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ERIE - LACKAWANNA MERGER STUDY

Effect of Merger on System Freight Revenues

Study XIII

The purpose of this study was to determine the net effect of merger on freight traffic and revenues, excluding traffic already dealt with in Study II - Duplicate Lines, Study V - Possibility of Soliciting Carload Freight for Longer Hauls and Study IX - Material and Supplies Stocks, including Purchases and Stores Organizations. The traffic analyzed by each road was the same as outlined in Study V.

Consideration was given to the following items

1. Possible losses of carload freight traffic at other than common points because of the pro rata allocation of traffic by, certain traffic managers.

2. Possible loss of revenue on freight now handled by two lines on two-line rates which would be handled by one merged company at single-line rates.

3. Possible losses of revenue as a result of revised divisions.

4. Possible increases in freight revenue at other than common points, because of improved service, better car supply, etc., under merger.

5. Other possible losses in freight revenue under merger. This item included a study of possible decreased interchange with foreign lines due to deteriorating relationships as a result of diverting traffic away from foreign lines for a longer haul as estimated in Study V - Possibility of Soliciting Carload Freight for Longer Hauls.

It is believed there would be no losses for Items 1, 2 and The traffic officers are of the opinion that improved service and better car supply, Item 4, would ultimately lead to additional traffic and revenue though the amount cannot be estimated.

It was assumed in this study, as in Study V - Possibility of Soliciting Carload Freight for Longer Hauls, that the policy of the merged company would be to make every effort to secure traffic for the routing providing the greatest net revenue but, failing in that, to accept whatever business it could get via any route. This policy would manifest itself principally in the solicitation of traffic for the longer haul via the Erie line to and from points west of Hornell and Buffalo and in transfer of the Lackawanna's New Haven interchange from Port Morris to Maybrook.

While it is expected that this would result in substantial increases in revenues, as indicated in Study V, this increase would be at the expense of other carriers now handling this business west of Buffalo and of the L&HR and L&NE, and these carriers, especially the Nickel Plate, which is now the Lackawanna's preferred connection, could hardly be expected to view their relationships with the merged company with the same enthusiasm with which they now deal with the Lackawanna.

On the other hand, the choices east of Buffalo are limited. The New York Central is already a strong competitor, and the Lehigh Valley, though independently operated, is an affiliate of the Pennsylvania. In addition, the merged company, through its new yard at Buffalo, and its maintenance of existing service through the Buffalo gateway, would undoubtedly provide superior service east of Buffalo which would continue to be most attractive to shippers.

After consideration of all these factors, it is believed that the most serious losses would occur in traffic originating or terminating west of Buffalo moving over the Lackawanna to or from New York Harbor and southern New England, the losses being greater eastbound than westbound. No losses are estimated in Erie traffic, since the assumed solicitation policy of the merged company is substantially the policy of the Erie today.

Estimates of cars and revenues lost and out-of-pocket costs saved (Developed and applied in accordance with the principles outlined in Appendix C) are summarized below. Freight car per them and mileage costs were taken into account in Study VII-F, Freight Car Pools.

                                                 Out-of-Pocket
Estimated Losses             Cars     Revenue     Costs Saved     Net Loss

DL&W Traffic
 Overhead traffic between
 points west of Buffalo
 and New England            26,492  $2,9244,992   $ 819,454      $1,425,538
Traffic from Buffalo
 connections termi-
 nating at New York         18,023   3,131,510        620,679     2,510,831
Traffic to Buffalo
 connections origi-
 nating at New York          1,888     341,300         63,206       278,094

Total- DL&W Traffic         46,403  $5,717,802      $1,503,339    $4,214,463

These estimated losses represent half of the Lackawanna overhead traffic between Buffalo and New England and approximately 24.5% of the Lackawanna business originating or terminating at New York.

A comparison of these estimated losses with the estimated gains which could be expected to result from solicitation for longer hauls by the merged company is shown in the table below:

                                           Erie      DL&W
                                         Traffic     Traffic         Total

Estimated increased not revenue which
will be obtained by the merged company
from solicitation of freight for
longer hauls   (Study v).               $168,538 $5,291,209      $5,459,747


Estimated net revenue which would be
lost by the merged company as a
result of adverse solicitation by
connection lines (Study   XIII).          ------  4,214,463      4,214,463


Estimated loss of freight revenue
account reduced divisions on Erie
traffic now moving to and from
CNJ points via Plains Junction,
which, after merger, would move
via Taylor (Study XIII).                    32428     -----         32,286


Estimated net gain in revenues by
merged company                           $136,252  $1,076,746      $1,212,998