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Mr. FLYNT. I will defer any questions I have.
The CHAIRMAN. Mr. Wolverton.
Mr. WOLVERTON. Mr. Chairman.

I will likewise defer any questioning that would be appropriate. I wish to say there is nothing that I could add to what our chairman has said, to emphasize more strongly the statement and his feelings with respect to this presentation, other than has already been said. Most of you know I have been a member of this committee for a good many years. I do not hesitate to say that at no time have I heard a more thought-provoking, a more well-considered report of an industry made to this committee than has been made by the witness this morning. The information that is contained—and there are many in addition to what the witness has already testified to—in the statement which in full will be made a part of this record, certainly must cause one to stop, look, and listen with respect to this great basic industry of our country.

The clarity with which the difficulties of the railroad industry have been presented leave a very clear understanding that there is something radically wrong some place that requires most careful and considered attention. Because we all must admit that we cannot permit an industry of this importance to leave the thought in the minds of some people that it is a dying industry.

Mr. Chairman, I wish to commend the witness for the statement that he has made. I think everyone will realize the great amount of time and effort and study that must have gone into the preparation of this statement that has been presented to us this morning. And I feel that the committee has a right to feel greatly indebted to the witness for having brought these important facts to the attention of the committee in order that the whole picture may have the fullest careful and studious attention of this committee.

The CHAIRMAN. Mr. Jarman.
Mr. JARMAN. No questions.

The CHAIRMAN. Mr. O'Hara.
Mr. O'HARA. Yes, Mr. Chairman.

Mr. Bevan, I certainly appreciate this quick lesson in railroad economics.

The thing that bothers me is that a great railroad like the Pennsylvania Railroad is confronted with the economic problems that you are. I am wondering what some of our midwestern roads are going to do. I don't know whether you would care to comment on that, but I certainly live out in the part of the country where we are very concerned over what is going on in the taking off of trains, and the abandonment of feeder lines on some of our railroads. They are a very serious consideration to our part of the country.

I don't know whether you would care to make any comment or not. Obviously it is a problem where you are trying to cut down on expenses, and at the same time you are losing capital, with which you must be seriously concerned.

Mr. BEVAN. Yes, sir; I think everybody has been most generous, and I appreciate everything that has been said.

I would like to add one thing. I think the industry is so vital and essential and it is not a dying industry, but we are facing tremendous demands on it which, if not met in the future, will hurt all industry. I think it is so vital and essential that I am sure we are going to find ways around the problem.

hat he position than great many represent route to pick

But I think the road to knowledge is to first recognize what they are, and I am not pessimistic. I just believe inherently we just have to find the answer.

As far as other railroads are concerned, I would not like to pick out individual roads, but obviously when we represent roughly 10 percent of the industry there are a great many other railroads that are not in any better position than we are. There are some more fortunate ones that have found oil and gas and other minerals, and are in territories that are growing more rapidly so that they can absorb these spiraling costs more easily. But even taking them out, I think it is obvious that there is a very real percentage of the industry that is not in any better shape than we are.

Mr. O'HARA. Certainly the answer isn't a continuing increase of freight and passenger rates, because you are going to price yourself out of the market. Isn't that a fact?

Mr. BEVAN. That is the $64 question, but I think this: As I pointed out here, in the whole transportation industry I think that prices, we might say, have been held down artificially as compared to other industries. That is because of more favorable treatment accorded some of the others. They have not felt the same necessity to raise rates as the railroads and we have only been able to go up so much because of that.

The whole industry—I am talking not only of the railroad industry—but the whole transportation industry is suffering from the fact that we have not all been allowed to find our economic niche in the situation. But as long as we are in this inflationary economy, I don't think the people in the railroad industry are any more miracle men than in any other basic industry. Costs are rising faster than productivity, therefore I think there has to be some increase in every industry.

Mr. O'HARA. That is all, thank you,
Mr. FLYNT (presiding). Mr. Moss.
Mr. Moss. No questions at the moment.
Mr. FLYNT. Mr. Hale.

Mr. HALE. Mr. Chairman, I want to echo the sentiments expressed by my colleagues. Like Mr. Wolverton and Mr. O'Hara, I am very much impressed by your statement, Mr. Bevan. On this occasion I can't help remembering our dear friend Carter Fort, who used to sit in that chair and talk to us about the troubles of the railroads and he did it with great eloquence. You are no less eloquent.

It is a very disturbing and distressing picture to me. What Mr. O'Hara said about the railroads in the Middle West, is certainly true about railroads in New England. We have had plenty of trouble up there and I am not hopeful enough to believe that they are over. Personally, I like to be a passenger on the railroads. But I don't know that that is a privilege that I shall be able to enjoy very much longer.

I believe that is all.
Mr. FLYNT. Mr. Dingell.
Mr. DINGELL. No questions, Mr. Chairman.
Mr. FLYNT. Mr. Springer.
Mr. SPRINGER. Mr. Chairman.

ted and pubviously bete. In 1946, lion.

You certainly draw on a lot of economics. You have made an excellent statement of your position. There were 1 or 2 questions I wanted to ask.

According to the chart T on page 44 of your statement concerning your expected experience during the next 10-year period, and a deficiency overall for the Pennsylvania Railroad Co., of $615 million what has been the experience of the railroad over the last 10 years?

Mr. BEVAN. I will see if we have the 1946 figure. Over the period of 1946 to 1956 we have lost working capital despite the fact that we liquidated and put into working capital around $90 million of capital assets. And obviously we can't go on selling companies, we don't have many of that type left. In 1946 our working capital was $96 million. At the end of 1956 it was $72 million. So there is a loss there of $24 million, despite the fact that we liquidated roughly $90 million of capital assets to help reimburse our working capital.

Mr. SPRINGER. Would a true statement be that during that 10-year period you lost in layman's language, $114 million?

Mr. BEVAN. In cash. You see it is different from your income statement because actually we only reported a net income deficit 1 year in our history. But after we get through we have to buy new equipment; and a freight car that used to cost $3,000 or $3,500, today is costing $8,000.

Mr. SPRINGER. Do you subtract that?

Mr. BEVAN. We have to take into consideration that it comes out of our cash drawer to the extent that we cannot finance it and so the cash has been declining at that rate.

You will not find that in the net income statement, and you may have seen in this morning's paper the comments of United States Steel about phantom profits. You are depreciating a freight car, say, that cost you $3,000, you are depreciating that, if it has a 30-year life, over 30 years, $100 each year. When you come to buy a new one you have to pay eight or nine thousand dollars. So the amount that you put aside from depreciating it, isn't enough to buy your new car.

Do I make that clear, sir?

Mr. SPRINGER. No, I am afraid you don't. I am trying to find out that $114 million was what you lost during this last 10-year period.

Mr. BEVAN. That is what we lost in cash. That is the difference between what we realized from all sources in cash as against what we spent out of that cash for all sources.

Mr. SPRINGER. That also includes $90 million of capital investment?

Mr. BEVAN. That includes the excess of our expenditures, including capital expenditures over what we took in' in the form of net income, depreciation which is a noncash charge, and through the sale of capital assets.

It is just the same as this: Suppose my income is $10,000 a year. Then I might have another $10,000 of securities at the start of a period. I use my $10,000 of income, I sell my securities, which gives me a total of $20,000 and then I go out and for one purpose or another spend $25,000.

My income as income is still $10,000, but I have used up additional cash resources that I have.

Mr. SPRINGER. You have a deficit? Mr. BEVAN. A deficit cashwise. But my salary is still $10,000 a year, and so that you will report net income. You will still report

net income, but you are spending more than you are taking in from all sources.

Mr. SPRINGER. What do you think your competitive position is in this next 10-year period in the open market for freight with other 'major forms of transportation ?

Mr. BEVAN. Well, we are optimistic as to the outlook freightwise for the industry. The decline in our percentage of the overall market has been slowing up. It was going down pretty fast from 70 to 53, say, but from there on that decline has been flattening out and I think last year our percentage was 49.5.

Our railroad has been one of the leaders in the United States of "piggyback” or the carrying of trucks on freight cars.

Through that and other sources we hope the industry is going to increase its percentage somewhat. I don't think it will be spectacular. But we hope to increase our percentage. But even if we don't increase our percentage, there will be an increased volume if we just hold the same over the period and what worries us most is to be able to participate in this inflationary economy. We have got to get the earnings if we are going to get the financing. And if we can't get the financing, we are not going to get the equipment that we need in order to meet this demand.

We think one of the biggest problems facing the industry is raising sufficient money to get the equipment and the things we need over the next 10 years and also for our roadbeds, so that we can increase our efficiency.

Mr. SPRINGER. Are you talking about long-term capital now?

Mr. Bevan. I am talking about both. But long-term capital, other thán equipment, is very difficult to get in the railroad industry today. An example of that was last fall' with Southern Pacific. They put out $35 million of first mortgage bonds and the Southern Pacific is an excellent railroad. They ended up by having to pay almost 5.30 percent. And the market wasn't enthusiastic about even an issue the size of $35 million.

Today there is a very limited demand for railroad securities.
Mr. SPRINGER. Your report today isn't likely to increase that, is it?
Mr. BEVAN. No, sir.

Mr. SPRINGER. You estimate some $615 million deficit for Pennsylvania Railroad ?

Mr. BEVAN. No, sir; but I think we have to face facts. I think in fact that an experienced investor will be at least encouraged that we recognize what are our problems and it is up to us to try to find some way of meeting them.

Mr. SPRINGER. Mr. Bevan, what has been your average yearly dividend over the past 10-year period ?

Mr. BEVAN. I would say it is an average of about 2 percent and to put it another way it is an average of about between 48 and 50 percent of our reported net income.

Mr. SPRINGER. And about 2 percent on your--
Mr. BEVAN. On our capital stock.
Mr. SPRINGER. On your capital stock.
Is that what you have been paying in dividends, roughly?
Mr. BEVAN. Is that what, sir?
Mr. SPRINGER. Is that what you have been paying in dividends?

Mr. Bevand 3 pecould expechart pod man

Mr. BEVAN. Two percent, roughly. I would say it averaged that. Three percent would be a dollar and a half, and last year we paid $1.55 and that is the highest for a good many years.

Mr. SPRINGER. On your chart T projected ahead again, was that about what you would expect over the next 10-year period, somewhere between 2 and 3 percent? . On your common stock?

Mr. BEVAN. I am afraid so.

We may not be able to pay that. Until we find some way of licking this it is a little hard to say. We are probably going to have to cut all along the line. Since we know we have to pay our interest and we have to pay our maturities.

Mr. SPRINGER. Just this, then, to follow it up: Is efficiency in the next 10-year period going to reduce this any? I don't take it you have reached the peak of efficiency.

Mr. BEVAN. No. There are a lot of things to de done. There are a lot of things to be done but of course we got a tremendous lot out of diesels.

Mr. SPRINGER. That is what I referred to. Have we got anything projected forward to take up the same amount of slack?

Mr. BEVAN. I think that perhaps the savings rate will not be as great, but there are any number of such things. We have got them planned by percent, of how much saving they are going to give us, and we could do a great deal more than we are doing right now if we had the money. But we have just had to take the ones that give us the biggest savings and say next year we will take some more. Mr. SPRINGER. Let me ask you this last question. Is the Federal highway program going to increase your deficit? Mr. BEVAN. I think that initially it will help us while they are in the course of constructing the roads. One of the things that worries us greatly, however—and I think it will hurt us afterward—is that many places now they are talking about trying to have the present toll roads made free through the use of Federal funds which won't give you any additional roads but will make these toll roads free, which is another way of making it much cheaper for the trucker as against our lines running right alongside of them. That could be a very serious thing to us since they would not be paying their share of the cost of their doing business then. Mr. SPRINGER. Thank you. Mr. FLYNT. Mr. Mack, do you have any questions? Mr. Mack. Not right now. Mr. FLYNT. Mr. Carrigg.

Mr. CARRIGG. I would like to compliment the witness for a very fine presentation. It is my hope that we could look forward to the time when he would be back here again with us, so we might have the opportunity of hearing some of his constructive thoughts on what we could do to help the railroads.

Mr. BEVAN. I would be very happy to, sir, at any time.
Mr. CARRIGG. Thank you.
Mr. FLYNT. Mr. Derounian.

Mr. DEROUNIAN. Mr. Bevan, I have looked over your group of charts. It is quite documentary, and I think we will gain a lot from it.

May I just ask you a question on the bill which we are currently discussing.

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