1936-37 period

1936

Actual net railway operating income to be adjusted.

Increase in cost of materials..

Wage increases.......

Net increases in unemployment insurance and retirement tax accruals.

Loss.

Figures for 1936 calendar year in each case.

Deficit in italic.

Adjusted to allow for changes in rates and fares.

Net railway operating income is what is left of operating revenues after deducting operating expenses, taxes, and the net amount of rents of equipment and joint facilities. Figures given above indicate that if the operations in the 1936-37 period were to be repeated at the present levels of rates, fares, and costs, the net railway operating income would be $515,700,000 instead of $726,000,000, and that, on the basis of the calendar year 1936, there would be a reduction thereof from $667,000,000 to $384,200,000. In other words, the annual net added annual cost of operation resulting from changes in wages, prices, and taxes, allowing for rate changes, has been $210,888,875 since the end of the 1936-37 period and $283,098,624 since the end of the calendar year 1936.

The adjusted operating income for the 1936-37 period and 1936 plus other income would have produced a deficit, after fixed charges and miscellaneous deductions in 1936 and income of $13,000,000 in 1936-37.2 If the current bases of costs and rates had prevailed in those years, realization of net earnings equivalent to those actually received would have necessitated an increase in operating revenues spread over all traffic equally of 4.92 percent for the 1936-37 period and 7.05 percent for 1936. The difference in percentages is explained by a greater volume of traffic in the 1936-37 period, by varying expenditures for maintenance, and by changes in rates and fares. For 1936-37, the lessening in revenue of $61,259,000 from discontinuance of the emergency charges is more than counterbalanced by increases of $69,121,000 in freight revenue resulting directly and indirectly from the last decision in Ex Parte No. 115, and increased passenger revenue in the South and the West amounting to $15,188,125. If

In the computation of net income or net deficit, accruals of fixed charges are taken into account, whether paid or not. A large amount of such accruals was not, in fact paid: this is particularly true as to roads in receivership or under reorganization as provided by section 77 of the Uniform Bankruptcy Act.

the increased costs were to be recouped by uniform increases of rates on the freight traffic alone, so as to make good the operating income actually received, the percentages of increase, based upon 1936-37, would be 6.03 and upon 1936, 8.69.

Relative profitableness of freight and passenger services.-It has long been recognized that relatively the passenger service is far less profitable than freight service. Subjoined is a statement which shows for all districts and for the three major districts the percentage ratio of operating expenses to operating revenues, of class I steam railways, assigned according to the formula prescribed by us, for the calendar year 1936:

This deficit in the passenger traffic as a whole has continued from at least 1926, mounting steadily to a peak in 1932, and receding only slightly thereafter. Passenger Fares and Surcharges, 214 I. C. C. 174, 182. The interrelation of the freight and passenger traffic has often been commented on by us, and we have declined to accede to the proposition again repeated here by certain protestants that we can authorize no increase in freight rates to correct deficiencies in aggregate earnings growing out of the inability of the passenger business to meet its full share of the revenue burden. Revenues in Western District, 113 I. C. C. 3, 22-23; Fifteen Per Cent Case, 1931, 178 I. C. C. 539, 565; compare General Commodity Rate Increases, 1937, supra.

Additional revenue expected from increases proposed.-Predicated on the 1936 volume of freight traffic, applicants estimate that their proposed increases would produce additional revenue from the primary commodity groups and accessorial services above those which would be derived under the existing rates as follows:

1 Switching revenue only: other accessorial service revenue not segregated.

These figures relate to class I railroads only, excluding switching and terminal companies. The increases in passenger fares sought by the eastern carriers would yield $30,000,000 annually, according to their estimates, in addition to the sums shown above which would be derived from freight. The increase in expense applicable to all classes of traffic as before shown is $283,098,624 and the proposed increases would produce net railway operating income of $154,000,000 per annum higher than the amount in 1936, when emergency charges or surcharges were in effect. This amount might be lessened somewhat by the corresponding increase in Federal income taxes based upon the greater revenue, but what amount would be so added is not calculable.

The evidence of traffic witnesses is largely confined to expressions of belief, or opinion, that the proposed increased rates will produce higher gross revenues, or, in other words, will not restrict traffic. Some of these witnesses are of the opinion that the diversion of railroad traffic to other carriers has largely run its course, and that the regulation of motor carriers is having a stabilizing influence upon destructive competition between rail and highway carriers. They further point to the fact that costs of truck and water transportation have also risen sharply, and they rely strongly on the fulfillment of the expressed hope of these competing agencies that they will be able to effect increases in their own charges.

Financial results of operation, 1929–1937.—At page 665 of our report in General Commodity Rate Increases, 1937, supra, there was set forth. a table showing the financial results of operation of class I roads from 1929 to the 12-month period which ended April 30, 1937, inclusive. It is now possible to supplement this table by including the entire year 1937, and also the 12 months ended June 30, 1937, as follows:

The operating ratio in 1937 was more than two points higher than in the preceding year, as operating expenses in 1937 increased 6 percent, while operating revenues increased less than 3 percent.

226 I. C. C.

Adverse effect of increased costs on income.—The fact that net railway operating income for the 12 months ended June 30, 1937, was 23 percent greater than for the calendar year 1937 indicates the highly adverse effect on railroad income of the increases in operating costs and the decline of traffic which made themselves felt in the last six months of 1937. Significantly net railway operating income for the 12 months of 1936-37 was nearly 9 percent greater than that for the calendar year 1936. Hence, at the time of the expiration of the emergency charges there was ample ground for the expectation that expanding traffic and seeming stability of operating costs would enhance railroad income, and this was the actual result for the first six months after the emergency charges expired. But, although operating revenues for 1937 were only about 2.5 percent below the 1936-37 twelvemonth, net railway operating income was 19 percent less. This shows the highly adverse effect on operating income of the sharp rise in operating cost which came in the latter part of the year 1937. It has been pointed out that the adjustment in net railway operating income on the basis of changes in rates and costs reduces the figure for the 1936-37 period to $515,694,125, only about 7 percent higher than the average for the three years 1933 to 1935, when we undertook to improve railroad earnings through authorization of emergency charges. Total operating revenues in the 1936-37 period, on the other hand, were 30 percent higher than the average for the three years 1933 to 1935, inclusive.

Lowering of general level of rates and fares since 1929.-Applicants stress the fact that the rise in operating costs has also been accompanied by a lowering of the general level of freight rates and passenger fares since 1929, as measured by average revenues per ton-mile and per passenger-mile. In 1929 the average freight revenue per tonmile for the class I carriers was 1.076 cents. The figure has declined steadily except for a small rise in 1935. In 1936 the average was 0.974 cent, approximately the same as in 1934, 9.48 percent lower than in 1929. Due to the removal of emergency charges and other causes there was a further decline in 1937, and the average for the first eight months of that year was 0.939 cent. The reduction in average revenue per ton-mile is due in some degree to changes in the relative amounts of the various kinds of traffic and to an increase in the average haul resultant from the loss of short-haul traffic; but making allowance for these elements, the freight-rate level averaged 10 percent lower in 1937 than in 1929. The average revenue per passenger-mile declined 36.4 percent from 2.808 cents in 1929 to 1.785 cents in the first eight months of 1937. For all steam roads the average revenue per ton and per passenger-mile would be somewhat greater than for class I roads alone.

Impairment of credit.-Much of applicants' evidence relates to their impaired financial credit and their consequent inability to finance improvements in their facilities to keep pace with the changing character of the service which they are called upon to furnish. Such improvements are also represented as necessary to lower the cost of transportation to the shipper as well as to the carrier, and to increase the productivity of the railroad worker. They may be made only if applicants are able to attract adequate supplies of new money at low cost, and sound credit conditions demand that such financing be not merely by the sale of bonds. The evidence includes an exhaustive statistical survey of railroad capitalization, indebtedness, operating expense, net railway operating income, and other items from 1890 to date. In 1890 the class I railroads operated 156,404 miles of road, compared with 236,878 miles in 1936. Book investment in road and equipment in 1890 was $8,134,000,000 and of class I roads $24,971,000,000 in 1936, which would be stated as $22,212,000,000 if depreciation reserves be deducted. From 1890 to 1930 the investment carried on carriers' books increased at an average rate of 2.37 percent per year. The unreliability of the early investment accounts has been lessened in importance as our work of verification and correction has proceeded and as proportionately large additional amounts have been expended and accounted for under our regulations. Since 1931 there has been a small but steady decline in the aggregate recorded investment. The net capitalization of all steam railroads in 1935 was but 71.9 percent of the recorded investment in road and equipment before depreciation and 80.6 percent after deducting depreciation reserves. There has been a steadily declining trend in this percentage. For 1911 after deducting depreciation the figure was 97.6 percent.

Effect of fixed charges.-For many years net funded debt has constituted about 60 percent of the net capitalization of all steam railroads. Accordingly, as the ratio of net capitalization to recorded investment in road and equipment has declined, the percentage relation of net funded debt to that investment has been lowered. As of December 31, 1935, this percentage was 49.9 percent after depreciation, compared with 59.6 percent in 1911. Likewise there has been a gradual decline in the ratio of fixed charges to investment in road and equipment. Applicants therefore deny that the decline in railroad credit has been due to a weakening of capital structures in relation to investment, and they insist that there has been an improvement in this respect. They also assert that railroad capitalization, particularly that portion consisting of funded debt, is not unduly high in relation to gross revenue, as shown by the fact that, in general, the ratio of operating revenue to net capitalization has shown a rising trend since