The Railroad Dilemma

The Interstate Commerce Commission is reviewing the greatest number of proposed railway mergers in its history. If the majority of these mergers is approved, the railways will have succeeded in a massive attempt at consolidation which will group them into five or ten large companies covering the nation.

Something must be done to rejuvenate the railroad industry, which remains the sick man of American transportation. Over the last two decades the industry has declined markedly: in 1944 the railroads carried 69 per cent of all commercial freight; in 1960 they carried only 44 per cent. Although the western and southern railways continue to show a profit, the eastern lines lost $25 million in 1960 and $96 million in 1961. The railroads hope that mergers will reduce this trend by sharply reducing operating costs--the Pennsylvania and the New York Central alone hope to save $75 million annually through a merger.

Yet unless it is accompanied by a reform of rate structure, consolidation alone will not save the railroads.

Under the Transportation Act of 1940 the ICC now handles each merger separately.

In the last year the government has realized the need for "overall plan and direction" in its approach to mergers. In the last few months the Justice Department has attempted to force the ICC to study all Eastern rail merger proceedings together in order to consider their effect on transportation as a whole. Yet the government has not considered mergers in relation to the most serious problem of all: the railroads' outmoded rate structure, which the ICC has long controlled.

Theoretically, railways can provide cheaper transportation than can trucks for a wide range of goods, especially over long distance. Because of distortions in their rate structure, however, they are priced out of the market on many items and are forced to ship a third of their freight at a loss. For example, the rates on Army and Navy ammunition and supplies are so high (they produce 500 per cent profit) the trucking industry is able to undercut them.

Such overpricing largely results from the old system of charging rates "ad valorum" or according "to what the traffic will bear." In the days when railroads still enjoyed a monopoly of transportation, the more valuable products were charged at a higher rate and the less valuable materials were carried at a minimum profit. Before competition from the trucking industry this system worked well, but now railroads must adjust their rates to shipping costs rather than to the value of the commodities.

Another anomaly in the rate structure is the determination of rates within a given classification of commodities (such as agricultural products) by weight. For instance, the railroads charge the same rates for cabbage as for corn, although cabbages load "light" and are unprofitable, while corn loads "heavy" and is highly profitable. Such commodities should be classified by bull.

The question of rates is central to the railroads' financial difficulties. Regardless of efficiency of operation they will continue to make little money unless they break better than even on every commodity they carry. Without an increased profit margin, the railroads will not have enough capital funds to improve their service (they have 217,000 miles of track and nearly 1,700,000 cars to repair, replace, and maintain).

The lack of rate reform largely results from the failure of the railroads to make any proposals to the ICC for modification of the rate structure. The present merger proceedings give the government an opportunity to require the railroads to prepare a thorough computation of their shipping costs and suggest possible rate changes. With the help of these suggestions the ICC could devise a whole new rate structure.

The railroads must address themselves to the problem of rates if they are to compete effectively in the future. The present merger crisis presents the ICC with a unique chance to force them to do so.