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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, and, with increased freight rates and passenger fares, the railways earnings have been well maintained.

We have shown on exhibit 6 the trend of unit costs of operationincluding expenses, rents, and taxes—for the years from 1921 to 1957.

On the same table, we have shown the trend of the Consumer Price Index and the Wholesale Price Index, published by the United States Department of Labor.

Since 1945 total railway costs per gross ton-mile have increased by only 39.7 percent. In the same period, consumer prices have risen 56.3 percent, and the Wholesale Price Index by 70.9 percent.

Comparisons based on earlier years reveal similar trends. In 1957 costs per gross ton-mile were 92.8 percent above 1939, with the Consumer Price Index and Wholesale Price Index showing increases of 102.4 percent and 134.7 percent, respectively.

Thus, in spite of the increases in wages, materials, and supplies and other items, the actual costs of providing railway service have risen less than the general price level. C. RATES AND FARES, AND REVENUES PER TRAFFIC UNIT AND PER GROSS TON-MILE HAVE

KEPT PACE WITH RISING COSTS The railways have sought for and received successive increases in freight and passenger charges from the Interstate Commerce Commission during the postwar period. These increases have been enough to keep railway revenues generally in line with increases in unit costs.

The effect of increased rates and fares is reflected in revenue per ton-mile and revenue per passenger-mile. Exhibit 7 shows the trend of these elements from 1921 to 1957. Revenue per ton-mile rose from 0.959 cents in 1945 to 1.445 cents in 1957—an increase of 50.7 percent. Revenue per passenger-mile in the same period rose from 1.871 cents to 2.839 cents, or 51.7 percent.

It will be noted that these increases were more than the increases in unit costs.

These increases in rates have yielded revenues far above the level of even the best prewar years. Railway operating revenues rose above $10 billion for the first time in history in the year 1951. They have fallen below that level only once since that year–in 1954. In 1957, operating revenues remained close to $10.5 billion.

D. AS A RESULT, NET EARNINGS OF THE RAILWAYS HAVE BEEN EXTREMELY STABLE

SINCE THE END OF WORLD WAR II Railway profits today are more stable than at any time in history. Exhibit 8 shows the trend of net income for all class I railways, 1921 to 1957. Net income is the amount the railways have left as profit after paying all costs of operation, depreciation, equipment, and facility rents, all taxes (including income taxes), and all fixed and contingent charges.

Prior to World War II, the net earnings of the carriers fluctuated over a very wide range.

In good years, like 1929, net income went as high as $896 million. In bad years, like the depression years of the 1930's, the carriers had net deficits—with deficits reaching a peak of $139,204,000 in 1932. Since the end of World War II, there has been no year in which the carriers as a whole have run into the red. In good years like 1953 and 1955, net income went above $900 million—attaining the highest levels in history. In one of the recession years—1949—net income dropped below $500 million. In all other years, including the recession years 1954 and 1957, net earnings have held up at levels comparable to many of the very good years of the past. In 1957, for instance, net income was $734 million—which was higher than the level of 1925, 1927, 1948, and 1951, and only slightly below 1926, 1928, 1950, and 1952. All of these years were considered very profitable years for the railroad industry. Of course, we recognize that American railways do not constitute one single system or corporation, and have no common pocketbook. But, in general, the individual railway companies themselves are in better condition than ever before. Exhibit 9 shows summary statistics on the mileage of line-haul railways operated by receivers or trustees as of various dates from 1895 to 1956. As this table shows, at some periods of the past very heavy proportions of total railway mileage were insolvent. In the depression years of the 1930's nearly one-third of total mileage was being operated by receivers or trustees. At the end of 1956, only sixty-eight one-hundredths of 1 percent of total railway mileage was in the hands of receivers and trustees. Some railways did have net deficits in 1957, of course, but the number was far *. that of past years. Exhibit 10 shows the number of carriers with net incomes and net deficits for each year since 1929. In 1957, only 16 carriers failed to make a net profit after all cost, taxes, and charges. This was fewer than in any prewar year shown, including 1929, when there were 20 such carriers. In some depression years over half of the carriers operated with net deficits. Definitely the situation as of 1957 was a vast improvement over these earlier periods. I want to refer you very briefly to those two tables. Exhibit No. 9 goes back to 1895, up to 1956, and it shows the mileage of line haul steam railways operated by receivers or trustees at various dates. You will notice that as late as 1940, in fact, that was the highest year—75,000 line-miles of railways was in the hands of receivers or trustees, or 30 percent. In 1956, that had dropped to 1,594 miles, or less than 1 percent of the total railroad mileage. Exhibit 10, of course, shows the number of line-haul railways, class I line-haul railways, that operated with a net income or a deficit in the various years from 1929 through 1957. There has been a decrease in the number of class I railways, because some years ago a change was made in the definition of class I railways. For many years, a railway with revenues of more than $1 million was considered a class I railway. Some years ago that was changed to railways with gross revenues of over $5 million. So that accounts for the decline in the number of class I railways during that period. You will note that in 1957, only 16 operated at a deficit. Those roads that operated at a deficit, charged, in accordance with ICC accounting procedures, contingent charges against their operations before arriving at the final outcome, and on a number of carriers that resulted in showing a deficit. As a matter of fact, these contingent charges were not paid because they were not earned, so those railroads, except from an accounting opoint, did not operate at a deficit in that year or in the year SnOWI). Most individual railways earned substantial profits in 1957 and some made more money in 1957 than they did in 1956. Exhibit 10A is a tabulation of selected financial data for the 59 principal railways in the United States, designated by the Interstate Commerce Commission as large railways in its monthly statement M-150. This exhibit shows clearly that 1957 was a good year for most of these railways. Only 1 carrier out of the 59 large railroads covered in this tabulation Imad an operating deficit in 1957. That means only one carrier failed to pay the full costs of its operations, including all expenses, depreciation, and taxes. Only six carriers failed to cover all of these expenses and their interest, and other fixed and contingent charges. Of these 6, 2 made their fixed charges, but simply failed to make interest on income of interest that was not payable and not paid since it was not ea.I’IlêOl. That refers to the 2 of the 59 shown there, not of the entire total of class Iline-haul railways. We have shown on this table, the amount of depreciation and the total cash available from operations, which is the sum of net income and depreciation charges. This is all money which has been taken in by #. carriers during the year and which is available for use as the carrier managements see fit—to pay dividends, to buy new equipment or replace old equipment, to finance other improvements, to retire debts, or for other purposes. Fifty-eight out of the total of fifty-nine carriers had net cash available from their 1957 operations. Exhibit 10A is composed of 9 pages, and there is an explanation of the terms used on the last page. Most of those terms have been explained to you in the context which I have read to you. ut if you will notice, in the eastern region in 1957, on the first page, all of the carriers shown had a net income. Again in the eastern region, all of the railroads, except two, had net income. The Grand Trunk Western failed to have any net income, but the Grand Trunk Western, as everyone knows, is a subsidiary of the Canadian National Railways. That method of operation has been something that has continued over the years, because the Canadian National believes that the Grand Trunk Western is a sufficient feeder to them to warrant the deficits that they incur from year to year. In other words, the revenues that they receive from the business that goes on into Canada, and which is received by the Canadian portion of their system, is more than sufficient to offset the deficits shown here. There, again, you get back to the situation of charging all expense of one operation, and the results.

That isn't necessarily the net result of a system. It isn't in the case of the Grand Trunk Western. The Lehigh Valley also showed a deficit in net income of a relatively small amount, but with their depreciation, their cash available from operations was over $2.5 million, and they also had their contingent interest, which was not paid as an additional amount, which they did have.

Strange as it may seem, the Long Island Railroad, which we have heard so much about in years, had a net income in 1957 which exceeded their net income in 1956. That is shown on the bottom of page 2. When you go to page 3, you only find one railroad that had a deficit in their net

income, the New Haven. They show a net income deficit of $2,263,000, but they also show a contingent interest charge which was not paid of $2,373,000.

That railroad, in addition to practically breaking even in their operations, had a depreciation allowance that year of $9 million. When you go to page 4, the first deficit shown on that page is in the southeastern region, where the Florida East Coast does show a net income loss of $1,400,000. But there, again, it is more than outweighed by the depreciation allowance which it received.

On page 5 we again have southeastern railroads. Each and everyone of them showed net income, some in very substantial amounts: Norfolk & Western, $44 million; the Southern $34 million. And in addition to those net incomes, they also had their depreciation allowances. I should not pass over the road that made the best showing, the Chesapeake & Ohio, shown on page 4.

Their net income for 1957 was $67 million, as compared with $66 million in 1956. They also had depreciation allowances of over $20 million. On page 6 we find the western railways. The first one listed, Santa Fe, had net revenues in 1957 of $61 million, plus a depreciation allowance of $35 million.

The next one shown with a deficit is Northwestern. They show a net income deficit of $416,000. However, they show a contingent interest charge of $3 million. So, as a matter of fact, their net operation was not a deficit, and in addition they had their $16 million depreciation allowance.

On page 7, all of the railroads shown show a net income. The Great Northern, for example, with $26 million, and others of substantial amounts. On page 8, the only railroad showing a net income deficit was the Missouri,

Kansas & Texas. They show a net income deficit of $855,000, but they have a depreciation allowance of over $4 million, and contingent interest charges of $677,000.

The CHAIRMAN. Would you explain contingent interest a little bit further?

Mr. LEIGHTY. In the reorganizations of many of these railroads, they exchanged preferred stock, sometimes junior-grade bonds, for what they call income-bearing bonds.

Those bonds are similar to preferred stock. They do not pay the interest on those bonds unless it is earned in that year's operation. On a few of the carriers, it provides that that contingent interest can be carried over from year to year for several years.

But that is the exception rather than the rule. It is similar to preferred stock and it is not paid unless it is earned.

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Another reason why the M. K. & T. shows a deficit in 1957 is that they changed some of their accounting practices. Mr. Rogers. Mr. Chairman, may I ask one question about that? The CHAIRMAN. Mr. Rogers. Mr. RogFRs. Is it sort of a sinking fund, your contingent interest? Mr. LEIGHTY. No. Let's assume that a carrier reorganized, and in the reorganization they issue, say, $50 million of o: bonds, and, say, $25 million of what they call income-bearing bonds. On the first item, the regular mortgage bonds, they are required to pay the interest whether it is earned or not. Mr. RogFRs. They are required to set up a sinking fund for that, are they not? Mr. LEIGHTY. Well, on some railroads they are required to do that, and with other railroads they are not. It all depends on the nature of the bond issue. These contingent bonds are bonds that were exchanged for other securities, and they only draw interest in the event the carrier has an earning for that year and can pay that interest. Occasionally it provides for a sinking fund in connection with the second class of bonds, too, in years where the earnings are sufficient so that they can provide for a sinking fund for those bonds. But it varies from railroad to railroad. And whether or not the contingent interest is a carryover from one year to another varies from railroad to railroad. In most instances, if there is a carryover, it cannot be carried over for a period of more than 3 years. Mr. RogFRs. If they set up this fund and charge this interest off as they go along, and then there is no interest to be paid, you take the position that that would come into their net income? Mr. LEIGHTY. This is interest that is not paid because the carriers did not have sufficient earnings to pay it. , Let's assume, for example, that the carrier, after paying all of their expenses, ended up with net operating railway revenue, of, say, $10 million. One of the first charges they have to pay is their interest on these first-mortgage bonds. Then they have equipment obligations of some kind or another that must come out of that, equipment rents and things of that nature that come out of it. Then if there is a sufficient amount left, then the interest on these coningent bonds is paid. In most instances, the amount left must be more than the amount of the contingent interest, because only a percentage of the amount left is used for that purpose. Mr. FLYNT. Mr. Chairman, I have a question which I would like to ask, if I may. Mr. LEIGHTY. But it is charged against their accounts in accordance with ICC accounting procedures, whether they earn it or whether they pay it or not. Mr. FRIEDEL. Don’t they owe it? Mr. LEIGHTY. In many instances, I should say, it is wiped out in the year in which it accrues, if they don’t earn it. In some instances, it accrues for a period of 3 years, or until the total contingency interest obligations amount to a certain sum of money. Then it cannot go above that amount. But it is not an accrual such as an accrual is ordinarily understood to be. Mr. FRIEDEL. It is a debt, is it not?

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