Statement of-Continued Symes, James M., president, Pennsylvania Railroad Co., Transporta- 1958.. Tuohy, Walter J., president, Chesapeake & Ohio Railway Co., Cleve- land, Ohio, January 17, 1958... Williams, Arthur, president, Standard Railway Equipment Manu- Dilworth, Hon. Richardson, mayor, city of Philadelphia, Pa.--- Heineman, Ben W., chairman, Chicago & North Western Railway Co., Russell, D. J., president, Southern Pacific Co., San Francisco, Calif____ Countryman, M. L., Jr., vice president and general counsel, North Pacific Railway Co., St. Paul 1, Minn., dated January 23, 1958, to Mr. Frank Barton, transportation counsel, Senate Committee on Interstate and Foreign Commerce. De Butts, Harry A., dated January 20, 1958, to Senator George A. Driscoll, Martin A., 424 Market Street, Jacksonville, Fla., to Senator Loomis, Daniel P., president, Association of American Railroads, McGinnis, Patrick B., president, Boston & Maine Railroad, North Perlman, Alfred E., president, New York Central Railroad Co., dated January 17, 1958, to Senator Smathers... Rice, W. T., president, Atlantic Coast Line Railroad Co., Wilmington, N. C., dated January 24, 1958, to Senator Smathers. Summerfield, Arthur E., Postmaster General, Washington, D. C., dated January 17, 1958, to Senator Smathers.. Tobin, Austin J., executive director, Port of New York_Authority, 111 8th Avenue at 15th Street, New York, N. Y., dated January 21, Ward, William W., president, Ward Trucking Corp., Ward Tower, Page 590 70 388 315 315 739 PROBLEMS OF THE RAILROADS MONDAY, JANUARY 13, 1958 UNITED STATES SENATE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, SUBCOMMITTEE ON SURFACE TRANSPORTATION, Washington, D. C. The subcommittee met, pursuant to notice, at 10:30 a. m., in the caucus room, Senate Office Building, Senator George A. Smathers, chairman of the subcommittee, presiding.1 Senator SMATHERS. The meeting will come to order. Gentlemen, first I would like to say that we are happy to get this particular meeting underway. However, before we start listening to the testimony of the invited witnesses I want to welcome here the chairman of the full Committee on Interstate and Foreign Commerce, Senator Magnuson, from Washington. We are delighted to have him. here and we hope that he will sit with the subcommittee whenever he feels that he can spare the time. We know that he knows how important this matter is to the whole country and we know that he will give us what attention and time that he can. We are also delighted to have here a former chairman of the full committee, Senator John Bricker, of Ohio, and, Senator, we extend to you the same invitation. And, Senator Cotton, we are delighted to have you here, also as a member of the full committee. With that preliminary statement of welcome, may I say that we hope that the other members of the subcommittee who are down welcoming Senator Russell, of Georgia, on his 25th anniversary of service in the Congress-we hope they will be here very shortly. I would like to make this preliminary statement: In this age of space we would still be concerned with travel on the ground. In this age when the speed of sound is often a yardstick of travel, we must not forget the importance of surface transportation. President Eisenhower has just called upon our Nation to embark upon a program of upgrading our national-defense system. At the same time he has called upon us to wage a campaign of total peace with every resource at this Nation's disposal. He has asked the people of America for a strong military posture and a strong economy. Both of these goals demand a strong transportation system operating at peak efficiency. Military preparedness, military defense, depend upon efficient transportation of all types: Airplanes, trucks, the merchant marine, and indeed, railroads. Therefore, our interest in a strong up-to-the-minute defense requires that we in Congress give 1 Staff counsel assigned to these hearings: Frank L. Barton and William L. Kohler. 1 attention and thought to the state of preparedness of our national transportation system, for the one is dependent upon the other. This hearing will concern itself with the problems of the railroads. Subsequently the subcommittee will again look into the problems of the other forms of surface transportation, but these first hearings will inquire only into the conditions of the railroads, for the railroads still remain as the bedrock of the transportation, vital to a vigorous and healthy industrial economy. For as late as 1956 the railroads carried the equivalent of 48 percent of all American freight, and 35 percent of the Nation's passenger traffic. However, there is little question but that today our railroads are in a serious condition. A mighty industry has come upon sick and precarious times. We have observed that since the hearings were announced on November 22, 1957, the economic danger signals for the railroads have become even more ominous. For instance, railroad carloadings in the week ending December 28, 1957, dropped to 410,022, the lowest figure since the last week in December 1932. Further, preliminary figures for November 1957 show net income to be about $46 million, compared with nearly $69 million in November 1955. This is a decrease of over 33 percent in the space of 2 years. Another significant danger sign is the decline in railroad working capital from $880 million in September 1955 to about $576 million at the end of last October. Experts in transportation consider $600 million as the minimum safe net working capital necessary because railroad operating expense approximates that amount each month. These ominous statistics call for attention. It is clear that a study must be quickly undertaken, and solutions proposed to the problems presented if we are to keep the railroads alive and a part of an effective transportation system in these United States, and if we are to keep them completely out of Government ownership. At the hearings this week the committee will hear the testimony of respective railroad officials from various parts of the Nation. In addition, we are pleased to observe that later we shall hear the testimony of representatives of railroad labor, of State and Federal regulatory agencies which are concerned with the railroad industry, as well as testimony from certain financiers and economists who are experts in this field of transportation. I am happy to ask Mr. Daniel P. Loomis, who is the president of the Association of American Railroads, to be our first witness. Mr. Loomis? STATEMENT OF DANIEL P. LOOMIS, PRESIDENT, ASSOCIATION OF AMERICAN RAILROADS Mr. LOOMIS. Thank you, Mr. Chairman. Mr. Chairman and gentlemen, for the record, my name is Daniel P. Loomis. I am president of the Association of American Railroads, with headquarters at Washington, D. C. I have filed with the subcommitte a rather lengthy formal statement, and an exhibit entitled "Trends in Railroad Operations." My purpose this morning will be to give the contents of that statement in as brief form as possible. The notice refers to the deteriorating railroad situation and its effect on the national transportation picture. With nearly 1 million people directly employed by the railroads, a payroll of approximately $5 billion, and total operating expenses exceeding over $8 billion a year, together with capital expenditures of almost $12 billion, the railroads certainly play a substantial part in the national transportation picture and in the national economic picture. The notice also refers to constructive action to allow the railroads to help themselves. We appreciate very much the opportunity to appear here and to discuss the problems of the industry and the statesmanlike approach taken by the subcommittee. Railroad officers are daily trying to overcome their problems. I think it is a safe bet to say that most railroad officers are lying awake nights seeking ways and means to help themselves. Railroad transportation is, of course, the only general common carrier which will carry anything for anybody at any time from practically any point to any point in the United States and Canada and Mexico. I take it that the essentiality of the railroad industry is not questioned. Now as to the existing situation. Carloadings for the year 1957 show a drop of 6.2 percent under 1956. The carloadings figures, incidentally, appear at page 1 of the trend exhibit. Those figures only go up to the end of November 1957. In the last 4 weeks, in December 1957, carloadings showed a drop of 15.9 percent under the corresponding period of 1956. And for the week ending January 4, 1958, carloadings again showed a drop of 15.9 percent under the corresponding week a year ago. It is estimated that the rate of return on net investment for the year 1957 will approximate only 31% percent, and preliminary estimates indicate that the rate of return may well drop below 3 percent for 1958. The net working capital for various years is shown at page 4 of the exhibit. At the end of 1945, after the war, the railroads had net working capital approximating $1,643 million. That had dropped to $938 million by the end of 1955. But by September 1957, net working capital was down to $537 million. That is equivalent to only about two-thirds of 1 month's cash operating expenses. With the severe stringencies in capital funds, it is now estimated that capital expenditures for 1958 will probably fall below $1 billion, compared to capital expenditures of almost $112 billion for 1957. The exhibit shows the persistence of unfavorable developments for railroads more particularly over the last decade when the country as a whole has seen rapid growth and general prosperity. But the railroads during that period have not shared in that prosperity. With the heavy investment in fixed facilities, and with the heavy fixed costs of the railroads, it is a basic characteristic that the full potentiality for low unit costs, and the inherent economy in railroad operation, can only be attained with large traffic volume. In effect, the more the traffic, the lower the rates can be, because the fixed costs do not increase proportionately to an increase in traffic, and additional traffic can be handled without a proportionate rise in operating costs. Conversely, when travel falls off, these heavy fixed costs leave the railroads in a very precarious situation. For instance, it costs the railroads more than $22 billion a year to own, maintain, and pay taxes on their right-of-way and track. This does not include office buildings, stations, equipment, and so forth, but is simply the right-of-way and track structure. For other forms of transportation that cost is very largely borne by the general taxpayers, including the taxpaying railroads. With inadequate earnings, and with tax-supported competition, the fact that the railroads have made capital expenditures in the 12 years since the war approximately $132 billion, certainly manifests a determination to modernize and improve the railroad plant. They have plowed back the major portion of their limited earnings and their other internal funds. They have engaged in a great deal of research. And in passing I might comment that only this past fall the Association of American Railroads received the Henderson award of the Franklin Institute for the achievement of the mechanical and engineering divisions of the AAR in the field of railway engineering. These expenditures have brought about almost complete dieselization of the railroad system. They have brought in new push-button yards, extention of centralized traffic control, improved rail and road beds, and communications, mechanization of construction and maintenance work, modernized rolling stock. The railroads have engaged in the so-called trailer on flatcar, or piggyback operations. There have been consolidations and mergers, there have been innumerable rate adjustments, there have been abandonments and discontinuances of unprofitable service where those were permitted by the regulatory bodies. And there have been attempts to engage in other forms of transportation. The railroads have made many efforts of all kinds at self-help. What are the sources of the difficulties and the underlying causes of the deteriorating railroad situation? One of these, of course, is subsidized competition. There are some encouraging signs in that field. Congress, in passing the Highway Act of 1956, provided that heavy commercial users of the highways should contribute more toward the support of the highways used for commercial purposes. This fall the Director of the Bureau of the Budget issued a bulletin to Government departments and establishments, advising them to study the proposition of applying user charges where people received special services from the Government, and also advising them where legislation was necessary to prepare proposed legislation with respect to user charges, and to have it ready by February 1, 1958. Many of the most important and most vexing problems stem from governmental transportation policies and practices, past policies of Congress, interpretation and application of such policies by the Interstate Commerce Commission and the courts, and some stem from the executive branch. Then there is the problem of regulation by State and local governments. I and the witnesses who follow me will devote our major attention to these problems since, in our opinion, they are the crux of the situation. The first item I would like to discuss is the matter of competitive ratemaking. The railroads too often are prevented from reflecting their low-cost operation because it is held that proposed rates would |