Illinois Central Corporation

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Illinois Central Corporation

455 North Cityfront Plaza Drive
Chicago, Illinois 60611
U.S.A.
(312) 755-7500
Fax: (312) 755-7920

Public Company
Incorporated: 1851
Employees: 3,300
Sales: $.56 million
Stock Exchanges:
New York
SICs: 4011 Railroads—Line-Haul Operating; 4013 Switching
& Terminal Services; 6719 Holding Companies, Nec

Illinois Central Corporation owns and operates the oldest land-grant railroad in the United States, the Illinois Central Railroad. That rail system encompasses 2,700 miles of freight railroad lines, traverses six states between Chicago and the Gulf of Mexico, and is the tenth largest railroad in the nation. The Illinois Central Railroad played a prominent and enduring role in the evolution of the United States.

The Illinois Central (IC) Railroad was built between 1852 and 1856, following the Senate’s passage of the Douglas Land Grant Bill. That bill essentially gave the state of Illinois the right to use federal lands for the construction of a north-south railroad system. As one of his first assignments as a lawyer, Abraham Lincoln served as counsel for IC during the early 1850s and helped the company to secure land rights. Interestingly, Lincoln had to sue IC for his $5,000 fee, the largest he had ever received, but he was kept on retainer with the railroad until 1960.

The IC railroad and others like it were a corollary of the rugged individualism and pioneer spirit that characterized the United States during the mid-1850s. Americans were still trying to achieve their “manifest destiny,” and most people viewed the railroad as the best way to accomplish that vision. As immigration and a high birth rate raised the U.S. population past 23 million in 1850, the push west escalated along with the need for an efficient means of traversing the enormous territory. Before construction was started on the IC line the United States had only 9,000 miles of rail in operation, most of which was in the Northeast. By 1860, however, more than 30,000 miles of rail had been laid.

The actual construction of the IC Railroad during the 19th century is, perhaps, the most colorful aspect of the company’s history. The work was grueling, and, because the land grants often required sections of track to be completed within a specific time frame, work usually progressed at a feverish rate. Between 1852 and 1856 rail crews working for IC laid 706 miles of track in Illinois, making its line the longest rail line in the world. At a cost of $25 million, the first 706-mile span of the railroad was the most expensive and among the most grand projects ever attempted in the United States.

Laborers poured in from all corners of the globe to help build the railroad, as the momentous project immediately absorbed the regional labor supply. In fact, workers were in such demand that IC recruited European immigrants straight off incoming ships. It also hired agents to find large numbers of immigrants and ship them to Illinois—one New York agency shipped 1,500 Germans to the project in 1853, only to be one-upped by the Irish Emigrant Society, which supplied an even larger group a few months later. “Wanted! 3,000 Laborers on the 12th Division of the Illinois Central Railroad. Constant employment for two years or more give. Good board can be obtained at two dollars per week. This is rare chance for persons to go West...,” read an advertisement distributed in New York. Workers received $1.25 for a full 12-hour work day—good wages during that period.

Construction of the first 706-mile span of track was accomplished under the direction of taskmaster Colonel Roswell B. Mason, engineer-in-chief of the IC Railroad. A race in 1855 between Mason and Bill Mattoon, a contractor at an Indiana railroad company demonstrated the fervor with which the rail was constructed. Mattoon was building a section of track from Indiana to Illinois that was to join a leg being constructed by Mason. As legend has it, Mattoon challenged Mason to a bet to see which team could reach the specified meeting point first. Mason refused to wager for moral reasons, but agreed to name the new town at the crossing point after the man that reached it first. Both teams doubled their efforts. Mason won by a close margin, but was so grateful to his competitor for contriving the contest and speeding up construction that he renamed the town “Mattoon.”

By 1855, with only 600 miles of rail in service, IC generated a staggering $1.3 million in revenues. A surprising half of that sum came from passenger service rather than freight. IC also entered into the steamboat transportation business in the 1850s on the Mississippi River, employing a young pilot named Samuel Clemens (Mark Twain) to guide one of its riverboats. All of IC’s operations combined generated sales of $13 million between 1851 and 1860. The company showed a loss of only $5 million during that decade, despite enormous start-up costs. More importantly, IC had accomplished a construction feat arguably unsurpassed in the history of the nation.

Although the Civil War posed problems for IC during the early 1860s, such as a shortage of labor, it also resulted in huge profits for the company. As demand for freight and passenger service ballooned in the midst of the war, IC’s revenues climbed from about $4 million annually in 1861 to almost $8 million by 1865. In addition, IC expanded its lines during the 1860s and early 1870s to include a total of 1,107 miles of rail reaching all the way from Chicago to New Orleans. During the same period, the total mileage of operating rail in the U.S. swelled to 53,000. Because it spanned the entire nation, north to south, Illinois Central became known as the “Main Line of Mid-America.”

IC Railroad continued its rapid rise in the late 1800s and early 1900s as the U.S. population soared and the industrial revolution generated a massive demand for freight services. In fact, it was during that period that railroads reached their pinnacle of influence in North America. IC and its peers had a virtual lock on intercity commercial transport, and their monopoly of freight and passenger traffic became so dominant after 1900 that Congress chose to enact extensive restraints on the industry. Through new construction and acquisitions of smaller rail lines, IC expanded its system throughout Iowa, Illinois, and Mississippi. By 1890, in fact, the total IC system encompassed 2,874 miles of track. That figure rose to 3,845 by 1900 and then to a record 4,736 in 1910.

As IC’s size increased, so did its sales. Revenues between 1900 and 1910 totaled $575 million, more than double the total during the previous decade. Likewise, net income surged from $36 million during the 1890s to $92 million from 1900 to 1910. Revenues and income grew to $1 billion and $116 million during the 1910s, moreover. The total number of people employed by the massive corporation reached about 60,000 by 1920. By that year, the miles of IC rail in service was approaching 5,000, while the total miles of track laid in the United States had surpassed 250,000. However, IC realized its most explosive period of growth during the “Roaring Twenties,” as a red hot economy put IC’s rails to work. Sales during the decade neared $2 billion as total track miles in service reached a pre-1972 peak of 6,721 in 1929.

IC suffered immensely during the Great Depression. As freight and passenger demand slowed, IC and other railroads were forced to reduce service, delay maintenance, and dismiss workers. IC’s total work force, in fact, plummeted from 60,000 to only 25,000 between 1922 and 1933. Even IC’s electric rail service in Chicago, which it had started in the 1920s, floundered. IC’s total revenues during the 1930s dropped to just over $1 billion. It posted a discouraging net loss for period of $15 million. The tables were turned in 1939 by the advent of World War II, however, which spawned huge temporary sales and profit gains for IC.

Despite IC’s recovery during World War II and even into the late 1940s and early 1950s, the railroad industry as a whole was beginning to feel the repercussions of more permanent trends that had begun in the 1910s and 1920s. Most importantly, new modes of transportation began challenging the railroad industry’s unmitigated dominance. More efficient means of water transportation on rivers, canals, and lakes posed an early threat. However, that means of delivery soon began to give way to more high-tech transportation methods, such as the automobile and large trucks. By the 1950s even the casual observer could see that railroad companies like IC were going to face a serious threat from large trucks, proliferating networks of pipelines, and may be even airplanes.

Wayne Andrew Johnston served as president of Illinois Central Railroad from 1945 to 1966, years in which the railroad industry entered a stage of maturity. Despite industry malaise, however, his keen management kept the company on a profitable course. Having served the longest term of any other IC president, Johnston is credited with having as great an impact on the company as any other individual. His leadership style reflected his personality—spartan and conservative. He worked long hours and always answered his own telephone at work. Johnston was known for giving up his seat on the ride to work to passengers riding on his train. A lifetime of public service was punctuated by his Sunday morning sermons from pulpits throughout mid-America; “You’ve got to put back as much or more than you take out,” Johnston said about life.

Under Johnston’s direction, IC’s revenues grew a respectable 25 percent between 1945 and 1960, to about $295 million. For comparison, average industry growth during that period was about 19 percent. However, that steady growth belied serious railroad industry problems. By the late 1960s trucks and planes were rapidly eroding rail’s share of the freight market. In addition, passenger service had all but disappeared as a result of the massive interstate highway system constructed during the post-WW II era, which made long-distance automobile and bus transportation possible. Ironically, much of the growth that IC was able to achieve during the 1960s and 1970s was from transporting new cars. By 1970, IC was making about $24 million in profits annually, operating 6,520 miles of track, and employing a work force of 17,000—the reduced work force was primarily the result of automation and a dearth of new construction activity.

One of Johnston’s last moves as president was to create Illinois Central Industries (ICI), a holding company with Illinois Central Railroad as its primary subsidiary. ICI would provide a means of diversifying the company’s activities to achieve greater returns—by the mid-1960s, the railroad industry was delivering the worst investment return of all the regulated trafficking industries, by far. Although IC had toyed with activities in other industries, such as real estate, prior to forming ICI, it stepped up its efforts after Johnston retired in 1966. The first new member of the ICI family was Waukesha Foundry Company, a producer of castings and pumps.

By the early 1970s, ICI boasted major holdings in several industries, including industrial products, consumer products, real estate, and financial services. It also put renewed effort into enlarging its rail service: In 1972, IC Railroad merged with Gulf, Mobile & Ohio to become the Illinois Central Gulf Railroad. The resultant carrier had almost 10,000 miles of track in 13 states. Nevertheless, in 1972 ICI’s railroad operations furnished less than 30 percent of its pretax income. ICI continued to diversify throughout the decade, investing in everything from Midas International (Midas Muffler) to Pepsi Cola, and steadily diminishing the importance of its rail services.

By the late 1970s, the railroad industry was staggering. Competing transportation services had all but snuffed out some of its most important market niches. Furthermore, much of the massive rail network that had been created during the past century was in dire need of replacement. IC, for example, was forced to rebuild most of its lines during the late 1970s and early 1980s at an enormous expense, thus worsening the subsidiary’s financial performance. In the early 1980s, ICI even started looking for a buyer for the lagging division. As it broadened its reach into food service, automobile repair, and aerospace, ICI began selling off chunks of Illinois Central Gulf, eventually reducing it to a 3,000-mile freight rail system by 1988. Finally, ICI, which by then was a $4 billion conglomerate, found a way to jettison its rail operations.

In 1989, ICI, which became Whitman Corporation in 1988, sold Illinois Central to The Prospect Group, Inc., an investment company. Prospect eventually paid a total of $560 million for the railroad, which basically consisted of a 3,000-mile system of rails between Chicago and New Orleans. It created a holding company called Illinois Central Corporation with Illinois Central Railroad Company as its chief subsidiary. Prospect made Edward Moyers president of Illinois Central. In fact, it was Moyers who had masterminded Prospect’s buyout of IC and had devised a plan to return the ailing carrier to profitability.

The 62-year-old Moyers, a Mississippi native, had started his career with Illinois Central in the 1940s. He swept floors during his summer high school breaks and then joined the company full time after college. The would-be entrepreneur rose sluggishly through the ranks, developing a contempt for IC’s bureaucracy. “I was hardheaded,” Moyers recalled in a December 1990 issue of Forbes. “I spoke up about things I thought ought to be done and was told to go home and be quiet.” Moyers left IC in 1977 and joined a smaller railroad where he could have an impact. He eventually ran the smaller railroad. In the late 1980s Moyers began eyeing the ailing Illinois Central as a potential takeover target and approached Prospect with the idea.

Moyers, to the dismay of IC’s old guard, immediately transformed IC into a streamlined money machine. Moyers accomplished the spectacular feat through a series of innovative moves that, in retrospect, appeared quite simple. First, he fired all the department heads except one and replaced them with under-40 managers—“All their counterparts at other [railroad] companies are about 103,” Moyers jested in the Forbes article. Next, Moyers removed one of the side-by-side tracks that connected Chicago and Illinois for northbound and southbound traffic. Every 12 miles he left a 3.4-mile siding where a train could move off of the track while an oncoming train passed. He sold the withdrawn rails and fittings for $50 million and used the remaining materials to cut IC’s supply budget by $70 million over four years. He also installed a $20 million automated signaling and scheduling system that saved IC about $100 million.

As Moyers restructured IC’s rail system, he went to work slashing the fat out of IC’s management and labor force. In his first few months he eliminated 650 of 3,800 employees for a $24 million savings. He also dry-docked one-third of the company’s 600 locomotives for an additional $12.6 million boost. In a savvy financial maneuver, Moyers purchased fuel contracts before the Persian Gulf War and saved the company about $1 million per month during the conflict. Moyers’ productivity gains allowed IC to drop its grain-hauling prices 15 percent, thus regaining much of that market which had been lost during the previous decade. The end result of Moyers efforts was that IC’s operating income rose from $18 million in 1989 to a whopping $87 million in 1990, despite an ugly U.S. recession. Furthermore, IC was recognized as one of the most efficient carriers in the industry in 1990 after being labeled as one of the least productive just one year earlier.

Moyers continued to dispose of IC’s unneeded assets and to whittle away at the carrier’s overhead during the early 1990s. Total employment, for example, decreased from 3,688 in 1991 to 3,306 by 1993. Although sales remained level at about $550 million, costs steadily declined and profits improved. IC’s income (before taxes) ballooned to $148 million in 1993. Its productivity continued to improve at a rapid pace, earning it the status of most efficient rail carrier in the United States between 1990 and 1993. Furthermore, by 1993 Moyers had eliminated about two-thirds of the debt that the company had accrued during the 1989 buyout.

After restoring the carrier’s health and earning a multimillion-dollar personal fortune, Moyers stepped aside as president of IC in 1993. He was succeeded by E. Hunter Harrison, a board member with extensive industry experience. When Harrison assumed the presidency, IC shifted into “Phase II” of an eight-year plan started by Moyers in 1989. The first four-year phase focused on reducing operating costs and improving service. The second phase, to be administered by Harrison, would emphasize a lowering of debt and an increase in revenues through market share gains. IC’s three stated goals going into 1994 were to increase annual sales by $100 million by the end of 1995, reduce operating costs, and cut annual interest expenditures (on debt) by $10 million. Harrison and co-managers had already achieved healthy progress toward those goals during 1993 and early 1994.

Illinois Central had declined significantly in stature since its glory days early in the 20th century. However, it entered the mid-1990s as a robust railroad company with long-term industry sticking power—a tribute to the great Americans that had helped to build it during the past 150 years. The company’s future as it moved into the 21st century was as much dependent on government regulation, labor relations, and transportation trends as it was on the will of IC’s management.