PART II

TRANSPORTATION TRENDS

CHAPTER 1. INTRODUCTION: IS THE UNITED STATES HEADED FOR ANOTHER MAJOR TRANSPORTATION CRISIS?

Although there are critical spots and serious problems, there is today no general crisis in the domestic transportation system of the United States. All modes are well advanced and provide the Nation with some of the best facilities to be found anywhere. Nevertheless, there are trends which give cause for concern for the future overall adequacy and efficiency of our transportation system and for the health if not the very existence of common carriers. These trends, if continued unabated, could in a few years add up to a condition that would represent the second major crisis in our transportation history. It is the purpose of this part to identify certain of these trends and project them into the future period 1975.

The Nation has had but one major crisis in transportation policy. That was between 1870 and 1887 when the States and the Federal Government were confronted with the problems of bringing the railroads, which then represented a monopoly in transportation, under regulation. The prevalence of gross discrimination in rates, unreasonable monopolistic rates and extensive rate wars respecting traffic between competitive points were revealed in the reports of extensive investigations of the Windom and Cullom committees. The act to regulate commerce of 1887 was the result, launching the Government into the task of regulating the railroad industry as an alternative policy to Government ownership which prevailed in almost all other countries. Conditions of wasteful and unfair competition had reached an intolerable state. Some carrier rates incident to rate cutting to get the traffic at competitive points at any cost, were far from compensatory; charges, in fact, were often negligible. Rates elsewhere were exorbitant.

Periods of minor crisis have occurred since that time. Notable among these was the problem of adjustment immediately following World War I, 1919-20, incident to the return of the railroads to private operation. Government ownership was seriously debated but a more comprehensive program of regulation with a positive philosophy was chosen. The period of the great depression, 1932-36, forced 30 percent of railroad mileage into receivership and the Office of Federal Coordinator of Transportation was created in 1933 in response to this situation. The Emergency Transportation Act of 1933 included the rule of ratemaking, providing a more flexible basis of regulation of rate level and abolished the recapture clause. Stock and lease control were subject to provisions covering consolidations. But no major reorientation of transportation policy was held to be

necessary. General economic recovery was largely depended upon for correction of railroad difficulties.

World War II imposed new and greater demands on transportation capacity. Deep sea coastwise and intercoastal shipping, except for certain coastwise bulk carriers, was abandoned in 1942 to make general cargo, passenger and tanker vessels available for overseas service.

Since 1925 there has been a notable expansion in domestic motor, air, water, and pipeline transportation facilities and services. Advance in technology in all of them has been notable, and with the exception of pipeline improvement and extension, has been substantially influenced by an accelerated rate of public expenditures at a rate that would have been impossible had it depended upon private capital supplied by the using carriers. Air, motor, and highway transport has, in this period, matured into significant, advanced components of the transportation industry, each with different service characteristics and all different from rail. These different service characteristics offered the opportunity for highly coordinated service by combinations of modes, however, the result so far has been essentially a collection of transport facilities and services rather than an economically efficient transportation system.

Each industry component is reasonably concerned with maximizing itself with but little regard to the effect of general development by others meanwhile social investment, both public and private, in the total system has been made without regard to overall transportation needs. Unlike most industry, the total investment in transportation facilities includes an increasingly large proportion of public funds, and it must be admitted that these funds have been expended without regard to their impact on private investments. Excessive total social investment in transport facilities has already reached serious proportions. Should this policy continue we may find that the price of failure to coordinate and control total social investment in transportation facilities with the total transportation requirements of the Nation may be more than we are willing to pay. It is indeed time to see where we are going and whether we should exercise more careful control over the public portion of social investment in transportation. The statistics which are available and which are employed to establish these trends have serious limitations. Traffic and financial data are partially adequate for the railroad industry, class I highway carriers reporting to the ICC, the common carrier water carriers and pipelines reporting to the ICC, and the scheduled air carriers. Data regarding private and exempt carriers by highway and water, both passenger and freight are estimated by Government agencies or industry trade associations.

Predicted trends of private investments are projections of postwar trends whereas public expenditures for highways, waterways, and airways are estimates of responsible Government agencies. However, making due allowance for these limitations and the resulting margin of error in projections, the story they tell is significant and worthy of objective and serious consideration. Indeed, they present a picture that demands positive action in some directions and justify further detailed inquiry in others. The international situation is such that we cannot risk having some years hence a transport system unable to serve the economy as a whole and to assure vigorous economic progress. Is

not the public interest in transportation so great that we dare not await a crisis which is forseeable before positive action is taken?

CHAPTER 2. RELATIVE DECLINE OF COMMON CARRIERS

The strength of this economy is its broad base of business enterprisers, most of whom must depend upon a common carrier system of transportation. A strong and efficient one is essential to a growing national economy.

Recently a member of the Interstate Commerce Commission said. that "unless the signs are misleading there is a growing crisis in transportation which actually threatens survival of public surface carriers as a private enterprise system." 1 This he indicated grows out of the expansion of the exempt carriers and the accompanying decline of common carriage in recent years and especially in 1960. Net income decline and rising operating ratios in times of comparative prosperity are alarming. Prospects of relief through higher rates now appear to be uncertain.

The gross national product adjusted for price changes increased by approximately 26 percent between 1946 and 1959. During the same period the increase in intercity ton-miles was estimated at about 40 percent, showing that volume of intercity traffic increases at a substantially higher rate than the GNP.

If we add the ton-miles of regulated carriers on one hand and that of unregulated on the other hand as shown in table I, we find that private intercity carriage, which was only 21 percent of the total in 1946, had become 33 percent by 1959. Unregulated inland water carriage in 1946 amounted to 116.56 billion ton-miles, and was the principal part of unregulated carriage. However, unregulated motor highway carriage which was but 51.6 billion in 1946, had increased by 350 percent to 197.2 billion ton-miles in 1959, and now exceeds the volume of unregulated carriage by water.

The decline in the proportion of ton-miles by common carriers results from the rapid expansion of freight traffic of highway and inland water carriers which for the most part are not subject to regulation.

The percentage shift from public to private carriage has been obscured in part by the growth of air freight and pipeline services which are generally subject to regulation.

If this trend continues, private and exempt carriage can be expected to account for half of intercity freight not later than 1975. By that time, or before, regulated common carriage may have become eroded to the point that it might no longer be capable of maintaining a general, pervasive service for the general shipping public to whom it is the only dependable and economical means of transportation. The question is raised as to whether or not a national transportation system based primarily on unregulated transportation will serve the basic freight requirements of the Nation as a whole.

The emphasis in the railroad industry in this analysis of trends is not based on any assumption that the public interest in the health of railroad transportation is more important than in other common

1 Walrath, Laurence K., address before the 58th annual meeting of the National Petroleum Association, Sept. 15, 1960, mimeographed.

carrier service. It just happens that the railroad industry still performs the bulk of the Nation's common carrier service. Furthermore, the railroads share with the deep sea, coastwise, and intercoastal shipping industries the distinction of immediate threat of crisis. Again data is more complete for the railroads than for other modes.

TABLE I.-Comparison of total intercity traffic by carrier type with intercity traffic by federally regulated carriers

1 100 percent regulated.

Percentage is derived from information obtained from sample study of annual waterway carrier reports to ICC.

Source: Compiled from data obtained from the ICC, CAB, and Bureau of Public Roads.

CHAPTER 3. REQUIREMENTS FOR CAPITAL INVESTMENT

It has been estimated by an officer of one of our most prominent investment banking houses that transportation historically requires an annual private capital investment for equipment alone of more than 2 percent of our gross national product.2 Projected into the next decade this means that from $50 billion to $100 billion must be available to transportation during that period. To this amount must be added from $5 to $10 billion for railroad way and structures. A portion of this, from 10 to 20 percent, will probably be generated internally through depreciation and retained earnings the remainder must come from outside the industry.

Up to now the Nation has relied on privately owned common carriers as its basic transportation service. Capital required to maintain and develop these facilities other than earnings has come from private money market sources. These carriers can maintain this position of an adequate privately owned system only so long as adequate capital is available.

2 Wedel, T. Carl, vice president, transportation department, the First National City Bank of New York, speech before the Mason-Dixon Transportation Conference, Lord Baltimore Hotel, Baltimore, Md., June 1, 1960, entitled "A Great Future Needs Great Transportation."

What the capital requirements of the common carriers are for the next decade will depend on: (1) What volume of traffic is to be carried; (2) what modernization as against mere replacement is anticipated; and (3) the price level changes which may occur.

The deterioration of the credit position of the common carrier industries is and will be at once a symptom of an undesirable competitive situation and a most damaging result in itself. The recent downward trend in net income and collateral upward trend in operating ratios are bound to result in weakening the credit position of these carriers with resulting inability to modernize facilities and equipment to improve efficiency and attractiveness to users.

The financial community evaluates credit position for long-term capital on the basis of expected long-term earnings. The ability and willingness to improve property, to cut costs, to improve attractiveness of service, to pave the way for increase in net working capital and debt retirement are the primary considerations in credit standing with those who supply outside capital.

The privately owned common carriers must compete in the money market with other industry. If carrier earnings are not comparable much less declining, the free money market will not be interested in providing capital. The narrowing gap between rising costs and rate level, since 1956, for class I motor carriers and bargelines and the rail industry, has threatened their credit position. More alarming is the absolute loss of ton-mile traffic of the railroads in recent years during a period of increasing total traffic. This loss is most pronounced for the eastern railroads. The ability of the common carrier industry to compete will be caught in a vicious downward spiral if financial resources are denied them. The trend is illustrated by the average price placed on transportation equity by the market which will now pay only 10 times earnings for it as compared to 18 times earnings per share for industrials generally.

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Paramount in this problem are the capital requirements of the railroads. Here we confront the three considerations or assumptions mentioned earlier in estimating the future capital requirements of the railroad industry. A recent study of the Brookings Institution presented four estimates. Two were the result of a Brookings questionnaire directed to 41 class I railways and answered by 30 respondents, a third was that of John Barriger, in a study on "Super Railroads for a Dynamic American Economy," and a fourth was that submitted to the ICC in ex parte No. 206. The first two were for the decade 1956-65, and the last was for 5 years 1956-60. The Brookings estimates were based on two assumptions: Assumption 1, that railroads continue to carry about 50 percent of intercity traffic. Assumption 2, that they would increase their share to 55 percent.

Nelson, James C., "Railroad Transportation and Public Policy," pp. 381-411 (1959). Barriger, John, "Super Railroads for a Dynamic American Economy," p. 71 (1956).