SOUTHERN PACIFIC TRANSPORTATION COMPANY History

Company History:

The venerable Southern Pacific railroad operates a core route of 7,500 miles of railway in 14 of the western United States, its territory forming a broad crescent from Portland, Oregon, to New Orleans, Louisiana, and up through the Midwest. Faced with new and overwhelming competition in the 1980s, Southern Pacific first attempted a merger with the Santa Fe Railroad, and, when that was struck down by the Interstate Commerce Commission, joined Philip Anschutz's growing stable of transportation companies known as Rio Grande Industries, Inc. It then enjoyed integrated operations with Rio Grande's other railroad holdings, principally the Denver and Rio Grande Western Railroad Company, and expected thereby to prosper in the new era of consolidated railway systems; but Southern also retained its corporate identity and a relative degree of functional independence. The nature of its business remained much as it had been since the company's inception--bulk transport of manufactured goods, timber, and agricultural products between the far West and the more densely populated regions of the eastern United States.

The history of Southern Pacific begins with the efforts of Theodore D. Judah to build an earlier railroad, the Central Pacific. Judah was a Connecticut engineer experienced in railroad construction who moved to California in 1854 and immediately became absorbed by the possibility of a rail link between that state and the East. Not a financier, Judah lobbied Congress for help with his grand project, and around 1860 became acquainted with four ambitious businessmen from Sacramento. This quartet, whose members would go on to build and own the Southern Pacific, were Collis P. Huntington, proprietor of a large hardware store; Leland Stanford, lawyer and in 1861 governor of California; Charles Crocker, dry goods merchant; and Mark Hopkins, partner to Huntington. Along with Judah and a few other investors, the four promoters created the Central Pacific Railroad of California on June 28, 1861, and then set about finding the cash infusions that would be needed even to begin the mammoth construction project from Sacramento, California, to the East.

The bulk of these funds were eventually provided by the U.S. government, which under the terms of the railroad acts of 1862 and 1864 agreed to loan to Central Pacific a varying amount of government bonds for every mile of road built, depending on the difficulty of terrain traversed, and to grant it a checkerboard pattern of land on alternate sides of the railroad that would eventually total millions of acres of urban and range property. An important caveat deprived the railroad of most mineral rights to this land, a category generally interpreted by the courts to include oil. In addition to this federal aid, Central Pacific was empowered to sell stocks and bonds of its own, but in the early years few buyers for these could be found. The four original promoters were therefore continually scrambling for enough money to support the road's construction, which began in January 1863. To ease its chronic financial burden, Central Pacific persuaded municipalities to buy its bonds, threatening bluntly that if such support were not forthcoming the railroad would simply be built around the town in question, destroying its economic viability. In this way, Central managed to raise a substantial amount of money to complement its federal funds, but by revealing the threat inherent in its monopoly status also earned the resentment of the people of California. As it became clear that the partners would succeed in their project, public optimism about the benefits thus gained was tempered by the realization that there would be one and only one major rail system in northern California.

Further blackening the reputation of the Central Pacific was the widespread belief that the promoters of the road were skimming profits. They awarded lucrative contracts to construction companies owned by themselves, contracts calling for payments in the form of both cash and Central Pacific stock and so liberal in terms that by the time the road was completed in 1869 the construction company was, in effect, its owner. The net result was that a railroad had been built over the Sierra mountains to Ogden, Utah, with government funds, but was now owned by four individuals.

Once the road was finished the promoters decided to remain in the railroad business, foreseeing that with a modicum of effort they could establish a virtual monopoly over the state of California. They began an intensive campaign of acquisition and expansion, rapidly solidifying their hold on rail transport throughout the state's midsection. In particular, Central Pacific's attention was drawn to a new government railroad venture known as the Southern Pacific, chartered by Congress in 1866 to build rail lines from the San Francisco Bay area to San Diego, California, thence eastward to California's eastern boundary. The Central Pacific promoters gained control of this new road in 1868, recognizing that such a project would allow them to duplicate their construction profits and also grow to be the dominant railroad in the far West. In the following 15 years the Southern Pacific spread its myriad lines from Sacramento all the way to New Orleans, having effected a number of mergers in the process, and as early as 1877 the Central Pacific-Southern Pacific combination controlled 85% of all rail traffic in the state of California as well. In that year the combined companies had sales of $22.2 million and a capital of $225 million, soon greatly enlarged by the additional tracks reaching out to Texas and New Orleans.

In 1884 the three remaining promoters--Hopkins having died in 1878--took steps to ensure their control of the rapidly expanding Southern Pacific. Having sold the bulk of their holdings in Central Pacific, which by then was clearly of secondary value, they formed a new corporation, Southern Pacific Company of Kentucky, with which they acquired all of the stock of the old Southern Pacific and its subsidiaries while agreeing to lease the use of Central Pacific's roads. This arrangement not only further concentrated their hold upon Southern Pacific, it also distanced the promoters from California's laws of incorporation, under which stockholders' liability was unlimited.

Southern Pacific and its owners remained extremely unpopular for many years. The railroad's early bullying of municipalities, its discriminatory pricing, suspected trafficking in legislative votes by means of bribery, and monopoly power fueled popular resentment. Various legal remedies were attempted by the state of California, including the creation of a state Railroad Commission in 1876, but all were undermined by the Southern Pacific. In the 1890s the federal government also became increasingly involved in the regulation of railroads. The source of its concern was not only the public welfare but the more tangible fact that the transcontinental railroads owed the U.S. government a great deal of money, in the form of the 30-year bonds they had borrowed for construction and due to mature in the mid-1890s.

None of the roads, including Southern Pacific, had made provision for the repayment of these huge debts, operating income instead ending up in the hands of promoters. Partly in response to this crisis the Interstate Commerce Commission (ICC) was created in 1887 as a federal agency charged with general regulation of the railroads; more specifically, by the mid-1890s it was clear that Southern Pacific was unable to pay its debts and would require refinancing. So unpopular was the company in its home state of California that a San Francisco newspaper gathered 195,000 signatures--more than 10% of the state population--on a petition asking the government to foreclose on the railway and to run it as a public service. This the government was disinclined to do, preferring to get its money back rather than enter the railroad business, and after long negotiations the debt was re-funded until 1909 and Southern Pacific was instructed to have it paid off by that date. As the Southern Pacific was by then already the largest railroad in the United States, with 7,300 miles of track, and a profitable company when managed properly, it was able to meet the new debt schedule and was by 1909 financially independent of the government.

In 1901, shortly after the death of the last of Southern Pacific's founders had left the company vulnerable, the rival Union Pacific bought a controlling interest in the road and in effect merged the two great western rail systems. The railroad monopoly of California thus became part of an even larger corporate giant, stretching from Portland to New Orleans and Los Angeles to St. Louis, Missouri, and including a fleet of steamships traveling between California and the Far East and between New Orleans and New York. E.H. Harriman, Union Pacific's chairman, was a far more prudent administrator than the previous generation of rail magnates, and under his direction both the Union Pacific and Southern Pacific were run according to a conservative philosophy of low dividends, the reinvestment of income in capital improvements, and a tight lid on debt accumulation. As a result, Southern Pacific was able to pay off the federal government while strengthening its physical assets and generally to grow into a mature, efficient corporation.

Congress and the U.S. populace were less interested in Harriman's skills than in the monopolistic status of his railroads. As two monopolies do not make a market, an ICC investigation was followed in 1911 by a federal antitrust suit against the Union Pacific-Southern Pacific combination. The Supreme Court agreed that the combine inhibited competition and in 1913 ordered the sale of Southern Pacific stock, much of which ended up in the hands of the Pennsylvania Railroad. As of that date, then, the Southern Pacific Railroad was restored to the general configuration it had had before the 1901 merger, its three principal routes being those between San Francisco and Portland, San Francisco and Ogden, Utah, and San Francisco and New Orleans. A second antitrust action deprived Southern Pacific of its Ogden lines for a number of years, but these were eventually restored. Other litigation forced Southern Pacific to give up most of the oil-producing land included in its original grants, oil falling under the rubric of mineral rights, as well as its timberland.

Southern Pacific survived, however, and enjoyed a decade of unbroken prosperity in the 1920s. Buoyed by a strong national economy and the rapid growth of its two main markets, California and Texas, Southern's net income steadily rose to its 1929 peak of $48 million, despite having lost to the ICC the right to fix its own freight rates. These results were misleading, however, for in the meantime the nature of U.S. transportation had undergone a fundamental change as great as that of the railroad itself. Truck and auto traffic trebled during the 1920s, and along with the airplane would soon wrest from the railroads most long-distance passenger service and many types of freight, except those bulk items for which rail transport is ideal. The impact of these changes was not really felt by Southern Pacific until the Great Depression brought to an end the era of plentiful business for all; reeling from these double blows, Southern Pacific watched its net decline to $4 million in 1931 and then disappear altogether for the next four years.

The age of railroads had come to an end, and under new president Angus McDonald the Southern Pacific began the long evolution needed if it were to survive in a truly competitive marketplace. The former monopoly became far more responsive to the needs of its customers, offering a much more flexible schedule of service and the use of the railroad's own short-haul trucking company, Pacific Motor Trucking Company. Although the latter was barred by law from competing with full-service truck lines it became an integral adjunct to Southern Pacific's rail system, transporting goods between the rail depots and customer warehouses. Southern Pacific also fought a well-publicized if losing battle for passenger business, offering low-priced tickets on a number of famous routes between California and the East. These efforts may well have kept the Southern Pacific name before the public eye, but it proved simply impossible to move passengers by rail as cheaply and directly as by car and airplane, and for many years passenger travel was a money-losing burden on all railroads.

Despite these generally gloomy developments, Southern Pacific remained a true giant among U.S. corporations. Its 1936 assets of $1.95 billion were exceeded by only two other U.S. industrial corporations; it retained ownership of millions of acres of land that would some day become extremely valuable; and with 16,000 miles of track and $200 million in annual sales, Southern Pacific was among the three largest U.S. railroads by any measure chosen. Although the industry as a whole faced new competition, Southern Pacific itself continued to enjoy the benefits of its relatively uncrowded western territory, where only Union Pacific and Santa Fe offered any challenge to its supremacy. The company was thus well positioned to take advantage of the enormous upsurge in heavy freight caused by the outbreak of war in 1939. With every segment of the industrial economy straining to meet the requirements of war, the railroad entered a period of unprecedented prosperity. Southern Pacific's net income reached an all-time high of $80 million in 1942 and remained strong for several years, despite a vigorous program of debt reduction and capital outlays for new rolling stock and track.

Following the war, Southern Pacific settled into a long period of sedate good fortune. Business lost to the truckers and airlines was more than compensated by the overall economic growth of its western home. Passenger revenue continued to decline, except for commuter service, but under the regulatory regime of the ICC the railroads were ensured a living wage in the bulk freight business, and since neither mergers nor rate wars were permitted the competitive environment was stable and modestly profitable. Under Donald J. Russell, Southern Pacific's chief from 1952 through the mid-1960s, revenue rose from $650 million to $840 million, and the company expanded its trucking service as well as added a profitable oil pipeline along a segment of its track in the Southwest. Russell spent liberally on maintenance of track and rolling stock, and Southern Pacific generally built a reputation as one of the country's soundest railroads, although the sheer size of its operations forced the company to incur debt for capital expenditures at a level higher than Wall Street thought prudent. The tremendous growth of California's population and agricultural production kept Southern Pacific healthy, along with the rapid increase in intermodal--rail-to-truck and truck-to-rail--transport and a booming oil business in Texas and Louisiana. The latter portion of the Southern Pacific system had been solidified years before by the acquisition in 1932 of the "cotton belt" lines extending northward to St. Louis from Dallas, Texas.

While Southern Pacific's market area and rate structure were both fixed, it could and did increase efficiency by means of technological innovation and consequent labor cuts. By 1969 the entire railroad was under the guidance of a computerized information system that helped to cut down on idle cars and switching delays. By means of such changes Southern Pacific was able to reduce its labor force from 76,000 in the mid-1950s to 45,000 by 1970, while substantially increasing its volume of rail traffic. This trend continued; in 1990 Southern Pacific employed about 21,000 workers.

In 1972 Southern Pacific diversified into telecommunications. Using its existing network of microwave transmitters, the company became a carrier of long-distance telephone and data communications, first to large corporate users and later to the general public under the Sprint name. In 1979 it also bought Ticor, the largest title insurer in the United States. Neither venture was particularly successful, however. Telecommunications was a world all its own, one that demanded expertise and more capital than Southern Pacific could spare from its own vast physical plant; and the Ticor purchase had barely been signed when a severe recession all but killed the residential real estate market on which the title business depends. As a result, both companies were eventually sold off. In 1982 two of Southern Pacific's chief rivals announced a potentially devastating merger--Union Pacific and Missouri Pacific would soon form the largest rail combine since the days of E.H. Harriman.

The merger of Union Pacific and Missouri Pacific was made possible by U.S. President Ronald Reagan's deregulation of the railroad industry and presented Southern Pacific with grave problems. The new Union Pacific would be able to offer longer through service and lower rates than Southern Pacific in nearly every market area, and Southern Pacific immediately began casting about for a merger partner of its own. Southern Pacific and Santa Fe Industries agreed to merge in 1983, but four years later the ICC declared this conglomerate anticompetitive. In October 1988 Southern Pacific found a new home among the holdings of Denver businessman Philip Anschutz, whose Rio Grande Industries already owned the Denver and Rio Grande Western Railroad. Anschutz paid $1 billion for Southern Pacific, which thus became a part of Rio Grande Industries, a group of railroads that function as cooperating but distinct rail systems. Rio Grande in 1989 secured access to the important Chicago rail hub, acquiring 282 miles of track between that city and St. Louis. In 1990 it acquired the right to use Burlington Northern tracks between Chicago and Kansas City, Missouri; and in the early 1990s initial reports from the combined companies indicated renewed vigor and enthusiasm for Chairman Anschutz. On the other hand, Southern Pacific continued to show operating losses after the merger and was profiting mainly from the proceeds of real estate sales, which left open the question of the railroad's long-term viability.

Principal Subsidiaries: Southern Pacific Telecommunications Company; Southern Pacific Environmental Systems, Inc.; Pacific Pipelines, Inc.

Further Reading:

• "Southern Pacific," Fortune, November 1937.
• Daggett, Stuart, Chapters on the History of the Southern Pacific, New York, Kelley, 1966.

Source: International Directory of Company Histories, Vol. 5. St. James Press, 1992.

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