An Investor Believes He's On Track Banking Heir Timothy D. Mellon Has Poured Millions Into Regional Railroads. He's Also Stirred Controversy.

Posted: May 06, 1990

NORTH BILLERICA, Mass. — Timothy D. Mellon fits few of the stereotypes of an heir to one of America's great fortunes.

Rather than tuck away his inheritance from the Pittsburgh banking empire that bears the family name, over the last eight years the quiet, self-effacing Mellon has poured millions of dollars into one of America's oldest industries: New England railroads.

Mellon also has taken a chance on an equally risky venture that uses satellite technology to track precisely railroad cars or locomotives, trucks as they move down the highway, or ships as they cross oceans.

Today, despite big setbacks and bitter controversy along the way, Mellon and others believe his investments are ready to pay off.

Although his Guilford Transportation Industries Inc. and its subsidiary railroads are privately held and don't issue public financial statements, officials said the company turned around last year. It made a profit on a 30 percent increase in revenues from 1988, when Guilford operated through a strike.

In the process of running Guilford, the biggest rail operator in New England, Mellon and his managers have become the bane of organized labor for a harsh, confrontational approach to trimming costs.

Guilford also has angered other constituencies that railroads usually seek to please, including freight shippers who use Guilford service and numerous state and local government officials.

For example, Guilford got into a nasty fight two years ago with Amtrak over the condition of 50 miles of Guilford-owned track in Massachusetts and Vermont over which Amtrak runs its popular passenger train, the Montrealer. The fight ended when the Interstate Commerce Commission approved condemnation of the track so Amtrak could own it and refurbish it, allowing resumption of daily service.

In the Boston area, operation of commuter trains was contracted out to Amtrak in 1986 after a strike against Guilford's Boston & Maine Railroad subsidiary stopped the trains.

Guilford has endured criticism for declining to prop up the Delaware & Hudson Railway Co., one of three railroads the parent company owns. When Guilford was unable to change the work rules of its D&H train crews in 1988, it put the money-losing D&H into Chapter 11 bankruptcy, allowing a trustee to try to find a new owner to run it.

Many political leaders and shippers in Pennsylvania and New York want to see the bankruptcy trustee sell the D&H so it can survive as a competitor to Conrail, the dominant freight railroad in the Northeast and upper Midwest.

Such disputes have prompted Mellon's critics to call him a stubborn ideologue.

But Mellon says his business ventures are in tune with his belief that inherited wealth should be used to build solid businesses, keeping an industry healthy so that employment in it will increase over time and add permanent strength to the economy.

"I didn't go into the business just for the sake of profit," Mellon said in a recent interview. "I only go into something if it adds to the overall welfare."

Guilford executives say they fervently believe that the stands they have taken, particularly in regard to cutting labor costs, not only were necessary to keep rail service alive in New England but should serve as a model for other companies.

The two strikes that occurred at Guilford's Boston & Maine and Maine Central railroad units, starting in 1986, were among the most bitter in the railroad industry in recent years.

The first walkout was prompted by Guilford's efforts to lease the operations of the two railroads to a new division, Springfield Terminal Co., which would then have imposed new wage rates and work rules on all employees.

Springfield Terminal, a subsidiary whose only function was unloading automobiles from railcars onto trucks, had a contract with the United Transportation Union that lowered operating costs of the railroads by having more flexible work rules and lower wages.

A key work-rule change created a new category of railroader, erasing previous craft categories such as engineer or conductor.

But the union contended it had signed the Springfield contract with Guilford only because the auto-unloading terminal was not typical railroad work. Springfield and its work rules, the union contends, should not be used to circumvent contracts for traditional railroad jobs.

Another strike against Guilford, in 1987 and 1988, centered on severance- pay rules, issues still being decided by federal arbitrators. The same sort of issues figured in an announcement last month by the ICC of a formal investigation into "numerous, repeated complaints" from employees over Guilford's practices in paying severance and unemployment benefits.

Ultimately, it took an act of Congress to dictate a settlement of the first strike. Federal abitrators have ruled in the union's favor on some major points, including the way the company attempted to place employees under new contracts through the leases to Springfield Terminal.

But Guilford has accomplished the main goal of the disputes with labor, now paying many of the employees who operate its trains by the hour instead of by the distance a train travels and changing work rules to reduce crew size. A freight train running from Waterville, Maine, to Rotterdam Junction, N.Y., now operates with six crew members, working in two-person teams, rather than a total of 18 crew members.

Guilford was able to reduce its labor costs to less than 35 percent of

revenues, compared with an average for large railroads of 44 percent to 48 percent, vice president Colin Pease said.

Without such a drastic cut in its labor costs, Guilford wouldn't be able to subsist on the types and amount of freight that it hauls, company officials said.

"What seemed like a confrontational approach . . . was really the only approach available to us," Mellon said.

Other major railroads, he said, also will eventually abandon the "old way" - which he says was to avoid strikes at any cost by giving in to labor's demands. Unless they follow the Guilford example, Mellon said, the other railroads will never lower costs significantly.

"We don't really blame labor for this," Pease said. "It's been management's fault" for capitulating to labor's demands.

The ultimate dream of Mellon and his colleagues is to operate like the Florida East Coast, for years one of the only non-union railroads in the country. The FEC endured a long and violent strike, starting in the 1960s, that eventually resulted in the streamlining of the operation when the number of crew members on each train were reduced.

The FEC today is a specialist in efficiently hauling intermodal traffic made up of truck trailers or marine-cargo containers riding on rail flat cars.

"Eighty percent of the Florida East Coast's traffic is southbound from Jacksonville to Miami, and 35 percent of their revenue flows to the bottom line," said Pease. "It's an example of what happens if you can get rid of the encumbrances, such as the work rules."

Guilford's characterization of work rules as encumbrances, of course, is one of many points on which unions disagree with the company. When Guilford combined train-operating jobs into the railroader category, it endangered the lives of employees, the unions say.

"Throughout these years of trying to come to an equitable agreement on work rules with the Guilford system, we've been totally frustrated," said Steve Fitzgerald, a spokesman for the Brotherhood of Locomotive Engineers.

The chief concern "has been the plummeting level of safety that resulted

from the use of 'railroaders,' who are expected to know all of the jobs but can't possibly know all the safety aspects," Fitzgerald said. "Guilford

hasn't trained or assigned those employees properly."

Pease replied that Guilford has trained its crews properly and said federal inspectors recently noted marked improvement in the company's safety practices.

Guilford's wish to be like the Florida East Coast could be frustrated by the type of business it has. Guilford mostly hauls paper, lumber, grain and other mixed freight in boxcars - the sorts of cargoes for which trucks tend to compete most seriously.

Most railroads make money by hauling large quantities of bulk commodities, such as coal or chemicals, or by carrying "intermodal" truck trailers and containers on flat cars. Indeed, the FEC gets 80 percent of its revenue hauling intermodal traffic.

One of the brightest spots for Guilford in recent months has been an agreement with Conrail that calls for the two railroads jointly to haul most of Ford Motor Co.'s new cars and trucks bound for dealers in New England.

The vehicles ride from the assembly plants to a Guilford terminal at Ayer, Mass., where they are transferred to special trucks for delivery to the dealers.

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