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I. THE RAILROADS HAVE RECOVERED FROM THE 1957–58 RECESSION A. The carriers came through the recession of 1957–58 in excellent condition with
no permanent injuries or bruises The carriers have emphasized their performance during 1958, and particularly the experience of companies which were hard hit by the recession in the early part of that year. For our purposes here, no meaningful appraisal of the railroad industry can be based on circumstances resulting from short-turn, temporary economic trends. The 1957-58 recession brought a general adjustment of inventories by business enterprises throughout the country. Retailers, wholesalers, manufacturers, and suppliers of raw materials, fearing decline in prices, all reduced orders and production so as to reduce stocks of goods on hand. The immediate and natural effect of this development was to cut down on the amount of materials and products moving in commerce. This resulted in a heavy reduction in the amount of transportation needed and the railways accordingly suffered a heavy decline in traffic. That is what happened beginning in late 1957 and running through the early months of 1958.
In retrospect, economists now recognize that the 1958 recession was extremely deep; but that it didn't last quite as long as the two previous postwar inventory recessions in 1949 and 1954. The railroad industry lived through both of these periods and came back with great strength. After the 1949 recession, with recovery in 1950, the carriers went forward to new earnings' records. In 1953, they had the greatest net income in their history, surpassing even the best of the golden 1920's and the peak years of World War II. In late 1953, and throughout most of 1954, the railways went through another recession period; but, in 1955, they again advanced to a new peak level, with 1955 breaking the 1953 record.
In the 1957-58 recession, railway earnings did decline steeply. During the first 8 months of 1958 net railway operating income fell to $392,813,000, which was 42 percent below the level of the same months of 1956 and 36 percent below the level of the same months of 1957. Net income showed an even greater proportionate decline, dropping to $278,226,000, 48 percent below the level of the same months of 1956 and 41 percent below the level of the same months of 1957. In the early months of 1958, a large number of individual carriers had net deficits. That is, they failed to make their fixed and contingent charges for several months in a row. In January, there were 37 such carriers; in February, there were 45 such carriers; and in March, there were 33 such carriers. In hearings before this committee last summer, the carrier spokesmen placed great emphasis on the railroads that showed monthly deficits in early 1958. However, in the later months of 1958, higher traffic and improved revenues brought net earnings to those less fortunate roads; most of them overcame the deficits of the early months and realized net profits for the whole year. In the final accounting at the end of 1958 only 17 railroads failed to earn their fixed and contingent charges for the year.
Although the recession was comparatively severe on some railways, as it was for many other industries, no serious damage was done; no new carriers fell into receivership or bankruptcy. A few roads reduced their dividends or eliminated them for the year, but total dividends for the industry as a whole were reduced only moderately. In the first 10 months, the reduction for all railways was only about 18 percent below the 1957 levels; and these were only slightly under the extremely high payments of 1955 and 1956.
The real burdens of the recession fell on the employees. Railway employment dropped to the lowest levels of the 20th century. . As of May 15, 1958, only 825,000 employees were working on the railroads. More than 300,000 railroad workers were laid off in the 12-month period ending June 30, 1958; 67,000 of these unemployed workers completely exhausted their benefits under the Unemployment Insurance Act for that year. And that is one of the real problems before this committee: the plight of one-third of this industry's loyal workers, who during 1958 were thrown out of work; whose benefits under the present Unemployment Insurance Act were too low to begin with and were cut off too soon.
The experience of 1958 has been extremely illuminating. The railways proved their ability to ride an economic recession with ease and serenity. As revenues declined, the carriers laid off workers and reduced their payrolls and expenses. Net earnings held up at a comparatively high level and most dividend payments to stockholders were continued. But 300,000 employees were thrown out of work, and the reserves of the unemployment insurance system were heavily depleted.
B. The recession is over and the carriers are now headed toward high prosperity
Business conditions began to improve just before midyear of 1958. By August, economists recognized that the recession had definitely been arrested and that the recovery was underway. By September railroad earnings had also turned up. In the last 4 months of the year net railway operating income and net income had returned nearly to their prerecession level. In the months from September through December of 1958 total net railway operating income for al railways was $368,932,000, 20 percent above the same period of 1957 and only 6 percent under the same period in 1956, a year in which net railway operating income exceeded $1 'billion. In the last third of 1958 net railway operating income was at an annual rate of $1 billion. This is not far below the levels of such record prosperity years as 1953, 1955, and 1956. Net income after all charges, during the last 4 months of 1958, was $323,774,000, 25 percent over the 1957 level and only 6 percent under 1956.
Almost all individual railways have shared in this industrywide comeback ; the earnings of most carriers have advanced far above the last months of 1957 and close to the high levels of 1956; some carriers have actually earned higher profits than in 1956.
The outlook for 1959 is excellent. Carloading predictions by shippers' advisory boards and other authorities indicate a substantial traffic increase above last year's level. Actual carloadings in the early weeks of this year have already advanced beyond last year's levels. In the latest week for which information is available, the gain over 1958 was 6.2 percent, the best year-to-year gain in 3 years. • In spite of this gain in traffic and pickup in earnings, there has been no improve ment in railway employment. Heavy layoffs continued in 1959. Preliminary January estimates place total railway jobs at 810,675, 15,000 below the level of last May.
Most economists are predicting good business for 1959. The Economic Report of the President (although phrased with considerable restraint) clearly showed general confidence in full recovery, and renewed national growth to unprecedented heights.
The railroads fully expect to share in the anticipated recovery in 1959. As usual, railway spokesmen show little enthusiasm and comment with subdued eloquence when they appraise a bright and pleasant future. Nevertheless, Mr. J. Elmer Monroe, vice preseident of the Association of American Railroads and director of the Bureau of Railroad Economics, in the conclusion of his review of last year's results, stated :
“With the lean and troublesome 1958 behind them, the railroads entered 1959 with a more favorable outlook than prevailed at this time a year ago. General business trends are currently on the upgrade and seem likely to show continued though moderate improvement in the year ahead.”
The basis for the restraint of railway leaders in discussing their immediate traffic and earnings prospects is common knowledge, as the following excerpt from an article in the Wall Street Journal on February 11, 1959, shows:
"Rail unions are certain to try to capitalize on increasing railroad earnings. (Because of this, the president of a major eastern railroad concedes privately he's tempreing his statements about his line's improving business.)” 1
However careful railroad leaders may appear to be in their short-term predictions of traffic and earnings, most of them hold strong and optimistic views of the long-term railroad outlook. Mr. Symes, president of the Pennsylvania Railroad, for instance, made the following statement on September 7, 1955, in
"In 1954 they (the railroads) participated in 51 percent of the total intercity freight ton-miles—or 557 billion ton-miles. If the downward trend in rail participation of the past 10 years continued unabated during the next 10 years, then by 1965 the railroads would be called upon to handle 650 billion ton-miles of intercity freight-17 percent more than last year. If the distribution leveled off and the railroads maintained their 1954 participation, they would be called upon to handle 790 billion ton-miles-42 percent more than last year. If the railroads were called upon to handle 55 percent of the total tonnage, that would mean 852 billion ton-miles—53 percent more than last year and 14 percent more than they ever handled in their history—which was the war year of 1944.
1 Source: Wall Street Journal, Feb. 11, 1959, p. 1, a feature article by William R. Clabby, staff reporter.
“Now, I, for one, am optimistic enough to believe that 55 percent participation by the railroad industry should be the minimum by 1965 * * *.":
II. THE BASIC RAILROAD FINANCIAL POSITION IS EXCELLENT An understanding of the condition of the railroad industry cannot be based on fragmentary and incomplete evidence relating to a few financial items or to a few individual railroads. Any appraisal, to be of real value, must cover adequately the railroad capital structure and physical condition, the relationship between the trends of costs and income, and the long-term trend and outlook for earnings. No reliable picture of these elements was presented by any of the carrier witnesses who thus far have appeared before this committee.
The capital structure of the railroad industry today is stronger than it has ever been. Prior to the Second World War, a large part of the industry was heavily overburdened by debt, with total funded debt in the hands of the public in excess of $10 billion. This debt was supported by an investment in road and equipment of just over $20 billion. Thus, debt in the prewar years made up about half of the total investment. At the end of 1957, investment was over $27.5 billion, but debt was down to just over $8 billion-less than one-third of the total investment.
These debt reductions naturally lowered interest payments and enabled the carriers to cover fixed charges by a much wider and safer margin than ever before. Prior to the war, interest alone sometimes claimed as much as 18 percent of total yearly revenues. In 1957, interest took less than 4 percent. In 1929, one of the best predepression years, income before fixed charges covered such charges by a ratio of only 2 to 1. In 1957 the comparable ratio was almost 3 to 1. Clearly, from an investor's point of view, the financial structure of the industry has been substantially improved.
These improvements in the railroads? financial structure took place over a period when the carriers were making enormous investments in additions and betterments. Such investments were financed primarily through earnings and depreciation accruals, or through relatively short-term equipment obligations which were paid off largely from depreciation accruals. ,
The new investment brought about great improvements in railroad equipment and road properties. Over half the locomotives in service today are under 10 years old. Nearly half of the freight cars are 15 years old or newer. The industry has almost completely converted to diesel operation and the overall age of the freight car fleet is lower than it has been for many vears. This does not mean that more capital outlays for equipment won't be needed in the future. But is does show a significant improvement over past years.
Track and roadway have also been substantially improved. New and greatly improved signaling systems have been installed ; automatic classification yards have been built; ties and rails have been replaced. Railway offices have been equipped with new machinery and devices, including electronic computer systems to replace'old accounting methods
The carriers have impaired their properties and equipment during recent months through unwise maintenance policies. Many managements have not kept their properties in good repair, and thus have lost some of the value and return they should have realized from their expenditures for additions and betterments. Overall, however, with resumption of good maintenance, the railroad plant may be said to be as good as at any time in history.
The costs of railway operation have not increased disproportionately. It is true that the hourly wage rates of railway workers and the prices paid by the railways for materials and supplies have all increased substantially during the postwar years, in pace with the wage progress of other American workers and with the general price level. But unit costs of operation have not increased proportionately. Exhibit 1, attached, shows the trend of unit costs of oneration, the Consumer Price Index and the wholesale price index of the U.S. Department of Labor for the years 1922 to 1958. Since the end of the war, total railway costs per gross ton-mile have increased by only 42.6 percent. In the same period, consumers' prices have risen 60.6 percent and the wholesale price index by 73.3 percent. Comparisons based on earlier years reveal similar trends. Thus, the actual costs of providing railway service have risen less than the general price level, in spite of increases in wages, and prices of materials and supplies and other items.
Sourre: Association of American Railroads. "Railway Digest of Developments and Comments." vol. 10, No. 8, October 1955, nn. 242-245.
3 On Jan. 1. 1959. 8.6 percent of the Nation's freight cars were reported unserviceable because of larging maintenance; some shippers have expressed fears of a critical car shortage, particularly in the eastern and far western regions. (Railway Age, Feb. 9, 1959, p. 9.)
The carriers have sought for and received successive increases in freight and passenger charges from the ICC during the postwar period. These increases have kept railway revenues in line with increases in unit costs. Exhibit 2, attached, shows the trend of these elements from 1921 to 1958.
As a result of all of these factors the improved capital structure and physical condition of the railways, and their ability to keep costs and revenues in balance-net earnings have been maintained with great stability during the last decade. Exbibits 3 and 4, attached, show the trend of major income account items of the railways for the period 1921-58. It will be noted that net railway operating income, the operating profit of the carriers, has remained remarkably close to $1 billion throughout the postwar years. Prior to World War II, the carriers net railway operating income frequently dropped well below $500 million. Not once during any of the postwar years has it fallen below $600 million. Since 1949 it has not dropped below $750 million. Net income, which is the final corporate profit of the carriers, also has been extremely stable. Prior to the war, the carriers as a whole showed net deficits in some years. Since the end of the war, this has not happened and in recent years net income has held well above $500 million.
What has proved true for the industry as a whole has been generally true also for the individual railroad systems that make up the industry. Most carriers have maintained net income in every postwar year, and the number which have occasionally failed to show corporate profits has been very small even in the periods of temporary recession. Prior to the war, it was not unusual for more than half of the railways to show net deficits, i.e., to fail to make their fixed and contingent charges for the year. In recent years, the number of deficit carriers has remained low.
The adequacy and stability of railway earnings can be measured in many ways. One of the most reliable measures is the return earned in relation to the common and preferred stock in the hands of the public. Exhibit 5, attached, shows such a comparison for a number of years. In 1957, the latest year for which we have these figures, the railways earned 12.8 percent on their outstanding equity capital. All other recent years have shown similar high rates, generally better than those of most prewar years. It is clear that railway earnings have been maintained at relatively high levels during the postwar period.
III. RAILWAY EMPLOYEES HAVE MADE MAJOR CONTRIBUTIONS TO THE EFFICIENCY
AND ECONOMIC STRENGTH OF THE RAILROAD INDUSTRY The railroads are a service industry; their only product is the transportation service provided by the employees, using the facilities and equipment that railroad owners and management have made available. Progress in such an industry is necessarily achieved through the combined efforts of employees, management, and investors. Through the years, investors provide improved tools and equipment; management organizes, coordinates, and leads; and employees, through their ever-improving skills, wider knowledge, and growing efficiency, do the transportation job with progressively increasing efficiency.
The railroad industry has made an impressive record during the last four decades. In 1920 there were 2,022,000 employees of class I railways. The same carriers had 48,000 locomotives in road service, 2,300,000 freight cars, and 35,000 passenger-carrying cars. In that year, the railroads hauled 410 billion ton-miles of freight and 46 billion passenger miles. In 1957, the latest year for which we have such complete data, the carriers averaged only 986,000 employees; they owned only 13,500 road locomotives, 1,745,000 freight cars, and 15,837 passenger-carrying cars. American railroads had 52 percent fewer employees, 72 percent fewer locomotives, 24 percent fewer freight cars, and 55 percent fewer passenger cars than in 1920. Yet in 1957 the carriers, using this much smaller employee force and much smaller plant, hauled 34 percent more traffic than in 1920. They carried 618 billion ton-miles of freight, about 50 percent more than they had in 1920. Passenger traffic had dropped off from the 1920 level but not as much as the drop in employment and passenger equipment. Expressed in terms of traffic units (which combine ton-miles with passenger-miles) total traffic in 1957 was 669 billion as against 500 billion in 1920.
This was a .many-sided achievement attributable to no one factor or one element. Freight cars were loaded with an average of 33.4 tons in 1957 compared to 27.6 tons in 1921; the average freight car was hauled 47 miles a day in 1957 compared to 25.8. miles in 1921. Train crews moved trains averaging 69.3 such cars in 1957 at average speeds of 18.8 miles per hour. In 1921 they had pulled only 37.4 cars per train at average speeds of 11.5 miles per hour, Gross ton-miles per train-hour, an overall measure of operations' efficiency, increased from 16,555 in 1921 to 59,186 in 1957, nearly a fourfold increase. Even in passenger service, where traffic has declined, general efficiency has increased substantially, with trains moving at faster speeds and carrying many more passengers per car and per train.
The members of the committee will understand that the achievement of increased transportation efficiency is an organization achievement to which all groups contribute. Train and engine service employees are able to take longer and heavier trains over the road at increasing speeds, in part because the maintenance workers have provided and maintained a better roadway and better equip ment. Communications workers, station and office employees, and all other groups also have increased efficiency in many ways.
Output per man-hour, the generally accepted measure of employee productivity, is measured for the railroad industry in terms of revenue traffic units per manhour. From 1921 to 1958 revenue traffic units per hour increased by 225 percent, an average (compounded) rate of increase of 3.3 percent per year. This rate varied from year to year, depending to some extent on fluctuations in traffic; however, for the first 20 years of the period (1921 to 1941) the average annual rate of increase was 3.4 percent. During the war and in the early postwar adjustment years, the rate of advance slowed ; from 1941 to 1949, output per manhour increased at a rate of only 1.3 percent. From 1949 to 1958 (based on the first 10 months of operation in 1958) output per man-hour has increased at a rate of 4.8 percent per year. Employee efficiency in the railroad industry is at its all-time peak; the current rate of productivity progress is the highest in history.
And among the workers who have achieved this magnificant record are the thousands who have been thrown out of work on short notice, for long periods. Those railway men need and deserve the improvements in benefits we are here requesting.
We have discussed in this statement some of the broader and more fundamental characteristics of the railroad industry's position, as contrasted to the shortterm trends and effects which had been emphasized by the carriers here and which have already been reversed in recent months. Permanent changes in the railroad social insurance system should be based on the condition and needs of railway workers, not on any estimate of the financial condition of the industry. To the extent to which the financial position of the railroads is considered, however, attention should be directed to long-term, basic factors: the fundamental soundness of the railroads' position as the major common carrier of all forms of transportation in the Nation; the assurance of national growth and prosperity during the next half century; the basic financial soundness of the industry; and the record it made in withstanding the economic recession of 1957–58, just as it had the two earlier postwar recessions of 1949 and 1954. The railroad industry has achieved great records in improving its operations and efficiency during the last 40 years as a result of the integrated efforts and cooperation of all elements and all groups. The employees' achievements in this period were indispensable parts of that record of progress; these achievements entitle railway employees to have their case for improved retirement and unemployment benefits considered on its merits.