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ERIE - LACKAWANNA MERGER STUDY

APPENDIX D

Estimated Realization of Savings by Years

The savings from merger estimated for the various studies repre- sent ultimate savings after full benefits of merged operation have been realized. There will be a transition period after the effective date of the merger, however, before the ultimate savings are realized. For example, a new yard is to be constructed at Buffalo and substantial revisions made at Hornell. The estimated savings at these points, and also in other studies where the operations of the merged company will hinge upon the completion of these yards, cannot be realized in full until both yards are fully in operation. At these two points it is estimated that 10% of the total potential savings would be realized the first year and-would increase each year after merger until 100% of the total estimated savings are realized in the fourth year and thereafter.

Various factors apply to the several studies with respect to the time required before full savings can be realized. The estimated percentages realized by years, by study, are shown on Page 6, and the following comments outline the reasons for the percentages shown.

It will be noted that in general 50% is the maximum realization indicated for the first year after merger, since little detailed preparatory work would be practicable before the effective date of the merger, particularly as to negotiations with respect to working rules and seniority lists. Even for studies which can be made effective without elaborate preliminary planning or construction substantial savings would be realized only for the last six months of the year, which would permit 50% of the ultimate savings to be realized in the first year after merger, with 100% realized in the second year and thereafter.

Study I - Common Points

Each, common point was analyzed and percentages developed based upon the amount of preparatory time required before the savings could be realized. At nine of the thirteen points little or no preparatory work would be required other than that involved with the labor organizations, and it is believed that 50% of the savings could be realized during the first year and full realization could be achieved the second year. At Buffalo three years was allowed before full realization of savings in the fourth year, which reflects not only the delay caused by extensive construction plans and work, but also the greater complexity of the operations and the time which would be required to establish working rules and seniority lists covering the merged operation. At Binghamton, Scranton and the New Jersey terminal less construction is required but the savings at these points hinge on completion of the new yard at Buffalo and the revisions at Hornell in large part and full realization would not be obtained until the fourth year.

Study II - Duplicate Lines

The savings to be realized from the abandonment of duplicate lines depend in part upon new construction work and in part upon obtaining permission from the Interstate Commerce Commission. to make the abandonment.

The first three duplicate lines are located in the Pennsylvania coal fields and their abandonment would not affect the service now being rendered to the various mines. There would probably be no public opposition but a year might be required to meet the procedural requirements and it is estimated that full savings would be realized only in the second year after merger.

Traffic on the Binghamton-Great Bend line would be rerouted via the Lackawanna yard at East Binghamton, and this line could not be abandoned until the new bridge over the Susquehanna River between Great tend and Hallstead has been constructed. It is estimated that 25%'of the savings could be obtained the second year, and 100% thereafter. The last two duplicate lines, between Wayland and Corning, and between East Buffalo and Black Rock, are also largely questions of operation and public interest is but slightly involved. It is again estimated here that full savings would be realized in the second year.

Study III - Competitive_Freight Train Service

It is estimated that 50% of these potential savings could be realized for the last half of the first year or 25% for the year, and that 25% more could be realized in the second year, with total realization achieved in the third year. Realization would be delayed to some extent because of new construction.

Study IV - Carload Freight - Effect of Rerouting Freight Traffic

The rerouting of freight depends largely, on the yard revisions at Hornell which would probably be completed in the second year. Only 25% is allowed the first year and 50% the second year, with full realization in the third.

Study V - Possibility of Soliciting Carload Freight for Longer Hauls

The realization of these savings depends primarily upon the effective solicitation of the proposed traffic department, and some time will be required to change the established pattern of routing. Most of the additional revenue is earned on Lackawanna traffic. The per cents shown reflect the estimates of the traffic officers and are considered conservative.

Study VI - Less Than Carload Freight

The savings in this study would appear to be possible almost immediately, since no new construction is involved. Savings in the first year are estimated at 75% of the total, with the additional 25% included in the second year. r

Study VII - Equipment Pools

The savings in equipment in this study are largely within the control of the operating department, although some savings are contingent upon completion of the new yard at Buffalo. It is estimated that 40% of the total would be realized in the first year with an additional 20% more each year until complete realization is achieved.

Study VIII - Repair Facilities - Equipment

These savings will depend upon consolidation of repair operations at several points, involving certain new construction, transfer of machines used in repairs, and the merging F of seniority rosters and determination of personnel to be used. It Is estimated that 25% of the total savings will be realized in each of the first four years.

Study IX - Material and Supplies Stocks, and Purchases and Stores Organizations

The reduction in inventory will occur gradually as stocks are consolidated, surplus stocks are used up and not replaced, and specifications for the various items carried in stock are standardized following merger. Savings in the organization of the Purchasing Department can be realized fairly quickly, but savings in the organization of the Stores Department will depend in part upon consolidation of equipment repair facilities. It is estimated that 25% of the total will be realized each of the first three years, but that complete realization will not be achieved until after five years.

Study X - Foreign Line Charges on Company Material

Billing on company material can be changed very shortly after merger is effected and it is estimated that 90% of the savings can be realized in the first year and 100% thereafter.

Study XI - Communication Facilities

The time required for construction or transfer of communication facilities will delay realization of these savings but it is believed that 50% can be realized the first year and 100% the second year.

Study XII - Police Departments

The reorganization of this department could be done quickly and it is estimated that 75% of the savings could be realized in the first year and 100% in the second year and thereafter.

Study XIII - Effect of Merger on System Freight Revenues

Almost all of the losses estimated in this study are in Lackawanna traffic, and it is estimated that 20% of the traffic will be lost annually for a five year period. However, it is believed that these losses will begin when application to merge is filed, and if two years are allowed between the time of filing and the effective date, 40% would have been lost before merger becomes effective. Sixty per cent of the traffic would therefore be lost during the first year after merger, 80% the second year, and 100% the third year following the effective date.

Study XIV - System Expenses

G - General

Savings in this study are dependent upon consolidation of the executive, law, accounting and certain other departments, and this can be completed only after the necessary labor agreements have been worked out. Details of mechanization will be particularly troublesome. Some savings can be realized each year, however, and it is estimated that 25% can be realized for the first three years after the merger is effected, with complete realization after five years.

T - Traffic

Reorganization of the traffic department would not require as much time as Study G, but it is estimated that only 25% of the total potential can be realized the first year, with complete realization in the second year.

S - Superintendence: Operations

Reorganization of the operating department, including new divisional organizations for all lines east of Buffalo' might take a year, except for personnel forces, which will require considerably longer to adjust. No savings, therefore, are included in the first year after reorganization, but 90% savings are included for the second year and full savings in the fourth year.

Study XV - Effect of Merger on Expense of Operating Lines to be Retained

The effect of merger upon the remaining lines of the system after consolidation of operations at common points, abandonment of duplicate lines, rerouting of traffic, etc., will not be felt until the changes in operation have been made as estimated in the table showing percentage of realization for the various studies. It is therefore estimated that 20% of the total savings for this study will be realized each year until complete realization in the fifth year has been achieved.

Study XVI - Labor C;Contracts

(a) Washington Agreement

Payments under the Washington Agreement were developed by years, as described in that study, and the percentages shown represent the actual amounts by years so developed.

(b) Equalization of Rates

The estimated cost of equalizing rates would be incurred as the various merger proposals were made effective. The principal increases in cost would be in connection with train and yard service employees, who are mostly affected in Studies I, II, III, IV and V. It is estimated that 50% of the additional cost would be incurred the first year and 100% beginning with the second year and there- after.

Study XVII - Taxes on Operating Property

State taxes on operating property are payable annually on the basis of the assessment made in the previous year. Taxes in the first year after merger would therefore be unchanged as a result of merger. In following years taxes would be changed reflecting actual retirements or construction, as well as reflecting changes in net income as a result of merger, but the change would be gradual. It is estimated that 25% of the increase in taxes would be payable in the second year and an additional 25% each year.

Study XX Pensions, Group Insurance, Medical Protection and Stock Options

(a) Equalization of Benefits - Added Costs

The changes in costs resulting from equalization of benefits among officers and employees of the two companies would probably become effective as of the date of the merger.

(b) Saving from Reduction in Number of Officers and Employees

The decrease in costs following the reduction in total number of officers and employees as a result of merger would be realized only as the labor savings in the various studies were realized, and it is estimated that 20% of the total saving would be realized each year after merger.

Study XXI - Competitive Passenger Train Service

Substantial changes in passenger train service are subject to the jurisdiction of the various state public utility commissions, and the savings realized in this study could not be achieved until the necessary procedural requirements had been met. It is estimated that there would be no savings in the first year after merger, 50% in the second year, and 100% thereafter.

Study XXII - Train Dispatchers

The savings in train dispatchers would be realized in connection with the reorganization of operating divisions included in Study XIV-S. No savings are included in the first year, and 100% is estimated for the second year.

Summary of Estimated Percentages of Savings Realized
During the First Five Years After Merger

It is believed that all of the estimated savings would be realize by the end of the fifth year and would be continued thereafter. The estimated cumulative percentages of savings realized for each year by study are summarized in the table below, except that "100%" is not repeated after the first year of full realization.

Years After Effective Date of Merger
Study 1st 2nd 3rd 4th 5th
I- Common Points 18 42 88 100 -
II - Duplicate Lines - 94 100 - -
III - Competitive Freight Train Service 25 75 100 - -
IV - Carload Freight - Effect of Rerouting Freight Traffic2550100 - -
V- Possibility of Soliciting Carload Freight for Longer Hauls20356590 100
VI - Less Than Carload Freight 75 100 - - -
VII - Equipment Pools 40 60 80 100 -
VIII - Repair Facilities - Equipment 25 50 75 100 -
IX - Materials and Supplies,Stock including Purchasing and Stores Organization25507585100
X- Foreign Line Freight Charges on Company Material90100- --
XI - Communication Facilities 50 100 - - -
XII - Police Departments 75 100 - - -
XIII - Effect of Merger on System Freight Revenues6080100- -
XIV - System Expenses
G - General 25 50 75 85 100
T - Traffic 25 100 - - -
S - Superintendence: Operations - 90 95 100 -
XV - Effect of Merger on Expenses of Operating Lines to be Retained20406080100
XVI - Labor Contracts -
A - Equalization of Rates 50 100 - -
B - Washington Agreement 20 65 88 96 100
XVII - Taxes on Operating Property - 25 50 75 100
XVIII - Joint Facilities - 50 100 - -
XX - Pensions, Group Insurance, MedicalProtection and Stock Options
A - Equalization of Benefits and Added Cost 100----
B - Saving from reduction in number of officers and employees20406080100
XXI - Competitive Passenger Train Service - 50 100 - -
XXII - Train Dispatchers - 100 - - -


Summary of Estimated Savings Which Would be Realized

During the First Five Years After the Merger

At Current Cost Levels.



STUDY                                                              1st              2nd                3rd               4th               5th
  I Common Points                                              $ 815,261         $1,9O2,276        $3,985,721       $4,529,228        $4,529,228
 II   Duplicate Lines                                                 --            663,380           705,725          705,725           705,725
III   Duplicate Freight Train Service                            171,349            514,047           685,596          685,596           685,596
 IV   Carload Freight - Rerouting                                 60,044            120,087           240,174          240,174           240,174
  V   Carlod Freight - Longer Hauls                            1,015,849          1,777,736         5,301,510        4,571,521         5,079,246
VII   Equipment Pools
      L-Locomotives                                               84,825            127,254           169,646          212,057           212,057
      F-Freight Train Cars                                       121,242            181,863           242,484          305 105           505,105
      P-Passenger Train Cars                                       6,557              9,856            15,134           16 595            16,595
      W-Work Equipment                                            12,906             19,360            25,813           32,266            52,266
      M-Marine Equipent (Freight)                                325,760            488,641           651,521          814,401           814,401
VIII General Repair Facilities - Equipment
      F-Freight Train Cars                                        65,448            150,896            196,34          261,792           261,792
      P-Passenger Train Cars                                      79,095            158,186            257,27          516,572           516,572
IX   Material & Supplies Stocks, and Purchases
       and Stores Organizations                                  101,518            205,056           504,554          545,161           406,072
X     Foreign Line Freight Charges on Company
       Material                                                   16,855             18,706            18,706           18,706            18,706
XI    Comunication Facilities                                      4,345              8,690             8,690            8,690             8,690
XII   Police Departments                                         178,557            257,809           257,809          257,809           257,809
XIII  Effect of Merger on System Freight Revenues              2,580,216-L        5,173,621-L       3,967,026-L      5,967,026-L       5,967,026-L
XIV   System Expenses
       G-General                                                 462,225            924,449         1,386,674        1,571,665         1,848,898
       T-Traffic                                                 598,064          1,592,257         1,592,257        1,592,257         1,592,257
       S-Superintendence: Operations                                --              985,215         1,057,856        1,092,459         1,092,459
XV    Effect of Merger on Expense of Operating                                                                           -
       Lines Retained                                            263,460            526,922           790,392        1,055,843         1,517,504
XVI   Labor Contracts
       A-Annual Costs of Equalizing Rules and Rates              252,567-L          505,153-L         505,133-L        505,155-L         505,133-L
       B-Non-recurring payments under Washington
          Agreement and Transportation Act                        14,919-L           48,488-L          65,645-L         71,613-L          74,597-L
XVII   Taxes on Operating Property                                  ---               6,250            12,500           18,750            25,000
XVIII  Joint Facilities                                             ---              21,069            42,158           42,158            42,138
XX     Pensions, Group Insurance, Medical Protection
          and Stock Options
          A-Equalization of Benefits and Added Cost.              52,681-L           52,681-L          52,681-L         52,681-L          52,681-L
          B-Saving from reduction in number of
                  officers and employees                           9,254             18,468            27,705           56,937            46,171
XXI    Competitive Passenger Train Service                           ---            256,744           519,488          519,488           519,488
XXII   Train Dispatchers                                             ---            180,102           180,102          180,102           180,102

                                                           -------------------------------------------------------------------------------------
           A. Estimated moving                                 $1,491,987        $7,294,554       $12,025,079       $14,809,678      $15,951,810
           B. Less allowance of 15% for contingencies             225,798         1,094,150         1,803,469         2,221,452        2,389,772
           0. Estimated savings realized after allow-
                  ance for contingencies                       $1,268,189        $6,200,184       $10,219,617       $12,588,226      $15,542,038
           D. Per cent of total savings realized                    9%              46%              75%               95%              100%


           No symbol - Gain
                   L - Loss

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