RAILROAD SITUATION SHOWS SIGNS OF IMPROVEMENT

The present railroad situation, shown in such an alarming light by the preliminary statistics of the Interstate Commerce Commission for the month of January, 1921, arises directly from the railroads last year overestimating additional revenues and underestimating additional expenses, according to Professor W. J. Cunningham, of the Graduate School of Business Administration, in a recent interview for the Crimson. But there are indications of an early improvement, and meanwhile, the best plan for the railroads is to refrain from any radical steps, get what relief they can from an extension of their economies, and hold on until traffic revives.

"These preliminary statistics for January, as given out by the Interstate Commerce Commission," said Professor Cunningham, "show that out of fifty-one railroads which have annual operating revenues of $25,000,000, twenty-three had deficits in the net operating income. In other words, nearly one-half of the large railroads failed, in January, to meet their operating expenses, taxes, and rentals for joint facilities or equipment, and had nothing with which to pay the interest on their bonds. In thirteen cases out of fifty-one, the roads failed to earn even their operating expenses. The estimated returns for February and March show equally alarming results.

Government Control Injured Roads

"The roads were returned to their owners after two years of Government operation," continued Professor Cunningham, "with depleted earning power and in deteriorated physical condition. During the period of Federal control wage rates and other expenses were greater than increases in revenues, and it was partly to remedy this circumstance that, when Federal control terminated, Congress enacted a new law, known as the Transportation Act of 1920. The law was designed to restore the railroad carrying power, and provided for a transition period of six months in which the railroads could put their properties and organizations on a normal operating basis, while the Government continued its war-time guarantee of net income equal to that of the average of the three years prior to the war. During this transition period the railroads presented their petitions to the Interstate Commerce Commission, asking for rate increases, which would insure the net return of 6 percent on property value contemplated by the Transportation Act, and the Commission granted the increases with but little change.

New Rate Basis a Failure

It was thought that the new rate basis would restore the railroad earning power and reestablish railroad credit, so that funds could be raised to finance much needed improvements and enlargements in facilities, but the results have been quite disappointing. The reasons are easily seen. In the first place, the railroad estimates were based upon the 1919-1920 volume of traffic. The severe business depression in business which set in late last fall was not foreseen. The volume of traffic now is much less than the estimate upon which the rate increases were based. In the second place, the benefit from rate increases was modified adversely by the refusal of some of the states to accept the rate scales prescribed by the Federal Commission. This controversy is now before the Supreme Court. In the third place, the effect of the wage increases granted in 1920 by the Railroad Labor Board and the effect of the working rules of the national agreements entered into by the Director General in the last few months of Federal control, were underestimated. In short, the additional revenues were overestimated and the additional expenses were underestimated. Of the two, the falling off in revenues is the greater in importance."

In respect to the effect upon the railroads' net income of a substantial decline in traffic, Professor Cunningham declared that it is greater than is generally thought. "A simple arithmetical illustration," he explained, "will make the point clear. If the volume of traffic, upon which the rate increases were based, is taken at 100, the operating expenses at 70, the taxes at 5, and the interest, rentals and other charges as 15, the remainder of 10 is the surplus available for dividends, improvements or reserves. But instead of 100 units of traffic and revenue, the railroads are now offered but 80 units. If expenses, taxes and charges could each be reduced 20 percent to correspond with the decrease in traffic, the decrease in the surplus would be but 20 percent, or 2 units. Unfortunately, however, expenses cannot be reduced in the same proportion as the decrease in traffic, because such a large part of them are more or less independent of variations in traffic. If we assume that one-half of the expenses may be reduced 20 percent, the net result is a decrease of 10 percent in all operating expenses, or 63 units instead of 70. Taxes and charges are not affected at all. The result, then, is a decrease of 20 units in revenue, and a saving of but 7 units in expenses, taxes and charges, or a net decrease of 13 in net income. Thus the surplus of 10 is transformed to a deficit of 3. These assumptions approximate the situation today. The decline of something like 20 percent in gross, accounts, in greater part, for the serious financial condition of the railroads.

Expenses Cut to Minimum

"In an earnest effort to square the outgo with the income, the railroads are cutting expenses to the bone," continued Professor Cunningham. "Some of these cuts are real economies, such as those which come from increases in the efficiency of operating trains, stations, and yards. Others are not real--they are merely borrowing from the future. For example, the repair work on way structures and equipment has been radically curtailed. Locomotive and car shops have been partly or wholly closed, and programs for renewals of ties, rails and ballast have been reduced to a fraction of the requirements. Obviously this is deferred maintenance, which must be made up at increased cost later on. And, besides, when normal traffic is resumed, the equipment, in a poor condition after war service, will be in an even greater state of inadequacy."

In reply to a question as what means for meeting the situation were at the railroads' command, Professor Cunningham stated that there were three expedients available for improving the situation. "The first, that of seeking authority to make further advances in rates, may be mentioned and then dismissed," he said. "For this expedient holds out no promise, as the rates, as a whole, have now reached a level above which certain commodities will not move, and passengers will not travel. The net effect would probably be to lose more through further curtailment in traffic than would be gained by higher charges on the traffic that must move. The second expedient is to seek further operating economies. There are opportunities in that field, but it has been and is being earnestly cultivated.

"The third expedient is to reduce wages and to abolish certain restrictive and unjustifiable rules in the national agreements. The railroads are now pressing their petitions before the Railroad Labor Board, and there is likely to be some reduction in wage rates, particularly as regards unskilled labor, which profited to the greatest extent by war conditions, and in working rules. Much publicity has been given to the effect of these restrictive rules. It is not necessary for me to refer to them in detail, but as one example might be cited the case of an important eastern trunk-line, to which these rules alone are causing an additional yearly expense of $14,900,000, a sum sufficient to pay 5 percent on the capital stock of the company."

Business Must Become Normal

A liquidation in labor, according to Professor Cunningham, is certainly necessary in view of the current economic conditions, but will not, in itself, grant relief in sufficient degree to solve the problem of the railroad earning power. "In fact," he added, "no solution appears to be possible until general business is again on a normal basis, and traffic again moves in the volume contemplated by the rate scale set last year by the Interstate Commerce Commission. The signs already point to an improvement. There are indications that the worst is over and that there will soon be an upward swing. Until it is well under way, however, there seems to be nothing for the railroads to do but to continue and extend their economies, get such relief as is possible through liquidation in labor costs, tighten up their belts and hold on until traffic revives. It may be that certain of the weak roads will go under, but if business depression continues, such a result is inevitable."

Declaring that this was not the time to try new plans, and emphasizing the difference between railroads and factories, Professor Cunningham expressed the opinion that the Transportation Act of 1920 should be given a fair trial. "Railroads," he said, "are suffering little more than other industrial institutions. There are, however, fundamental differences which affect the analogy. In the first place, the railroads are public utilities which must operate whether they pay or not. An industrial concern may shut down if the losses thereby occasioned are less than those which it sustains under operation in these subnormal times. In the second place, the typical industrial concern made abnormal profits during the war and so gained a surplus to carry it over the lean years. The railroads, on the other hand, have no war fat to sustain them during the reconstruction period.

Opposed to Government Ownership

To the scheme of Government ownership, so much discussed and prophesied today, Professor Cunningham is absolutely opposed. In explaining his stand he said, "There is at present, on the part of employees and of a growing minority of the public who fail to appreciate the ultimately unfavorable effects, a strong demand for government ownership. It is to be hoped that such an economic calamity may be avoided. The weight of public opinion is in favor of leaving to private initiative those things that can be done better by individuals than by the Government. A continuation of Government operation was overwhelmingly opposed by the general public, when the issue was brought before them in 1919, and it is believed that there have been no fundamental changes since that time which justify a reversal in the public attitude."

"The dark clouds in the present railroad situation," concluded Professor Cunningham, "are merely incidents in the painful period of reconstruction. The Transportation Act has not failed. Under a resumption of normal business conditions, and with the beginning of the plan providing for consolidations which will eliminate the disturbing factor of the weak roads, I believe that the railroad problem will be well on toward a satisfactory solution.