Hafner's friend, William Ogden Coleman, gained control of the Edmonds-Metzel Hardware Company, a struggling hardware manufacturer in Chicago, in 1906 or 1907. Hafner and Coleman began producing toy trains using Edmonds-Metzel's excess manufacturing capability after Hafner was able to secure $15,000 worth of orders. By 1907, two American retailers, G. Sommers & Co. and Montgomery Ward, were selling Edmonds-Metzel trains. In 1908, Edmonds-Metzel adopted the American Flyer brand name for the trains, and by 1910, Edmonds-Metzel was out of the hardware business and changed its name to American Flyer Manufacturing Company.
Initially American Flyer -- aka "Chicago Flyer" -- was something of a budget brand, undercutting the prices of Ives, which was at the time the market leader. The trains proved popular, and American Flyer was soon expanding its product line. However, the company's rapid growth led to strains in the relationship between Hafner and Coleman.
In 1913, Hafner left the company. Believing he would be given a significant portion of the company if the trains proved successful, Coleman refused when Hafner asked to exercise this option. Hafner started the Hafner Manufacturing Company, which sold a line of trains called Overland Flyer. Sommers immediately stopped carrying the American Flyer trains in favor of Hafner's brand. Initially, the Hafner and American Flyer product lines were very similar, suggesting they may have been built using the same tooling. This suggests the possibility of the two companies continuing to collaborate. Hafner's business survived as a manufacturer of clockwork trains until 1951, when he sold his business to All Metal Products Company.
American Flyer's business grew during World War I, which locked out the German manufacturers that had dominated the U.S. toy train market to that point. During this time, American Flyer also introduced bicycle and motorcycle toys, segmented its market by creating both a low-priced and a high-priced line, and began to depart from its earlier designs by William Hafner.
In 1918, American Flyer introduced its first electric train, an O gauge model that was simply a windup model with an electric motor in place of the clockwork motor. This was a common practice at the time. The same year, William Coleman died and his son, William Ogden Coleman, Jr., took over the company. At that time the factory and administrative offices of the American Flyer Manufacturing Co. were located at 2219-2239 South Halsted Street in Chicago. The factory had its own railroad sidings and dock so cars could be slid inside the building for unloading/loading.
In 1925, American Flyer began offering Wide gauge electric trains at a premium price, attempting to compete with Lionel Corporation at the high end of the market. Like most of its competition, American Flyer did well in the 1920s, selling more than half a million trains in its best years, but suffered in the Great Depression, during which the company's focus shifted back to the more economical O gauge trains.
In 1928, American Flyer's competitor Ives went bankrupt. American Flyer and Lionel jointly purchased and operated Ives until 1930, when American Flyer sold its share to Lionel. During this time of joint operation, American Flyer supplied Ives with car bodies and other parts.
During the early 1930s, American Flyer struggled under increased competition, especially at the low end of the market. In 1931, Flyer announced it would not produce an electric train set to sell for less than $4 like its competition had. However, within three months, it relented and released a train without transformer that sold for $3.95, and in 1932, it released a set with transformer that retailed for $3.50. Sales increased, but the company was not profitable. Expansion into other toy arenas also failed.
Gilbert soon moved the company from Chicago to New Haven, Connecticut, and re-designed the product line. He pioneered the 3/16" to one foot (S-scale) variant of O gauge in 1939, in which the locomotive and car bodies are scaled to 1:64 scale, making them approximately 25% smaller than the standard 1:48 for O gauge while still running on the same type of three-rail track. While this allowed the S-scale trains to navigate tighter curves that would cause a conventional O gauge train to derail or jump the track, Gilbert actually introduced a wider radius (20") track for added realism. This still resulted in curves that were much tighter than those that appear in the real world, but appeared much more realistic than the 13.5" radius (O27) gauge train cars that appeared "stubby" in length. The new 40" diameter circles allowed more track in the same space as a layout constructed with O72 (36" radius) curves.
By 1941, Gilbert had discontinued the earlier designs and advertised his new American Flyer products as "Every train 3/16" scale from front end to rear end." Some boxes were labeled "3/16 scale" and others labeled "Tru-Model" As most prior trains from American Flyer and other manufacturers paid little attention to scale (proportional size mirroring the prototype), this new wrinkle made Gilbert American Flyer distinctive, as his cars at 1:64 were much closer in scale dimension to the prototypes on real railroads than the comparatively stubby 1:48 scale rolling stock that ran on O27 track.
At the same time, Gilbert also released a line of HO scale trains.
In 1946, after World War II, Gilbert discontinued manufacturing three-rail O gauge trains entirely in favor of the slightly (25%) smaller and more realistic S gauge and in the process eliminated the most unrealistic aspect of toy trains -- the center rail. His 3/16" American Flyer used two-rail track sized closer to 1:64 scale, or about seven-eighths inches between rails. The minimum radius for Gilbert's curves was 19 inches, which added to the look of "realism" missing with larger O gauge trains running on curves with a smaller 13.5-inch radius.
In order to further differentiate his product line from that of Lionel, Gilbert employed a bullet-shaped (link) coupler, but within a few years (1952), a newer, more realistic knuckle coupler design appeared. Flyer played up its improved realism and attention to details, with two-rail track and prototypical couplers, with Gilbert himself saying the design was inspired by his son's dissatisfaction with other toy trains available on the market. "Kids want realism", he said. His trains, which were closely proportioned to their prototypes, also had more detail elements than most O gauge competitors.
Although popular, American Flyer was always the second-ranked brand to Lionel in terms of market share at the high end of the market. With Marx and a handful of other brands relegated to the low end of the market, Lionel and American Flyer shared premium status. A rivalry emerged between both companies' fans that continues today.
Like Lionel, Gilbert was caught off guard by the popularity of HO scale trains that offered better realism at a lower price than its American Flyer S gauge products. But the true reason for the demise of the toy train industry was the changing interests of American youth. A new technology called television was taking the place of many traditional hobbies, and the toy market was subject to the success of unpredictable overnight fads like the Hula-Hoop and yo-yo. Kids were also eschewing their Lionel and American Flyer trains in favor of remote-control slot car racing sets.
Finally, the national phenomena of the discount store craze was ravaging toy train companies' traditional distribution network -- mom-and-pop hobby shops -- and sending them into financial oblivion. The discount stores demanded train sets at a low wholesale price and refused to offer the personal attention and repair services of the hobby shop. In order to get product on the shelves of discounters, toy train manufacturers cheapened their lines to get the price point down on sets -- which exacerbated the downward economic spiral. Longtime train collectors and hobbyists were offended at this newer production, dismissing the new products as "cheap junk", an accurate description.
These problems were compounded by the death of its founder, A.C. Gilbert in 1961. With the popularity of toy trains and construction toys declining, and without another successful product line to buoy the company's finances, Gilbert found itself in serious financial trouble. Finally, a majority of the company was sold by the family to a holding company, the Wrather Group, in 1962 with A.C. Gilbert, Jr., acting as CEO. Within a few months, though, A.C. Jr., died. The company continued to manufacture trains of limited appeal, thanks to the questionable quality.
Under the new ownership, the A.C. Gilbert Co. continued to struggle, although the new owners took a more aggressive approach to advertising and marketing than when the firm was headed by the more conservative A.C. Gilbert. It manufactured a wide variety of poorly-designed and poorly-conceived toys (dolls, racing sets, games) that sold slowly, if at all, and was nearly overwhelmed by store returns of defective merchandise. Gilbert took an especially-hard hit when a majority of a poorly-designed and manufacture red James Bond 007 slot car racing set flooded back as returns after component failures. [Because of the number of returns, these sets are rare and extremely collectable, now selling for an average of $1000 on ebay]. In addition, the company delivered many of its toy line products to discounters with a "100% sale guarantee." When the merchandise didn't sell through, it ended up back in Gilbert's warehouses. The company discontinued the American Flyer train line in 1966 and finally declared bankruptcy in 1967.
Within two years, Lionel Corp. was bankrupt itself and had sold its train lines to General Mills, including the unused American Flyer tooling. In 1979, General Mills' Lionel division started to reissue Flyer products under that name employing a mix of previously unused railroad heralds and traditional Gilbert American Flyer designs.
In 1984, General Mills sold the Lionel Co. to Kenner, a toy manufacturer. One year later, the company was sold to Richard Kughn, a Detroit toy train collector who made his fortune selling and developing real estate. For over a decade, Kughn moved both the Lionel and American Flyer brands forward, getting a shot of momentum from a resurgence in the toy train hobby in the early 1990s. In 1996, Kughn sold a majority interest to Wellspring Partners LLD, a Chicago-based national turnaround firm headed by Martin Davis. Kughn retained a small percentage, and rock star Neil Young, another toy train buff, also became a minor investor. Young's contributions include designing a sound system for trains (RailSounds) in 1992, as well as the Trainmaster Command Control (TMCC), a unique radio control system. The new company is known as Lionel, LLC.
The American Flyer brand name survives today under the guidance of Lionel, LLC, although Lionel's advertising and marketing emphasis seems to remain locked on promoting its own O and O27 gauge product lines. True American Flyer aficionados claim this narrow focus is a conflict of interest and prevents the growth of S Gauge among new train operators. Most of the American Flyer-branded product sold by Lionel, LLC today is reissues of 1950s designs utilizing refurbished old Gilbert tooling, decorated in traditional road names and paint schemes used by Gilbert, as well as an influx of some of today's modern railroad heralds. One complaint by longtime American Flyer devotees is that Lionel isn't creating Flyer products that appeal to the toy train masses -- rather, focusing instead on a small market of Flyer collectors.
However, winds of change are blowing. Each year since 2002 Lionel has increased the number of American Flyer offerings, a sign the demand for 3/16" S gauge is growing. In late 2004, Lionel finally debuted a new steam locomotive -- a highly-detailed, 2-8-2 Mikado in multiple road names. Utilizing all new tooling and issued under the American Flyer name, the Mike is the first original American Flyer steam locomotive design since the late 1950s. Complete with TMCC (Lionel's proprietary wireless remote control technology) and a superb sound chip/system (TrainSounds), the Mikados proved to be a hot seller and their success has led to future similar issues. In late 2006, Lionel began delivering an updated remake of its largest steam locomotive, the famous 4-8-4 Northern, as well as a gray Union Pacific Northern with smoke deflectors (elephant ears); both new versions have digital sounds. Due in late 2006 or early 2007 is a new high-detail Pacific (4-6-2) with both TMCC capability and RailSounds. Additionally, Lionel has just released, in 2006, the first newly tooled passenger fleet. These heavyweight style cars are neither a refashioning of older Flyer designs nor a repurposing of Lionel 027 rolling stock (as some earlier Lionel/Flyer freight cars had been.) Also in 2007 Lionel started to sell American Flyer track, the popular 19" radius curve remaining unavailable to this day. Due late 2008 is an American Flyer Big Boy with TMCC and Railsounds.
The license to manufacture the track had been held by Maury Klein, whose K-Line brand of 0 gauge trains competed against Lionel in the toy train renaissance of the 1980's and 90's and into the 21st. century. When K-Line fell upon hard times in recent years, it was purchased by Lionel LLC, who then got the Flyer track as well as the tooling for two 0 gauge locomotive designs; the UP Big-Boy and the C&O Allegheny. Both of these engines had been tooled to 1/60th. scale so that 0 gauge operators with small layouts and narrow radius curves would be able to enjoy what would otherwise be behemoth engines. Their closeness to 1/64th. scale, however, made these engines naturals for development into the American Flyer Line, particularly since Lionel already possesses tooling for these locomotives in their 0 scale product lines. The company has promised a December 2008 release for the Big Boy. No offering has yet been made as to the Allegheny, though collectors and aficionados hold out hope that a sell-out success with the current offering will stimulate the company to proceed further.
Lionel's investment in new tooling is being interpreted among many S-scalers as a sign of commitment by the manufacturer to their market segment, as well as the brand, the gauge, and the hobby in itself.