overcapacity of transportation facilities in peacetime is desirable and necessary to handle seasonal peak demands and desirable for economic growth. We had overcapacity in railroads going back to the 19th century when the railroad system was virtually synonomous with the national system of transportation. Previous serious conditions of overcapacity were associated with economic depressions such as that of the nineties and the thirties.

Today, in a time of relative high level of economic activity there is evidence of growing overcapacity in both passenger and freight transportation that has already reached serious proportions. In passenger service millions of automobiles each with passenger capacity of from five to eight move over our streets and highways carrying less than two passengers per car. On the same highway will be found buses with many empty seats and but few main route railroad passenger trains may be observed using more than a fraction of capacity. On the freight side, empty truck and rail car mileage and light loading have generally increased. Private carrier service is usually a one-way loaded service making for extensive empty truck mileage. Nevertheless, the principal burden of overcapacity falls on the common carrier who must maintain regular service despite unprofitable loadings and who moreover must maintain standby equipment and terminal capacity for peak seasons and emergencies.

Overcapacity means excessive plant and excessive standby equipment. We know from experience that in our expanding economy free entry and vigorous competition may lead to overexpansion among hopeful competitors. When the Government provides the whole investment in way facilities, as it does for three of the transport industries, overexpansion is to be expected.

The vast railroad system of the United States has contracted in mileage, but little if any in overall plant capacity since the midtwenties when it was at its peak, in real mileage, number of locomotives and number of cars and when it carried over 75 percent of intercity traffic. The capacity of way and structures of existing mileage has continued to increase through heavier tracks, lower gradients, central traffic control systems, automation of yards, etc. The number of locomotives as shown in table XI, page 73, in 1959 was approximately half the average number in the 1926-30 period but the total tractive power declined little until 1952. The 19 percent decrease in tractive power does not mean a substantial decrease in work capacity because of the substitution of diesel locomotives for steam which has occurred since 1949. These locomotives require less time out of service for maintenance, are more flexible in adapting units of power and in ability to maintain good operating speeds.

Table XII shows that total tonnage capacity of railroad cars has been generally maintained, in spite of decreasing number of cars, because of increases of average capacity of cars. It is, therefore, clear that the decline in the level of freight-ton mileage, as well as passenger miles has far exceeded adjustment of railroad plant capacity. The result is an unprecedented excess of plant and standby equipment in time of normal economic conditions. Mr. John Barriger has estimated 67,000 miles of railroads or 30 percent of the 225,000 miles of railroads carried but 2 percent of the ton-miles of railroad freight." Barriger, John, op. cit., p. 7.

This amounts to less than 550 freight ton-miles per day. This is equivalent to only one full carload of heavy freight going 10 miles. Based on World War II performance the rail systems as a whole could probably handle 75 percent more traffic if its distribution were at all favorable.

All of the domestic common carriers of passengers have found the number of empty seat-miles increasing since 1946. The rate of increase has been most pronounced in railroad service causing the passenger deficit to climb from less than $200 million in 1946 to over $700 million in 1957.

Although bus service has improved in terms of seats and speed, the number of passenger miles in regular route service has declined since 1951. The average passenger load in buses (18-19) has not changed since 1949 but the average number of seats in each bus has increased from 35 in 1949 to 39 in 1959 due to widespread introduction of scenic-cruisers. This produces an 11.4 percent increase in unused seat-miles per bus."

Table XIII shows the increase in available seat-miles among domestic trunk and local airlines from 1946 to 1959 inclusive. While the available seat-miles increased from 7,490 million to 45,793 million, or almost 6 times, the revenue-passenger miles increased from 5,910 million to only 29,151 million, or a little over 5 times. The result has been an increase of empty seat-miles from 1,580,000 to 16,642,000 or by an increase of 15,062,000 empty seat-miles.

Table XIV compares domestic airline capacity with ton-miles performed. Passenger units are converted to tons on basis of 10 passengers equals one ton. The resulting load factor as shown in the last column shows a steady decline from 57.4 in 1952 to 52.9 in 1959.

Source: Eastern Railroad Presidents Conference, "Yearbook of Railroad Information," 1959 edition, p. 8.

• National Association of Motor Bus Operators, "Bus Facts," 28th edition, p. 14.

TABLE XII.-Total freight car capacity 1926-58-class I railroads

NOTE. This per-car increase occurred during a period when much shipper preference tends toward smaller, more frequent shipments.

Source: AAR, "Railroad Transportation: A Statistical Record 1921-57." "Yearbook of Railroad Information," 1959 edition.

TABLE XIII.—Trunk and local service air passenger capacity and utilization

Source: Air Transport Association, Air Transport Facts and Figures (annual).

TABLE XIV.-Revenue and available ton-miles U.S. domestic intercity air carriers (includes passenger and property capacity in revenue service)

Source: Air Transport Association, Air Transport Facts and Figures (annual).

3. Declining net income

Conditions of overcapacity are certain to lead to a less favorable relation of income to expenses. Net income trends tell the story. Chart VII, page 66, of the previous section shows that the trend of net income of class I railroads was generally upward from 1946 to 1955, allowing for dips in 1949 and 1954. Since 1955 the trend has been definitely downward dropping over 40 percent between 1955 and 1959. As is to be expected the operating ratio turned for the worse after 1955. Chart I, page 54, of the previous section showing the operating ratio trend for class I railroads reflects a favorable downtrend from 1946 to 1950 with a general upward trend since then and particularly since 1955.

Table XV presents the operating ratios of class I motor carriers which report to the Interstate Commerce Commission. The table shows more stability in this industry than for the railroads. It is significant for all carriers of class I and for the common carriers of general freight that the operating ratio between 1947 and 1952 inclusive was in no year above 96 but from 1953 through 1959 it has not dropped below that figure.

4. Undermaintenance and reduced service capacity

Declining net income compels curtailment of expenses. Undermaintenance and delayed replacement are most likely results. Undermaintenance is sometimes called "deferred" maintenance. Table XVI, page 77, and chart IX, page 78, on operating expenses of classes I and II railroads show that the declining net revenue and higher operating ratios since 1955 were not reflected in reduced expenditures for maintenance of way and equipment until the year 1958 and that the reduction has not been proportional to dip in net income. However, the chart reveals that maintenance expenses are a smaller portion of the total operating expenses than in early postwar years.

Table XVII, page 79, sets forth the change in the age of owned and leased cars by class I railroads from 1946 to 1959, broken down by age groups. It shows that there has been some decline in the percent in the 5-year age group beginning in 1953, and an appreciable increase in the 30 years old and older group since 1952. The latter represented 23 percent of the total owned and leased car supply. Delay in replacement necessarily means an increase in the average age of equipment. The older the equipment the more it costs to maintain it in good operating condition. Therefore, a reduction in maintenance expense in such circumstances must be at the cost of increased bad-order equipment and reduction of service capacity.

5. Reduction of service

Discontinuance of some schedules of service has resulted here and there in the air transport field but there is no indication of any overall reduction of service. However, in rail passenger service many schedules have been abandoned since 1946. The rate of discontinuance has accelerated since 1958 when the Interstate Commerce Act was amended by section 13a (1) so as to facilitate discontinuance of the most unprofitable and least-used schedules. No less than 145 trains had been dropped as of March 7, 1960, under this provision. There is evidence of a decline in passenger service by bus lines in some areas.

71512-61-7

Freight service in terms of frequency of freight train service has also declined in the postwar period. Higher wage rates and fringe benefits have encouraged the railroads to increase the size of freight trains substantially. This in turn, in the absence of rising traffic, has necessitated fewer trains and the backward step of reverting from scheduled to tonnage trains. These very long trains moving into yards ill adapted to handle them has served to increase delays and decrease dependability in delivery time. Much single line service between major centers has speeded up and many special "red ball" trains including merchandise and solid perishable trains, in interline service give faster delivery than ever before. But there is evidence to raise doubt that the majority of shippers find the interline rail service as good as formerly. Service standards cannot be reduced without loss of traffic where a superior service by a competitive mode is available.

6. Higher financing costs

The chain reaction continues. Higher costs of financing result from worsened physical condition of plant and the net income potential. As pointed out above the regulated carriers must compete in the money market with industry in general and with the expanding monopolistic public utility industries. Just as financing costs tend to decline in a situation of growth and improved competitive position, they will increase if the reverse is true. Overcapacity, lower net incomes, undermaintenance, reduced service and higher financing costs indeed represent a vicious spiral. The carrier in this situation is forced to resort to debt financing rather than equity financing. This in turn saddles the carrier with heavier fixed charges that must be borne during a period of reduced traffiic volume. This in turn may lead to receivership for a high investment cost industry like the railroads. If earnings are relatively stable, as in monopolistic noncarrier utilities, the cheapest financing may call for a ratio of 55 percent or more in debt capital. As competition increased the railroads wisely set about to decrease the debt ratio. Accordingly, they "girded their loins" beginning in the midthirties and reduced the debt ratio from approximately 50 percent to 48.9 percent by 1947. They were able to hold the ratio at 49 plus until 1955 when it went to 50.3 and it has been going up each year to 54.3 in 1959. This is a rapid loss of position