1940: Railroads

Earnings.

The unusually high level of rail freight traffic reached in December 1940 is estimated to have been sufficient to give the railroads of the United States their largest annual gross revenue since 1930. However, higher operating expenses, including unusually high charges for repair of equipment, kept the year from showing a corresponding record so far as net income is concerned. Final net income for 1940 is estimated at about $140,000,000, or roughly 50 per cent greater than that for 1939. Aggregate carloadings for the year are estimated at approximately 36,300,000 as compared to 34,100,000 in 1939. In only seven weeks during the year were carloadings less than in the corresponding week of the previous year.

Passenger revenues did not make as favorable a showing for the year, possibly due in part to the fact that the Interstate Commerce Commission in March 1940 refused to grant a continuation of the maximum coach rate of 2½ cents a mile, thus compelling a return to the 2 cent level. Relations between labor and management were for the most part undisturbed during the year. A demand for vacations with pay was made early in the summer, but was not pushed. If rail earnings continue to show substantial improvement, however, it is believed likely that the subject may again arise. Rail employment increased by about 4 per cent during the year, and average earning per worker showed a slight increase. The Railroad Unemployment Insurance Act of 1938, as amended in 1939, was further amended in October 1940 in such a way as to increase substantially the benefits to which employees may become entitled.

Improved Operating and Financial Condition.

The improved operating and financial condition of the railroads in 1940 was not reflected in the prices of railroad stocks. The Dow-Jones average of 20 railroad stocks closed 1940 at 28.13 as compared with 31.83 at the close of 1939. High grade rail bonds showed an average price improvement during the year from 92.65 to 95.27. Second grade rail bonds showed very little change at the close of 1940 as compared with the close of 1939.

The year 1940 was in two respects a significant one from the standpoint of the weaker roads of the country. For the first year since 1930 no Class 1 railroad receivership occurred; and on the last day of the year occurred the first emergence from the courts of a Class 1 railroad which had gone into receivership during the depression. The Interstate Commerce Commission has now approved reorganization plans for nearly all the major roads of the country still in the hands of the courts, and the year 1940 should thus mark the wind-up of a number of such cases. The reorganization plans approved by the Commission have a number of characteristics in common. In the first place, there has been a drastic reduction in funded debt and fixed charges. The Missouri Pacific proposal, for example, cuts funded debt from $661,000,000 to $308,000,000, and annual fixed charges from $24,800,000 to $7,300,000. In the second place, stockholders' equities have in many instances received nothing in the reorganization plans. The composition theory of reorganization thus seems to have largely given way to the absolute priority theory. In the third place, funds for rehabilitation are frequently being provided by the R.F.C. Other common features of the plans are substantial sinking funds and large scale use of the device of income bonds. The importance to the country of the railroad reorganization problem is most clearly indicated by the fact that I.C.C. final plans for 21 of the 33 Class 1 railroads in receivership in December 1940 called for an aggregate reduction in funded debt from $3,643,000,000 to $1,594,000,000 and in annual fixed charges from about $127,000,000 to about $38,000,000. (See also BUSINESS.)

Railroad Legislation.

The only major piece of Federal rail legislation in 1940, other than the Rail Unemployment Insurance Act already referred to, was the Transportation Act of 1940, passed in September and frequently referred to as the Wheeler-Lea Transportation Act. This Act was the legislative culmination of several years consideration of the policy of a more completely coordinated regulation of the various major media of transportation in the United States. Among its more important provisions were the following: (1) Domestic water carriers are brought under the I.C.C.; (2) a new three-man board is created, to be appointed by the President, to study the relative economy, fitness, subsidies, and taxation of railroad, motor, and water carriers; (3) the lending powers of the R.F.C. are so broadened as to permit it to lend money to a railroad for re-purchase of its own bonds in an effort to reduce fixed charges; (4) government freight, other than army and navy material, need no longer be hauled by the 'land grant' roads at the low rates previously in effect; (5) the jurisdiction of the I.C.C. over rates is extended, particularly in relation to the long-and-short haul provision; (6) the carriers are permitted, with I.C.C. approval, to enter into agreements for pooling or dividing traffic, services, or earnings, if in the public interest; and (7) the requirement that railroad consolidations must conform to an official plan prescribed by the I.C.C. is done away with. Railroads are free to develop their own consolidation plans, subject to I.C.C. approval. Special care is taken to protect employees affected by any such plan. (See also SOCIAL SECURITY.)

Effect of Defense Program.

The prospective industrial activity of the country, resulting in large part from the defense program, puts the railroads in a more favorable position than they have enjoyed at any time in the past 10 years. Moreover, because of the fact that the roads are, for the most part, earning a fairly low rate of return on their invested capital, a much smaller part of their prospective increased earnings will be subject to excess profits taxation than is the case for most of our major industries. On the other hand, the relative rigidity of the rate structure might be a serious disadvantage if any major increase in wages or other operating costs should accompany rising business activity.

See also TRANSPORTATION.