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.

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 trafliic 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

reflecting the inadequacy of earnings and nonavailability of equity capital to meet capital needs. The trend since 1946 is shown in table XVIII, page 80.

The airlines because of the elasticity of their market and essentially competitive nature should finance themselves largely through equity capital to be in sound condition. However, when the jet equipment now on order is delivered the debt capital is expected to exceed equity capital. The alternative is to pay very high for equity capital. big four, it was estimated recently, must pay about 12.9 percent."

TABLE XV.-Operating ratios of class I motor carriers 1946-59

The

NOTE.-Unofficial estimates for 1st half of 1960 indicate ratio is about 97 percent.

Source: American Trucking Associations, Inc., American trucking trends; financial and operating sta tistics, class I and II motor carriers of property, 1959.

TABLE XVI.-Railroad operating expenses 1946-59-class I and II (thousands)

Source: ICC, "Transport Statistics in the United States" 1958, table 155, p. 105. "Transport Economlcs," February 1960, p. 1.

"Law and Contemporary Problems," vol. XXIV, autumn 1959, No. 4, pt. I. "The Rate of Return in Air Transport," by Paul Howell, at p. 689.

1946 47 48 49 50 51 52 53 54 55 56 57 58 59