that the automobile cost per mile for the driver alone is 8 to 13 cents. Many autos cover most of their miles with a single occupant.

From the standpoint of passenger choice the same conclusions may be drawn in regard to cost of production as in regard to prices actually charged. In times of rising or at least stable economic activity, Americans will pay a premium, both for business and personal travel, to avail themselves of the convenience and comfort they find desirable. It is reasonable to conclude that for most people price is not the most influential factor in choosing transportation, it is the quality of service. We have here a condition of service elasticity rather than price elasticity. Service includes comfort, speed, terminal convenience, and frequency of operation.

In considering the effect of the cost of private aircraft operation on business travel decisions it should be noted that the present levels of corporate income tax may influence such decisions. For a profitable corporation it can be argued that the real cost of flying the airplane is only half the cost calculated herein.

3. The earnings experience of public carrier companies

The net earnings of the public carriers are necessary not only to keep them solvent, they are necessary to take advantage of new innovations in equipment as promptly as practical improvements can be made. Such progress has been a keystone of public policy in all cases except for the railroads in modern times; it is explicitly stated in the Federal Aviation Act, for instance. In the highway building program we build to higher standards in the matter of speed and comfort. Earnings must be high enough to acquire the necessary equipment if the private enterprise system is to provide the most modern and efficient service. The companies must not only be solvent, they must be able to attract new outside capital when needed. Regulatory agencies must take this requirement into consideration in ratesetting. Recent results indicate that this may not have been the case although business fluctuations, or such expenses as equipment changeovers, may prevent a particular year from meeting the required average return.

(a) Railroads.-On the basis of the ICC-established methods of separating rail freight and passenger expenses, passenger revenues have failed to cover the full cost of the service since 1930, except for 4 years during World War II. Thus, except for unusual wartime conditions, there have been no industry earnings from the passenger business for 30 years. This situation did not cause determined action on the part of management, except for some new equipment programs and branchline discontinuances, until the net earnings from rail freight slumped badly in the late 1950's. Exhibit VIII shows that as long as the corporate net profits of the railroads maintained a general upward trend, the passenger deficit was allowed to maintain a high level and a trend of gradual increase. When corporate net earnings trended consistently downward the carriers finally took energetic action in regard to passenger operating ratio with the result that the 1959 ratio of passenger expense to revenues was 130.6, the lowest since 1948.

The principal means of controlling the deficit was to reduce train service. In the 1955-59 period the miles of road served by passenger trains declined from 121,000 to 100,000. More importantly the num

ber of passenger train-miles operated declined from 299 to 225 million, a reduction of 25 percent in 4 years. This cost control program, aided by the train discontinuance provision of the Transportation Act of 1958, has brought the railway passenger deficit down within $60 million of the total ICC "solely related" passenger service costs.83 This is the nearest revenues have come to covering this part of the costs since 1953 and is a $100 million decline in the excess of "solely related" costs above revenues. Revenues always more than covered these "solely related" passenger service costs between 1930 and 1949.

Railroad management has had no profit incentive to improve passenger facilities and services. Those improvements discussed in the next section of this chapter were financed on overall corporate earnings, which came only from freight service.

(b) Buslines.-Bus industry profits trended downward after 1951, gradually_reversed the trend and in 1957-59 experienced a sharp increase. Unlike the other public carrier groups the bus industry figures are greatly affected by a single company, Greyhound, which with two other systems, Trailways and Continental, dominate the long haul intercity traffic. In 1958, the three systems produced 74 percent of intercity passenger revenues. In 1959, Greyhound alone accounted for 66 percent of total bus operating revenues, 60 percent of the passengermiles, and 76 percent of net profits. Greyhound has been a stable and continuously profitable company and has had a stabilizing effect on industry totals. The industry record is much less favorable when viewed without Greyhound. In 1959, which exhibit VIII reveals as the best year since 1946 for bus earnings, 22 out of 137 reporting companies lost money. They are largely located in New England and the Central Atlantic States where short distances and advanced highway improvements now provide a maximum incentive for the use of private autos. In 1955, a relatively poor year in the bus industry, 56 companies lost money.

In the effort to maintain profitability the bus industry has gradually reduced service, bus-miles operated, since 1951. These reductions have been in regular route intercity service offset by increases in charter and special service mileage. The 1955-59 comparisons are:

84

A shift in the source of revenues has accompanied this shift in miles operated. For the entire industry, class I, II, and III carriers intercity regular route service accounted for 76 percent of all bus operating revenues in 1949 and 62 percent in 1958.85 For the class I

83 The estimated total expenses of rail passenger service are reported in two categories: "Solely related," which includes all items clearly and directly chargeable to the passenger service; and "Common expenses apportioned to passenger service," which includes allocated shares of such costs as the maintenance of tracks. "Solely related" expenses are somewhat greater than out-of-pocket costs since such noncash expenses as depreciation are included.

84 Interstate Commerce Commission, "Transport Statistics in the United States-Part 7, Motor Carriers." These data are for class I intercity carriers only.

85 Interstate Commerce Commission, "Transport Economics," December 1959, p. 6.

carriers only it may be observed that in 1949 charter service accounted for 2.8 percent of all revenues and company express service 1.7 percent. In 1959 charter accounted for 7.4 percent of revenue and express 6.5 percent. These services have been acclaimed the chief source of net profit in the bus industry in recent years.

At the moment the profit prospects in the bus industry do not appear unfavorable. Expenses per bus-mile are still increasing but revenues per bus-mile are rising at a more rapid rate. There is no question that low fixed costs and ability to tailor the production of service to the demand afford the larger and better managed bus systems a good opportunity to maintain reasonably adequate profits. They have been able to continue equipment innovations and a Îimited program of terminal improvements during the past decade.

(c) Airlines.-Exhibit VIII demonstrates that airline profits have been relatively unstable and operating ratios have been higher than desirable in recent years. When capital gains are considered the profit picture for airlines is even less favorable. For the 1949-59 period trunk airline net income totaled $493,151,000. Capital gains from the sale of equipment amounted to $109,622,000. Because of their relatively favorable tax treatment capital gains made a disproportionately large contribution to net profit.

A rapid flow of equipment and operating improvements, many of which reduced unit expenses, and a strong growth in traffic, have provided the airlines with sufficient earnings and cash flow (importantly due to the depreciation rates required by rapid obsolescence of transport aircraft) to finance the turbine equipment revolution. However, with capital gains profits nearing an end, the industry must produce an improved and stable profit on its basic businessmoving passengers and goods-if it is to continue aggressive improvement and reequipment programs.86 Supersonic transports will be offered to the industry with specific delivery dates attached, within the next 5 or 6 years. The earnings to finance this improvement must be made from traffic and it is clear that sufficient traffic will be available.

It will be the responsibility of the CAB and the airlines to devise the most productive fare structures and the most efficient and economical service patterns. A continuation of the current CAB efforts in adequacy-of-service proceedings, reported in detail in part VII, chapter 12, will greatly increase the regulator's responsibility for scheduling, a matter for management's decision in the past, and one greatly influencing net profits.

(d) Summary.-It is clear that postwar expense-revenue trends have been adverse in their effect on carrier profits. See part VII, chapter 7, for an extended discussion of the revenue-expense squeeze as it affects the railroads. The effect of this squeeze on net profits has been magnified by the traffic declines of the bus and rail carriers. and by the continuous cycles of reequipment in the airline industry. The Federal response to the lack of carrier profitability has been along two routes. The first is the special case of local service airlines

86 The high operating ratios of the past 4 years have been due, in part, to the impact of recessions on traffic and to the high costs of starting jet service. Among the latter costs are the training of flight crews and mechanics, installation of new fueling systems and loading gates, reequipping of maintenance shops, and the operating costs of low equipment utilization during the early months of route service.

which receive direct operating subsidy and for that reason have not been included in our earnings discussion.87 The other important step was to provide for Federal control of rail passenger train discontinuances as part of the Transportation Act of 1958. This has unquestionably aided in reducing the rail passenger deficit. However, it is essentially an expedient policy and makes no contribution to the longrun solution of the rail passenger business unless that solution is complete discontinuance of the service.

The common carriers of passengers are faced with having to provide a completeness of service traditionally borne by carriers having a monopoly, or at least a reasonable amount of regulatory protection from the inroads of free competition. Regular service to a large number of loss or marginal stations must be supported by the profitable stations on a transportation system. Limiting competition is the only way to protect and assure the necessary earnings to support this "public convenience and necessity." Due to the growth of private transportation, through the stimulus of local and Federal public investment programs, this protection can be no longer extended. Today's situation will clearly require more regulatory flexibility and more aggressive and fast-moving carrier management if the public carriers are to provide a reasonably complete service without subsidy. Thin traffic routes providing a service for public convenience will undoubtedly become fewer and fewer as profits are less able to sustain the burden.

D. THE CHALLENGE TO MANAGEMENT AND REGULATION-WILL THE RAILROADS BE VICTIMS OR SURVIVORS OF THE TRANSPORT REVOLUTION?

Many of the problem areas discussed in this section arise from one clearly identifiable but rather intangible aspect of the railroad industry-management. Since this intangible has been the subject of some discussion by those observing and analyzing the railroad industry, we will, in part through their eyes, review railroad management in recent years.

History is undoubtedly one of the severest problems of rail management in 1960-there is so much of it. Most of this history is that of a complete monopoly serving the public under detailed State and Federal regulation. The railroads did enjoy an unbroken monopoly from their maturity just prior to the Civil War until after the First World War. They were under Federal regulation for over 30 years of this period and the Interstate Commerce Commission matured as an organization with a single regulatory responsibility and with a vital and self-supporting industry to regulate. A long and comprehensive tradition of monopolistic self-determination and self-sufficiency grew up through these years on the part of both railroad management and the State and Federal regulators. The self-sufficiency seemed less sure in certain periods, i.e., 1913-16, 1921, and 1930-39, but it continued a reality and at present the railroads have enjoyed the greatest volume of profits, and for a longer period, since the late 1920's. Capital structures are in better condition and receiverships are at an all-time low.

87 This does not imply they require no earnings. They have a substantial earnings requirement which has not been provided by the CAB, although completely within its power to do so.

The aim of the regulators and the companies during the great period of effective monopoly was to provide a very complete service, and a very large volume of service, at generally reasonable prices. These prices were individually set to achieve many ends in marketing; the widest possible geographic distribution of raw materials; the beneficial provision of transportation service to as many citizens, farmers, and small businessmen as possible; and a distribution of finished products which, though expensive, was generally nondiscriminatory. The joint managers of this system, the commissions and the railroad officers, counted on traffic volume and the profit incentive to control the costs of doing business, while at the same time providing virtually omnipresent service. The package of rates and fares which supported this service did not need to be related to costs, nor to recover any specific cost. The sum total had only to attain an average sufficiency high to keep a majority of the companies solvent and profitable enough to attract capital.

The only really effective controls on costs were intraindustry competition, which featured the railroad scene until the depression of the 1930's, and the efforts of State and Federal regulators. Specific accounting and cost controls in the modern sense were neither needed nor used. Rates were changed in response to shipper pressures, to railroad competition, or in response to general increases in the cost of doing business. One of the situations produced by these broad methods was the extravagant application of taxes on railroad property by State and local governments. The railroads and the then captive shippers and passengers were regarded by these authorities as a prime and unlimited source of revenue.

It should be emphasized that this whole pattern became fixed in the minds of both management and regulators through a period of 75 years. The pattern has been very slow to change as the 20th century transport revolution has progressed. Even though this revolution started before World War I with the first pipelines and was accelerated by the Federal-aid highway program and the Inland Waterway Corporation of the 1920's, the railroads and their regulators did not realize what was happening until the depression of 1929-39. The railroads were much more oppressed by this occurrence than their competitors because of rigid operating practices, strong labor unions, and high levels of fixed charges. Although there was some public recognition of the transport revolution, and important changes in the scope of regulation and Government promotion in the 1930's, the railroads were so immersed in their own problems that they did not take many steps to change practices that could have been taken.

The previously ingrained patterns of management operation and thinking carried into the 1950's on most railroads. These may be clearly seen when comparisons are made with other corporate managers. The reluctance to market research and to merchandise the product in the contemporary sense of those terms, the reluctance to revise outmoded rate structures left over from nearly 100 years of monopoly, and an unwillingness to experiment are revealing when comparisons are made.

Observation leads to the conclusion that too many State regulators and tax authorities have also carried these monopolistic, 19th century, thought patterns into the most recent decade.