to remake western railroad map—
Nathan Klitenac—report released in 3 volumes (final
volume in 1974 recommends merger with conditions)
One Man Wrecking Crew

--Heineman’s strategy:
– Ruin the Rock Island merger with UP by offering stock swap and
exchange offer—more attractive than UP offer initially and UP
had to renegotiate terms of the deal
– Once in ICC’s hands, show how RI-UP merger would alter
regional rail map and propose instead a “merge a trois” between
RI, CNW and Milwaukee Road
– Delay, delay, delay—keep the merger before ICC and prevent
collapse of CNW in process—”one railroad would survive and it
would be the CNW”
– Diversification—Heineman diversifies into Northwest Corporation
and sells railroad to employees—Larry Provo continues as
intervener in Rock Island merger
Impact--Rock Island’s Worsening Condition
1964—last profitable year--$3.8 million net income
 1965—(1.4 million)--loss
 1966—(2.6 million)
 1967—(18 million)
 1968—(9.8 million)
 1969—(11.3 million)
 1971—(6.7 million)
 1972—(6.1 million)
 1973—(14.9 million)
 1974—(23 million)

Impact—Rock Island’s Working Capital
1961--$37 million
 1962--$16 million—funded improvements & paid debt
 1963--$14 million
 1964--$9 million
 1965--$6 million
 1966--$2.8 million
 1967—($4.6 million)
 1970—($15.7 million)
 1971—($15.2 million)
 1973—($27 million)
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What were the Problems?
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1. declining traffic base—loss of some agriculture to
trucks who could offer lower shipping rates
2. passenger trains are expensive and operate at loss—
Rock can’t afford Amtrak entry fee ($4.8 million) and
operate two intercity trains from 1971-1978 (both lose
$1 million per year even with subsidy)—Rock also has
Chicago commuter service as cash drain (RTA created in
1976)
3. little industry on line
4. not enough cars and locomotives
5. declining maintenance (no money for track repair)—
who is to blame?
ACT TWO:
Bankruptcy
No One Likes John Ingram


FRA Administrator who was named RI President in
October 1974 (a sort of coup)—Henry Crown was not
present at meeting
Why was he a choice of some board members?
– Thought he could supervise the government loan—in February
1975 Rock is granted $9 million, rather than $100 million
requested
– Problem was that he was hated in Washington—brash and
acerbic figure, he had antagonized many of the people who
could have helped the railroad—he himself thought Rock Island
should wither and die (1972)
– Penn Central kept tabs on his remarks and stalked him during
early 1970s
John Ingram
Bankruptcy—Key Issues
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1. Rock files for bankruptcy (cashless) on March 17,
1975—Ford administration refuses to bailout RI—notes
of phone call to Crown in Ford Library
2. Judge Frank McGarr appoints William Gibbons as
Trustee pursuant to Section 77 reorganization—Gibbons
and Rock President John Ingram decide to reorganize
the railroad
3. No help from federal government to repair track
(request for $100 million loan in 1974 from FRA—Rock
gets $9 million)
4. Intervention against reorganization by Henry Crown
William Gibbons, Trustee
Henry Crown
Crown Intervention
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1. Henry Crown was rags to riches tale—started
aggregate business in Chicago with his brothers—
became Material Services Corp., largest in Midwest
2. smart investor in railroads (Frisco, BN, Rock Island)
and in real estate (original investor in Hilton Hotel Corp.,
owned the Empire State Building in 1950s)
3. majority owner of General Dynamics in 1950s, 1970s
4. majority owner of RI stock (150,000 shares) and of
first mortgage bonds
5. served on RI Board from 1948-1975 (headed up
Finance and Executive Committees)
What Crown Wanted
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1. After 1974 Crown believed RI should be liquidated
2. Fought against the Trustee’s efforts to save RI in
Court
3. Retained the Chicago firm of Jenner and Block
4. Argued that the Trustee was using assets of road and
hurting bondholders (Continental Bank, First National
Bank of Chicago both agreed)
5. after liquidation supported Trustee’s efforts to
reorganize—Jenner and Block worked with Trustee after
1980
Major Problems with Reorganization
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1. Bad weather—historically bad Midwestern winters in
1978 and 1979
2. inflation—interest rates of 18% by 1980
3. diesel fuel shortages—another result of government
regulation (Rock Island down to 6 day supply by 1979)
4. continuing record losses (between 1975-1980 RI
accumulates an additional $100 million in losses)
5. labor issues—no willingness to negotiate to save
railroad by BRAC and UTU--strike on Aug. 28, 1979 ends
in ICC directed service
6. reorganization plan submitted to court in Dec. 1979—
rejected and railroad order liquidated in Jan. 1980
Improvements by Trustee
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1. Acquisition of motive power through lease
arrangements (EMD GP-38, SD 40-2)
2. Rebuild program for older GP-7s
3. Car acquisition program—jumbo hoppers
4. Unit grain trains from Iowa to Houston
5. Track maintenance program with states and shippers
(Iowa branchlines)
6. Problems: slow orders (over 5,000 miles of system
plagued by slow orders increasing operating costs
substantially); delay of plan of reorganization—why?
Siding Two—Federal Response
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1. BIG EVENT—Bankruptcy of Penn Central
Transportation Co. in June 1970—formed in Feb. 1968,
merger between Pennsylvania and New York Central
2. PC losses are staggering—over $1 billion per year—
threatens entire economy (threat of liquidation)—PC
carries 1/3 of passengers; 1/8 of freight
3. Nixon admin. And Congress react—form Amtrak
(1971) to remove passenger train burden from RRs
4. passage of 3R Act (Regional Rail Reorganization Act)
in Jan. 1974 to study plan for NE railroads—created FRA
and led towards Conrail in 1976
Ford and Choo-Choos
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1. 4R Act (1976)—creates
Conrail and offers
financial assistance to
struggling RRs
2. No aid to Rock Island
from federal govt.
3. Discussions of
regulatory reform
4. differences between
WH and Dept. of
Transportation
Carter—Deregulator
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1. Push towards deregulation
of transportation
2. Airlines and trucking
deregulated first—RRs take
longer—what about
privatization of Conrail? Not
time. Amtrak? No support
3. Congress acts with WH to
secure Staggers Act (1980)
which deregulates RRs and
frees them from rate control
by ICC; designed to speed up
mergers and process of track
abandonments
ACT THREE:
Liquidation
Reorganization and Rebirth
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1. Rock Island is liquidated—Trustee Gibbons sells estate
(5,000 of 7,500 miles is still in use today; remainder
abandoned and sold for scrap)
2. assets of railroads—real estate, locomotives, etc. all
sold or scrapped
3. Trustee secures major Supreme Court victory (Railway
Labor Executives vs. Gibbons, 1982), freeing Rock from
paying labor unions $75 million in vacation pay from
estate (argued by Jenner and Block, firm used to argue
against reorganization)
4. Successful reorganization plan filed with Court in 1982
Reorganization and Rebirth
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5. Rock emerges from reorganization in 1984 as Chicago
Pacific Corp.—Trustee had paid all debts (which
amounted to $250 million in 1980) with interest; repaid
stock and bondholders and taxes
6. Chicago Pacific is capitalized with $400 million from
liquidation of railroad—board includes Thomas Ayers, Bill
Ayer’s father
7. investment company led by Harvey Kapnick—acquires
Hoover Vacuum Cleaners; fights attempts at hostile
takeovers
8. Bought out by Maytag (Newton, Iowa) in 1989—end
of Rock Island RR
Major Changes in Lines
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1. Southern Pacific buys Golden State Route from NM to
SL in 1979 ($58 million)
2. bidding war for Spine Line between Minneapolis and
KC (won by CNW)
3. Branch lines in Iowa spun off to shortlines, CNW
4. Iowa Interstate created (1985) to takeover Chicago to
Omaha traffic—CSX buys main from Chicago to Bureau,
Il. and Peoria
5. RTA (later Metra) buys Rock Island main in Chicago
and controls commuter service