Burlington Northern Inc.

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Burlington Northern Inc.

3800 Continental Plaza
777 Main Street
Fort Worth, Texas 76102
U.S.A.
(817) 878–2000
Fax: (817) 897-7997

Public Company
Incorporated: 1849 as Aurora Branch Railroad
Employees: 32,000
Sale: $4.67 billion
Stock Exchanges: New York Midwest Pacific

Burlington Northern Inc. is one of the largest transportation firms in the United States. Specializing in rail transportation, in the early 1990s it operated more than 25,000 miles of track in 25 states and 2 Canadian provinces, more than any other U.S. railroad company. Founded in the mid-19th century on the wave of the pioneer movement, Burlington played a central role in settling the central and western United States. Despite efforts to diversify, in the 1990s the firm still gained most of its revenues from transporting agricultural and manufactured products, especially coal and grain, to markets and to export terminals throughout the eastern and western United States.

Burlington was founded in 1849 in the small town of Aurora, Illinois, and its early fortunes were linked with the burgeoning midwestern railway industry and the growing nearby city of Chicago. In the years from 1845 to 1848, swarms of settlers began to push west, lured by vast tracts of arable land and the promise of gold in California. By 1848 Illinois had already become the largest grain producer in the nation, requiring links with established eastern markets as well as with developing western settlements. The state’s promise was reflected most clearly in Chicago’s explosive growth as a railroad center. In 1847 Chicago had not even a single mile of railroad, but by 1854 it had become the railway capital of the United States.

Astutely anticipating Chicago’s ascendancy, Aurora businessmen in 1848 proposed the construction of a railroad to connect with the Galena and Chicago Union Railroad, thus linking Aurora not only to the hub of the Midwest but also to the markets of the East. The State of Illinois charter for the Aurora Branch Railroad was signed into law on February 12, 1849, by Governor Augustus French. It authorized 12 miles of track to connect with the Galena Railroad. The Aurora commissioners immediately issued stock, selling more than a quarter of the total issue in nine days, and elected five members to its board of directors with Stephen F. Gale as its president.

Construction of the Aurora Branch progressed swiftly. By August 27, 1850, six miles of rail were laid; by October 21 of the same year the fledgling railroad began regular service to Chicago. The company encountered stiff competition from the beginning. In 1850 the U.S. Congress ceded 2.5 million acres of public land in Illinois for the construction of a railroad throughout the length of the state. Eager to promote the railroad industry, the Illinois legislature in turn granted numerous charters to new rail firms during its first session of 1851. Potential routes then crisscrossed the state, some quickly materializing and threatening to cut off or supersede the Aurora Branch.

To safeguard their young firm, Aurora directors moved to consolidate with three other new lines: the Central Military Tract Railroad, Peoria and Oquawka Railroad, and Northern Cross Railroad. The move was financed by eastern interests bent on profiting from the developing Illinois railroad industry. In January 1852 Boston financiers bought enough stock to elect John W. Brooks, who represented Boston interests, to the Aurora board.

Chauncey Colton, a promoter of the Central Military Track, met with Elisha Wadsworth, an Aurora director, and James Grimes, a Peoria and Oquawka director, proposing to consolidate their three lines into one through-route between Chicago and the Mississippi River. John Brooks in turn persuaded John Murray Forbes, the leader of the Boston group, to fund the consolidation. In 1852 the respective charters were amended to accommodate the territorial changes, and the Aurora Branch officially changed its name to Chicago and Aurora Railroad Company. Eventually, Northern Cross, which extended southwest from Galesburg, Illinois, joined the group. The original 12-mile Aurora branch now reached from Chicago through Aurora and Galesburg to Burlington, Iowa, and Quincy, Illinois, two small towns on the Mississippi River, thus fulfilling the intent of Colton’s original plan. In 1855 the Chicago and Aurora again changed its name, this time to The Chicago, Burlington and Quincy Railroad Company (CB&Q). By 1864 the various segments of the system had been united into a single corporate entity under the control of the Chicago, Burlington and Quincy, which became the parent company.

CB&Q received its impetus from the urgent expansion and stiff competition of the young railroad industry rather than from a single visionary leader. In the first few years, presidents rapidly succeeded one another. In 1851 director Elisha Wadsworth followed Gale as president, but exactly a year later, Gale was re-elected to succeed Wadsworth. In 1853 an easterner, James F. Joy, was elected president, reflecting the enlarging interests of the Boston financial group in the future of the company. In 1857 John Van Nortwick became president, holding the post until 1865, the longest term of any president to date. For each of these men, running the railroad was only one of many responsibilities; CB&Q was not to have a full-time president until 1876.

Van Nortwick guided the firm through the financially rocky years of the late 1850s. With Boston capital supplementing local dollars, the railroad had established a solid financial footing by 1852. The panic of 1857, however, wiped out earlier successes. Wheat and corn crops were abnormally small in 1858 and 1859, providing little for railroads to haul. In the company’s fiscal year 1858–1859, tonnage moved by CB&Q amounted to only three-quarters of the previous year’s haul, and the number of passengers carried was 20% less than the preceding year. Revenues in 1858 were only 60% of what they had been in 1857. Bonds and a mortgage were issued to cover outstanding bills. A portion of the income from these sources, however, was earmarked to repay old bonds. One million dollars was set aside to cover the cost of a new entry into Chicago, and a sinking fund was established to liquidate the debt on or before its maturity, bespeaking a prudent approach to financial management that guaranteed CB&Q’s future. By fiscal year 1860-1861, total revenues were up 38%.

The Civil War closely followed the lean years of the late 1850s, and the wartime economy launched CB&Q’s full economic recovery. The company’s primary wartime challenge was to manage the increased traffic in goods and people. The railroad’s physical plant and facilities were enlarged and adapted to meet this demand. During the war years, the company doubled its supply of freight cars and improved its roadbed, track, and terminal facilities in Chicago, Aurora, and Galesburg. Revenues and profits increased with the traffic. For the fiscal year ending April 30, 1863, CB&Q experienced a 90% rise in net income.

Expansion and improvement continued in the postwar years. From 1864 to 1873, CB&Q track and traffic increased fourfold. Technical improvements kept pace. In 1867 the firm laid its first steel rails, replacing iron ones. During the 1870s and 1880s the route was expanded in Iowa, Nebraska, and Illinois, and preparations were made to reach farther toward the Pacific. The push west generated intense competition among railroad companies. Although revenues increased 2.5 times in the first postwar decade, traffic climbed more quickly. After guiding CB&Q through the financial panic of the late 1850s and the Civil War, Van Nortwick resigned as president in 1865, and James Joy was re-elected. Following him, James Walker was elected president in 1871 and Robert Harris in 1876.

As the railroad industry expanded in the 1870s, it also experienced increased government regulation and labor unrest. In the early 1870s most of the states on the Burlington route, as CB&Q’s network was called, passed stiff regulatory measures known collectively as the Granger Laws. Such laws fixed passenger fares and freight rates, providing that the latter be based on distance rather than the quantity or nature of the commodity shipped. In 1874 under Walker’s leadership, CB&Q challenged the constitutionality of Iowa’s Granger Laws. In 1877 the Supreme Court ruled in favor of Iowa. This suit was only one of many of the Granger cases. Together, these cases established the precedent of government intervention in and regulation of businesses that provided public services.

In 1877 in solidarity with railroad workers nationwide, CB&Q workers struck in Chicago, Galesburg, and Iowa. In Chicago, President Harris discontinued freight service but kept passenger lines open. Charles Perkins, vice president of CB&Q, refused to do the same in Iowa; acting independently, he completely shut down the Iowa leg. His disagreement with Harris over labor relations provoked corporate struggles that eventually moved Harris to resign. John Forbes, the eastern financier who had funded the original Aurora Branch, took over as president in 1878. Remaining in Boston, he joined forces with Perkins, who became the western partner in this two-man leadership team.

Together, Forbes and Perkins developed a highly efficient corporation. In 1881 Forbes resigned and let Perkins take over as president. Under Perkins, leadership was consolidated in the president’s hands, ending the power shifts between board and president that had characterized the first 30 years of CB&Q’s existence. Perkins’s 20-year presidency was marked by periods of financial success in the 1880s and financial downturn in the 1890s. These years were punctuated by ongoing contests with both the government and with labor.

The early and middle 1880s were years of general economic improvement with small fluctuations. Because CB&Q’s freight was largely agricultural, it was vulnerable to changing crop yields, and in 1881, for example, net income declined after a poor season. The 1883 crop was excellent, however, and net income rose to $8.7 million, the highest company income in the 19th century. In that year CB&Q was among 17 railroads serving Chicago, yet it carried 41% of all corn received in the city, 34% of all rye, 33% of all wheat, and 21% of the oats, and delivered more livestock than any other company. The year 1887 was the firm’s best to that time in terms of traffic hauled and gross earnings.

Technical improvements also contributed to CB&Q’s success in the 1880s. In 1886 and 1887 company engineers improved the air brake, previously devised by Westinghouse for use on heavy freight trains. The better brake allowed higher train speeds and the railroad instituted its fast mail coach in 1884. In general technical developments permitted rapid expansion. In 1882 Burlington completed a through line to Denver, and in 1886, to St. Paul-Minneapolis, Minnesota. All told, from December 31, 1880, to December 31, 1890, CB&Q track increased in length from 2,771 miles to 5,160 miles.

In the late 1880s another episode of labor unrest compromised some of the early successes of Perkins’s tenure. On February 27, 1888, CB&Q engineers struck, beginning a walkout that lasted until January 4, 1889. Labor finally capitulated to management, but not without damage to the company. After the hugely successful 1887, fiscal year 1888 was disastrous. Freight revenue dropped by more than 17% from the previous year, while operating expenses increased by the same percentage. By year’s end there was a net loss of almost $250,000.

Perkins was concerned about increasing government regulation. In 1887 President Cleveland signed the Interstate Commerce Act, a measure that Perkins strongly opposed as a restraint to the continued viability of the railroad industry. Along with the Chicago and Northwestern and the Union Pacific railroads, CB&Q tested the constitutionality of Nebraska’s Newberry Law, passed in 1893, which established maximum rates on all freight transported in the state. This time, the U.S. Supreme Court decided in favor of the railroads.

In the 1890s circumstances coincided that reversed the financial successes of the 1880s. Increasing competition and regulation, economic depression following the panic of 1893, and rising taxes combined to decrease net income for the eight years following 1888; during those years it was only 60% of what it had been from 1881 to 1887. Improvements in physical plant were kept to a minimum, reflecting CB&Q’s usual conservative fiscal policy. From 1889 to 1896 new acquisitions fell well behind the national average. In 1898 John Forbes died, closing the founding era.

By the mid-1890s CB&Q’s corporate structure had become large and unwieldy. Most of the smaller railroads it had acquired were independently owned and operated, affiliated with CB&Q only through lease arrangements or stock ownership. In 1899 Perkins financed the purchase of most of the companies, greatly simplifying the corporate structure of the Burlington system. Meanwhile, E.H. Harriman, chairman of the Union Pacific Railroad, and James J. Hill, chairman of the Great Northern Railroad and a controlling voice of the Northern Pacific, were both looking longingly at the entire Burlington network. CB&Q still controlled the Chicago traffic, the major prize that had eluded both of these men. For their part, Perkins and other CB&Q executives recognized the need for a link to the Pacific Northwest with its rich supplies of lumber. In April 1901 Hill agreed to purchase two-thirds of CB&Q stock, and CB&Q became a subsidiary of the Great Northern and Northern Pacific Railroads. Although Perkins completed the negotiations for sale, he resigned from his post in January 1901. George Harris, second vice president of CB&Q, succeeded Perkins as president.

The period preceding World War I was a time of smooth and regular expansion for CB&Q. Because Hill made few changes in management and operation, CB&Q was largely unaffected by the purchase. Harris continued as president, and the entire firm simply became one efficiently functioning unit of a larger system. In 1910 Harris resigned and was followed by Darius Miller. When Miller died suddenly in 1914, Hale Holden, general counsel for CB&Q, became president. CB&Q’s primary challenge after 1901 was to fill in the gaps in its rail network. From 1901 to 1915, trackage increased by 1,373 miles, 17.2%, to a total of 9,366 miles. These years made up the last great period of expansion; in 1916 the firm reached its peak mileage.

Financial performance during this period reflected smooth and steady development. Both freight and passenger revenues climbed during the prewar period but more steeply in the earlier than in the later years. By 1908 total revenues were up 56.8% over 1901, but by 1915 were only 82.2% over 1901. In the same period, operating expenses also increased. Because Hill had modernized track and physical plant after the acquisition, 1908 expenses showed a 72.5% increase over 1901. After 1908, however, the effect of modernization was reflected in reduced operating expenses. By 1915 the increase over 1901 was only 86.4%.

CB&Q began to feel the effects of World War I before the United States was directly involved. In 1916 traffic, revenues, and operating expenses all increased. When the United States declared war in 1917, the U.S. government authorized the formation of the Railroads’ War Board, a committee of five top railroad executives, including Hale Holden. The board monitored the flow of rail traffic and managed railroad personnel to maximize efficiency for the war effort. In late 1917, however, the government took complete control, regulating compensation rates as well as traffic flow. Each railroad was guaranteed an annual compensation equal to its average annual operating income for the three years ending June 30, 1917. For CB&Q this amounted to $33.3 million.

During these years, the company’s haulage of livestock and agricultural products increased substantially, and it set all-time records for transporting coal. The U.S. government relinquished control of the railroads on March 1, 1920, one day after passage of the Transportation Act. The act modified what had been a policy of encouraging competition among railroads; passage of the new plan permitted any mergers or acquisitions that met Interstate Commerce Commission (ICC) standards for approval and exempted railroads from antitrust laws to the extent necessary to permit these combinations. The law gave railroads broad leeway in devising policies generally, although the ICC had the final say in how the companies carried out these policies.

During the 1920s CB&Q focused on two broad tasks: testing the new industry-wide regulatory policy and reorganizing its prewar plant and traffic. In response to the new Transportation Act, Holden urged the railroad industry to follow the act’s mandate and initiate policy. Hill and Holden and other officials were themselves formulating a new financial arrangement between the CB&Q, the Great Northern, and the Northern Pacific. In 1930 the ICC rejected the proposal, and the group remained in its original 1901 configuration.

Physical plant improvements and technical innovations characterized CB&Q’s internal development during the 1920s. For the first time in the firm’s history, there was no net growth in railroad mileage. The number of locomotives and cars actually decreased. Carrying capacity increased, however, because of technical improvements. Throughout this decade, CB&Q consistently made money; although passenger revenues declined, operating expenses also declined, and income remained steady.

Early in 1929 Holden resigned to become chairman of the Southern Pacific. Frederick E. Williamson was chosen to replace him as president. Soon afterward, the stock market crashed. CB&Q felt the effects immediately. By March 1930, as the Great Depression engulfed the economy, gross revenue was less than in any comparable month since 1919. Overall in 1930, business decreased more than 12% compared to 1929. By June 1932 the number of employees had dropped to 23,135, a decrease of more than 7,000 since June 1931. In the first quarter of 1933 CB&Q fell short in meeting fixed expenses by $1.5 million. In the second quarter of that year, however, stimulated in part by New Deal legislation, the firm began a slow recovery. In May it not only met its expenses but also showed the first increase in gross revenue over the corresponding month in the previous four years. In 1931 Williamson resigned to become president of the New York Central, and Ralph Budd, president of the Great Northern, was chosen to replace Williamson as president of the CB&Q.

New Deal legislation that aided the railroad industry included 1933’s Emergency Transportation Act, which sought to eliminate duplication of services and promote financial reorganization of railroads. New Deal legislation, however, also helped labor, and in 1934 the National Railroad Board of Adjustment was established to settle labor disputes over rates of pay, work rules, and working conditions. Two other measures passed in 1935, the Railroad Retirement Act and an accompanying pension act, cost CB&Q $1.44 million in addition to the funds already paid into the company’s existing pension plan.

The railroad industry also suffered during the 1930s from the effects of stiffening competition as the number of passenger cars, trucks, and airplanes increased. CB&Q met that competition with technological advancements, especially in the area of passenger service. In 1934 it introduced the Zephyr, the first diesel-electric locomotive, which often cut travel times in half.

In 1940 even before the United States entered World War II, the government began to mobilize resources for a wartime economy. Rather than follow World War I practice and nationalize the railroads, the Roosevelt administration worked through such existing organizations as the Interstate Commerce Commission and the Association of American Railroads. The government did appoint an advisory commission to the revived Council of National Defense; Ralph Budd was appointed commissioner of transportation to this board.

By 1941 CB&Q had emerged fully from the Depression. Net income in that year was $10.4 million—in excess of $10 million for the first time since 1931. Wartime traffic and income continued to soar. Although miles of track were actually reduced during the war, CB&Q improved its traffic control and communications, and modernized many of its facilities, rising to the demands of a wartime economy. From 1940 through 1945 CB&Q increased the amount of freight and passengers by 88% and 179%, respectively, over the previous six-year period. Net income for the years 1942 through 1945 was 98% of total net income for the years 1929 through 1941.

In the immediate postwar period, the U.S. economy continued its prosperous trend. The railroad industry, however, was faced with stiffening competition from the airline and automobile industries, its wartime successes curtailed by rising operating and compensation costs. Although CB&Q’s total operating revenues did not decrease in the years 1945 to 1949, total operating expenses increased nearly 14.5% during the same period. The company met these challenges primarily by concentrating on passenger rail improvements.

In 1949 Ralph Budd resigned as president to become chairman of the Chicago Transit Authority. Harry C. Murphy was appointed as his successor. During Murphy’s tenure, which lasted until 1965, CB&Q continued to face rising wage costs and competition from other forms of transportation. To counter these challenges, the firm ceased operating 343 miles of underused track between 1950 and 1963. In addition from 1949 through 1963, CB&Q spent more than $430 million to improve plant and equipment, resulting in higher efficiency for handling freight and passengers. During these years, the firm maintained its reputation for innovations in passenger service. From 1949 to 1963, a period when the number of passengers declined on other railroads, the number of passengers on CB&Q increased 10.2%. Net income during these years ranged from a high of $33.8 million in 1950 to a low of $12.5 million in 1960.

In the 1960s CB&Q, the Great Northern, and the Northern Pacific proposed to merge into one corporate entity. Murphy resigned in 1965, before the ICC could rule on the proposal. L.W. Menk succeeded him as president and chairman. In 1966 Menk resigned to become president of Northern Pacific and was succeeded by William J. Quinn.

In 1968 the ICC approved the merger plan under the name Burlington Northern Inc. In March 1970 the three firms and two smaller railroads formally consolidated, and Menk became president and chief operating officer of the new company. Burlington Northern in 1970 sought to acquire the Missouri-Kansas-Texas (Katy) Railroad but subsequently dropped its bid without comment. Industry observers speculated that the Katy’s debt load may have discouraged Burlington Northern or that the ICC would have been unlikely to approve the merger.

In the early 1970s Burlington Northern diversified into natural resources management, focusing especially on coal development. It also added an air freight subsidiary. Management structure changed in the 1970s; Menk became chairman and chief executive officer, with Robert Downing, Norman M. Lorentzsen, and Richard Bressler, serially, filling the dual posts of president and chief operating officer.

In 1972 Burlington Northern and Union Pacific sought joint control of Peninsula Terminal Co., a switching line in Portland, Oregon, but the U.S. Supreme Court reversed the ICC’s approval of the plan. The following year brought merger negotiations between Burlington Northern and Chicago, Milwaukee, St. Paul & Pacific Railroad. The ICC rejected this merger plan. In 1980, however, Burlington Northern succeeded in acquiring the St. Louis-San Francisco Railway.

By 1978 the company had record profits, still largely from the railroad division. In 1982 Bressler became chairman, president, and chief operating officer. He streamlined existing operations by selling the air freight unit and unsuccessful segments of the railroad, and by continuing efforts to develop the company’s coal, timber, and gas reserves. In 1983 Burlington Northern acquired El Paso Natural Gas Company, a diversified energy concern that specialized in producing natural gas, and in 1985 bought Southland Royal Company, producer of oil and gas. Initially these moves profitably supplemented Burlington’s development of resources on its own railroad land. In June 1988, however, the company suddenly reversed its diversification trend and announced the spinoff of the energy resources operation as Burlington Resources Inc., an independent public company. The spinoff enabled Burlington Northern to avoid pending legal claims that remained against the former El Paso Natural Gas Company, which had been sued for breach of contract, and to recover from falling energy prices. Burlington Northern also sold its trucking subsidiary, Burlington Motor Carriers Inc., in 1988. The buyer was an investor group that included the subsidiary’s top management.

Bressler continued as chairman of Burlington Northern and Burlington Resources, while Gerald Grinstein, who had been vice chairman of both companies, became Burlington Northern’s president and chief executive officer in 1989. Bressler retired in 1990, and Grinstein assumed the additional post of chairman. In the early 1990s Burlington Northern was focused on its railroad business, the company’s historic strength. It was seeking increased flexibility in its labor contracts in an effort to improve efficiency and was investing in track improvements and new rolling stock.