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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.
| 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 Traffic | 25 | 50 | 100 | - | -
| V- Possibility of Soliciting Carload Freight for Longer Hauls | 20 | 35 | 65 | 90 | 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 Organization | 25 | 50 | 75 | 85 | 100
| X- Foreign Line Freight Charges on Company Material | 90 | 100 | - | - | -
| XI - Communication Facilities | 50 | 100 | - | - | -
| XII - Police Departments | 75 | 100 | - | - | -
| XIII - Effect of Merger on System Freight Revenues | 60 | 80 | 100 | - | -
| 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 Retained | 20 | 40 | 60 | 80 | 100
| 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 employees | 20 | 40 | 60 | 80 | 100
| XXI - Competitive Passenger Train Service | - | 50 | 100 | - | -
| XXII - Train Dispatchers | - | 100 | - | - | -
| |
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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
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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
