As part of the $10 billion deal, CSX and Norfolk Southern promised skeptical shippers, shareholders and government regulators they would improve transportation and lower freight costs east of the Mississippi. They insisted that they had planned the takeover so meticulously that they would avoid the costly gridlock and confusion that followed the merger of Union Pacific and Southern Pacific railroads in 1997.

Yet from day one of the Conrail takeover, the plan fell apart. Within weeks a huge list of problems and foul-ups stalled freight and sapped investor confidence. Norfolk Southern’s waybill system was incompatible with Conrail’s. Hurricane Floyd’s flooding in North Carolina, combined with a confusing new regional management system, overwhelmed CSX. Both railroads lost trains — sometimes for weeks at a time. The militaristic management styles of both companies made them unable to devise quick solutions. Customers screamed and sweated as their businesses were threatened, and some switched to more expensive trucks.

To correct their similar problems, both railroads spent millions of dollars for train-crew overtime, locomotive and equipment leasing, construction, computer programming and other items. Profits plunged and prominent investors such as Fidelity, Scudder Kemper Investments and T. Rowe Price raced to the exit, dumping millions in stock. Scudder sold nearly 5.7 million shares of CSX in this year’s first quarter, and T. Rowe Price unloaded 1.4 million shares of Norfolk Southern. Other big institutional investors — such as Fidelity Management and Research, Fidelity Magellan and Brinson Partners — likewise unloaded big stakes.

Both rail companies’ stocks tanked because of the Conrail woes, although rising fuel costs and a plunge in foreign demand for coal were also factors. Norfolk Southern dropped from $35 a share in June to a low of $12 a share in March. CSX dropped from a high of $51 a share in July to less than $20 a share in May.

To be sure, conditions today seem to be improving for CSX and Norfolk Southern. Both report that their trains are moving quicker and spending less time in terminals, signs that the companies have regained control over their separate networks of more than 20,000 miles. For now, however, top managers at the railroads are keeping their heads down. CSX Chairman and CEO John Snow and his counterpart at Norfolk Southern, David R. Goode, both declined to explain to Virginia Business their difficulties integrating Conrail’s assets into their existing operations, preferring to let their recent pep talks to shareholders and financial analysts speak for them.

In his latest message to shareholders, Snow says: "There is no doubt in my mind that CSX is positioned to regain earnings momentum and that the returns of the Conrail merger will start to be realized this year. ... We must regain shipper confidence by improving service and rooting out imbedded costs in our rail network. As we do this, we will reach our fundamental objective of building earnings momentum and accomplishing a significant turnaround in 2000." Norfolk Southern’s Goode was equally optimistic during an April conference call with stock analysts: "Without predicting numbers, we intend to demonstrate steady improvement throughout the year. We’re going to hit 2001 with a ‘no excuses,’ flat-out transportation system."

Up until last spring, however, Snow and Goode were making ambitious promises, rather than excuses. But what the railroad executives promised and what they actually delivered would make for a telling case study in how different corporate cultures, rigid management styles and incompatible computer systems make companies unable to adapt easily to new conditions.

When the takeover was imminent, the CEOs projected their companies would save more than $400 million over three to five years by integrating Conrail into their respective networks. They also claimed that their purchase of Conrail would speed shipments, reduce transport costs, increase competition by breaking up Conrail’s monopoly in the Northeast, and clean the air in cities from Florida to Michigan by diverting most bulk cargo from the region’s highways.

Within hours of Conrail’s demise, those pledges began to crumble. "Instead of removing trucks from I-95, I think they single-handedly were responsible [for] putting even more" on the interstate, says Mike Heimowitz, spokesman for the Chemical Manufacturers Association, a 190-member trade group based in Washington, D.C., that remains largely dissatisfied with both railroads’ performance.

Norfolk Southern, which paid $5.8 billion to add 7,200 miles of Conrail track to its 14,400-mile system, stumbled first. In the wee hours of June 1, 1999, someone wrecked schedules by mistakenly loading improper start-up data in the firm’s computer systems, company officials say. After programmers began to solve that first problem, it was determined that the waybill systems of the two railroads — which track customer orders and are perhaps the most important computer system of any cargo network — were incompatible. This major flaw of a very basic system somehow eluded 140 teams of examiners that labored for two years to pinpoint any and all trouble spots between Conrail and Norfolk Southern. "It was known the system wasn’t perfect, ... but we couldn’t possibly test all possible combinations" in all computer systems, says John D. Samuels, senior vice president of Norfolk Southern operations, planning and support.

Norfolk Southern’s computers were flooded with erroneous information about the whereabouts of hundreds of thousands of freight cars. Cars, both loaded and empty, bounced between terminals without being unloaded. Others idled as the railroad tried to correct the problem by having hundreds of workers check car records manually — something that hadn’t happened at U.S. railroads in 20 years, Samuels says.

Compounding the crisis was a problem Norfolk Southern should have known about before trying to increase its network by half: the brain drain in Conrail’s computer staff. As Conrail streamlined in the 1980s and CSX and Norfolk Southern bickered over the railroad in the early 1990s, programmers jumped ship, leaving Norfolk Southern with few experts to explain the nuances of Conrail’s latest computer systems. "The institutional knowledge of the Conrail [computer] systems was becoming weaker and weaker," says Samuels, who spent more than 20 years at Conrail.

It took Norfolk Southern more than four months to unclog its computers and clear most of its yards of thousands of rail cars that should have been somewhere else. These and other oversights by Norfolk Southern have cost the company to date "several hundred million dollars" to correct, says Bill Rohig, the company’s treasurer.

The carelessness with which Norfolk Southern approached the complicated integration of Conrail cost the company and its shareholders dearly. Last year, Norfolk Southern’s overall net income fell to an eight-year low of $239 million, or 63 cents a share. In 1998 it was $734 million, or $1.94 a share. Income from railroad operations slipped to $718 million from $1.05 billion in 1998 as railroad expenses jumped 37.5 percent to $4.4 billion last year from almost $3.2 billion.

By contrast, CSX got off to a strong start. By almost all accounts, operations throughout the company’s new 23,400-mile network ran smoothly throughout the summer. Norfolk Southern’s well-publicized troubles pushed new customers to CSX, which spent $4.2 billion for 4,500 miles of Conrail track. CSX officials, who said they were happy to get the new business, admitted they struggled to move it efficiently. Critics, including Penn State University business professor Peter Swan, say CSX miscalculated. "They clearly bit off far more than they could chew," Swan says.

Delays turned into disaster for CSX in September when Hurricane Floyd flooded towns and cities from Florida to New York. Especially hard-hit were CSX lines in North Carolina. Washed-out tracks and bridges disrupted service. Like Norfolk Southern, the railroad spent heavily to clear its tracks before the peak autumn shipping season.

Company officials say Floyd further complicated the already complex job CSX faced as the railroad tried to absorb new customers, unfamiliar routes, new equipment and thousands of Conrail personnel. "There was a terrifically difficult process of integration" of new resources within a new business environment, says Jesse Mohorovic, CSX’s vice president of corporate communications and investor relations. Exacerbating the problem was "our inability to resolve it quickly. We were kind of stuck in the mud for a little too long."

CSX won’t say how much it spent to recover from Floyd’s floods and the resulting congestion and delays. But the magnitude of the disaster is evident in the company’s 1999 annual report, which says net income plunged to seven-year lows of $2 million, or 1 cent a share, from 1998’s $537 million, or $2.51 a diluted share. Operating income dropped to $608 million from $1.1 billion a year earlier as operating expenses surged to $10.2 billion from $8.7 billion. "This [earnings] decline is directly attributable to the difficulties encountered implementing the Conrail merger," Snow said in his annual shareholder message.

Unfortunately for CSX, fallout from the Conrail merger extended to 2000, costing railroad division president Ronald J. Conway his job. Conway was promoted by Snow to run CSX’s rail operations in July 1999. Snow was pleased with Conway’s efforts to streamline and simplify CSX’s network. Conway had divided the system into five large regions and 252 local management areas. Taking a page from Conrail, Conway had also reorganized CSX by product lines, creating merchandise, automotive and coal-service groups. By Oct. 1, according to a 1999 interview with Trains magazine, Conway was claiming that the new CSX system had generated $5 million in new revenue and saved $3 million.

Conway’s claims of success aside, CSX management determined that his reorganization plan was too complicated for most CSX employees to understand and adopt during the difficult months of 1999. It confused CSX employees about accountability and to whom they reported. These difficulties, along with a bad winter, continued to hurt customer service. Other members of CSX’s senior management team felt Conway’s methods would not solve the company’s problems. While Conway’s plan "seemed to work at Conrail, it was not the right plan for us at the time," says Mohorovic. (Conway, reached by telephone at his Florida home, declined to comment for this story.)

That sounded the death knell for Conway. In the first quarter, per-share earnings dropped by more than half, to 14 cents a share, from 36 cents in March 1999. In April, Conway resigned after nine months on the job. Snow took direct control of railroad operations, a job he’d held in the mid-1980s.

Both railroads operate in a top-down, rigid way. Doing so may have been necessary before computers helped the nation’s trains run faster. But during the Conrail debacle, such a corporate style made things worse. Critics blame both Snow and Goode for maintaining this outdated corporate culture that dissuades employees from approaching management with solutions to problems. Had the two companies encouraged criticism and innovation from middle- and lower-level managers and employees, the problems with the computers and management that eventually shredded earnings could have been spotted — and corrected — earlier. When senior executives exert unyielding control over a company’s day-to-day activities, difficulties like the ones in the Conrail switchover "are not reported quickly for fear of reprisals," and that often means small problems become bigger and more costly to fix, says Penn State business professor and railroad analyst John C. Spychalski.

Also problematic was blending veteran employees and managers from organizations as diverse as Conrail, CSX and Norfolk Southern. Unlike button-down Norfolk Southern and CSX, Conrail had encouraged employee-generated innovations to survive government receivership and become the darling of the U.S. rail industry. Gary Spiegel, another Conrail veteran and former CSX senior vice president for railroad operations, told the employee newsletter in January before he departed along with Conway that the division’s internal sniping must end: "We must develop a culture where trust and teamwork replace traditional command-and-control management, and where cooperation is valued over confrontation."

Goode’s points hold special meaning as well for the shareholders and customers of his company and Norfolk Southern. This past year has been a painful one that has cost shareholders and customers dearly. They likely wish that David Goode and John Snow had been so considerate before they set their sights on Conrail.