This website has been archived from TrainWeb.org/southerntier to TrainWeb.US/southerntier.

Mr. P.W. Johnston, Chairman          Mr. P.M. Shoemaker, President
Erie Railroad Company                The Delaware, Lackawanna & Western
Midland Building                         Railroad Company
Cleveland 15, Ohio                   140 Cedar Street
                                     New York 6, New York

                                     August 6, 1959

Gentleman:

On April 29, 1959, you requested us to being up to date our earlier report on the economics which would result from merger of your two companies, using a basis which would require as little capital money as possible. You pointed out that time was an important factor since you were desirous of filing an application with the Interstate Commerce Commission as soon as possible.

Out earlier report, dated September 26, 1958, was based primarily upon data collected for the year 1956. After conferring with your representatives, it was agreed that the method that would best suit the conditions outlined was to modify our earlier report in such a way as to eliminate the capital expenditures previously envisaged in connection with the construction of a new modern electronic hump yard at Binghamton, the establishment of an insurance company subsidiary, and the modification of general office space at Hoboken. These modifications involved further changing our original plan in the following respects: the existing flat yard at Hornell would be somewhat expanded and modified and would be used as a major yard for the merged company; the Erie main line would be used between Corning and Buffalo for both freight and passenger service, with the Lackawanna line between these points being used only for way-freight; and the executive offices of the new company would be located in Cleveland with the Disbursement Accounting at Scranton and Revenue Accounting at Cleveland.

Because of the time factor we suggested modifying out earlier report by making the changes necessary to reflect revised operations as described and by bring out estimates of savings and capital expenditures up to date by taking into account changes in volume and employment since the basic data was prepared and by reflecting current costs and rate levels. Our report is attached and it includes, as Map No. 1, a map of the two railroads showing the area served by them in common.

The studies indicate that the increased net income at current revenue and expense levels realized from merger might run as high as $15,931,810. However, we believe that this total should be reduced by 15% as an allowance for contingencies as more fully explained in the report so that our final estimate of the ultimate increase in net income is $13,542,038, which is a net figure reduced by a 5% carrying charge on the net non-recurring cash expenditure required to effectuate merger. The following table summarizes the result of our study:

The difference between the gross and net cash required to effect merger is due to the fact that to a large extent, the gross requirements would be provided by cash realized from salvage of abandoned facilities, savings from elimination of extraordinary expenditures presently planned for the first four years after merger which would not be required in the event of merger, and non-recurring income tax savings. Due to the lag in realizing the salvage and income tax savings, we estimated that $1,610,086 would be the maximum cash requirement at the end of the second year before such realizations begin to cut that amount down to the final net figure. A more detailed summary of the capital required is contained in Appendix E of this report.

We believe that part of the increase in net income will be realized immediately and that the full amount estimated will be produced within five years. Estimated increases in net income by years, after allowing 15% for contingencies, as follows:

A more detailed statement of the time element as affecting estimated increase in net income is contained in Appendix D of the report.

As a result of merger, approximately 326 miles of main track including 100 miles of first main track and 227 miles of other track main track, could be abandoned. Forty diesel locomotives could be released.

The officers and employees of the two roads total approximately 28,000 and many of them would be affected by the merger. It may well be that your employees generally believe that this effect would be adverse, and to a substantial degree. In the long run this would not be true. Even from the short term viewpoint the dislocations could be held to a minimum. It is estimated that 1982 of these officers and employes would be deprived of employment, and the location of employment would be changed for a somewhat larger number estimated at 2,159. Nevertheless, over the four or five years of the transition period the number of jobs normally created through retirements, deaths, and resignations and dismissals, estimated at 2,433 annually, so far outnumber the jobs abolished or transferred, as shown in Study XVI, that the occasional hardships and inconveniences resulting from the merger would be experienced by a relatively few individuals, and all of these would be protected financially under and order which the Interstate Commerce Commission might make permitting merger.

There are few differences in rates of pay and working rules among the companies, and additional costs would probably be incurred by the new company in equalizing rates and rules to effect the merged operation. Certain additional payments under the Washington Agreement of 1936 or the Interstate Commerce Act would probably also be made to employees adversely affected. The necessary estimates required for the purposes of this study were developed in Study XVI, Labor Contracts, which is discussed in Appendix F.

During the many months we have worked on development of our studies, we have received full cooperation from every officer and employee from whom we sought assistance. In particular, we are indebted to Mr. S.F. McGranagan of the Erie and Messrs. P.D. Jonas and W.G. White of the Lackawanna who acted on the Steering Committee.

Sincerely,

Wyer, Dick & Company, Transportation Consultants, 250 Bellevue Avenue, Upper Montclair N.J.