1941: Railroads

As was true of most other phases of business and economic activity in the United States, the significant developments in the railroad industry during 1941 were all of them directly or indirectly the result of World War II. Increased volume of business, higher profits, labor problems, and delays in reorganization plans can all be ascribed to that cause.

Carloadings.

In terms of physical volume, loadings of revenue freight during 1941 were about 42,250,000 cars, an increase of 16.2 per cent over the figure of 36,350,000 cars for 1940. Although carloadings in 1941 were 20 per cent less than the level reached in 1929, nevertheless as a result of heavier average loadings per car and longer hauls freight transported in 1941 amounted to about 470,000,000,000 ton-miles, an increase of 5.1 per cent over the 1929 record and of 26 per cent over 1940. It is interesting to note, moreover, as an indication of increasing railroad efficiency, that this new record volume of business was handled with 26 per cent fewer freight locomotives and 23 per cent fewer freight cars than in 1929. Railroad officials estimate that carloadings in 1942 should approximate 46,000,000 cars, while some Government estimates run as high as 52,000,000.

Passenger Traffic.

Passenger traffic during most of the decade of the 1930's was a factor of small and declining significance to most of the railroads of the country. In the last year or two, however, there has been a sharp reversal in this trend, and passenger miles in 1941 were not only some 22 per cent higher than 1940, but the railroads are now carrying almost as many passengers as during former peak periods. This increase may be ascribed to a number of factors, including (1) improved passenger service, (2) large troop movements, (3) business travel in connection with the defense and war program, and (4) larger public income resulting from increased employment and payrolls. A spectacular further increase in passenger traffic as a result of tire, automobile, and possibly gasoline rationing is a distinct possibility.

Finances.

The increased volume of business in 1941, which grew out of the national defense program, was directly reflected in the financial results of the railroads for the year. Gross revenues for 1941 are estimated at $5,325,000,000, an increase of 24 per cent over 1940, but about $1,000,000,000 less than in 1929. Net operating income is estimated at $980,000,000, as compared with $682,000,000 in 1940 and $1,252,000,000 in 1929. It should be borne in mind, however, that in spite of the sharp improvement shown in 1941, the net operating income of the railroads is still less than 4 per cent on their property investment. Net income, after all charges, was about $485,000,000, a spectacular increase over the $189,000,000 of 1940, but still far below the $977,000,000 of 1929. The 1941 results, however, were the highest since the $524,000,000 figure for 1930. Railroad taxes in 1941 were about $550,000,000, a figure far exceeding the $396,000,000 of 1940 and the $397,000,000 of 1929.

Labor Problems.

The great improvement in the financial position of the railroads in 1941 led to a not unexpected demand by railroad labor of all classes for substantial increases in pay and changes in working conditions. The original demands of labor, which were obviously presented as a basis for bargaining, would have added about $900,000,000 per year to the wage bill of the nation's railroads. The customary steps of demands by labor, refusals by management, and the appointment by the President of a fact-finding board to make recommendations, were taken. The report of the President's Board early in November recommended no changes in the basic wage scale, but proposed temporary pay increases, retroactive to Sept. 1, amounting to about $300,000,000 per year. Increases were to terminate automatically on Dec. 31, 1942, unless extended by mutual agreement.

Railroad management agreed to abide by the recommendations of the Board, but labor refused and called a nationwide strike, for Dec. 5. The matter was referred to the Board again for reconsideration in an attempt to avert a strike, and subsequently revised recommendations were made which were accepted by both parties. The revised decision recommended further wage increases of about $30,000,000 per year, but, much more significant from the standpoint of labor, the total increase was to be treated as part of the basic wage rather than a temporary cost-of-living adjustment scheduled to end in December 1942.

The fact that the above-mentioned annual wage increases exceed the average annual net income of the railroads over the past 15 years explains the application by the railroads to the Interstate Commerce Commission for freight and passenger rate increases designed to offset the greater part of the increased wages. The railroads are pressing for prompt action on their application.

Reorganization Plans.

Possibly it will be recalled that at the close of 1940 the outlook for the successful consummation of a number of railroad reorganizations was regarded as very encouraging. It is true that more than usual progress was made in 1941 in this respect, as indicated by the completion of all but certain details of the reorganization of the Chicago Great Western, Chicago & Eastern Illinois, Mobile & Ohio, Spokane International, Erie, Wabash, and Norfolk & Southern. The financial success of the roads in 1941, however, together with court decisions on several reorganization plans, materially retarded the progress hoped for during the year. At the moment a further substantial period of delay is anticipated in consummating reorganization plans for the nearly 30 per cent of the Class I railway mileage of the country remaining in the hands of the courts.

Reorganization plans for a number of important railroads were developed by the Interstate Commerce Commission at a time when the earnings were so low that there appeared to be no value assignable to the preferred or common stocks of the roads in question. The result was that when substantially higher earnings began to be reported in 1941 appeals were taken by dissatisfied groups of security holders and a number of reorganization plans have been turned down by United States Courts, primarily on the matter of adequacy of valuation of the properties in question. The success of these appeals in cases such as the Western Pacific, the Chicago, Milwaukee & St. Paul, and the New Haven gives a strong basis for believing that similar action will be taken in other cases and that, regardless of the ultimate outcome, much delay in consummating reorganizations is to be expected.

A further serious complication in the working out of successful reorganization plans is the position taken by the Treasury Department with respect to the valuation of the properties of reorganized roads for purposes of calculating excess profits taxes. Sound reorganization plans have usually involved a drastic scaling down of funded debt, which would always result in a potentially increased normal income tax. However, unless the Treasury voluntarily or under compulsion modifies its present position, any such plan would in addition heavily penalize the security holders by drastically increasing excess profits taxes. Treasury rulings are thus at present exerting pressure for unsound financial plans.

Summary.

It seems to be generally admitted that the railroads of the United States have done an outstanding job, both physically and financially, in meeting the substantially increased volume of business in 1941, and in preparing to meet further increases anticipated in 1942. Capital expenditures for equipment, roadway and structures, and other improvements to property are estimated at $600,000,000 in 1941 as compared with $429,000,000 in 1940. Large additions to rolling stock were made in 1941, though deliveries were in many cases slowed up as a result of the inability of equipment makers to get materials, particularly steel plates. Of the 1,436 locomotives ordered during the year 1,047 were built. Orders were the largest since 1923, and construction the largest since 1926. Freight car orders totalled 118,371 of which 67,852 were built, the largest total since 1924 and 1930, respectively.

So far as financial strength is concerned, the railroads translated radically improved earnings into current debt retirement, funded debt reduction, and improved current asset position. For the greater part most roads have been conservative in using earnings to strengthen themselves financially before providing for resuming or increasing returns to security holders. The improved operating and financial condition of the railroads in 1941 was not reflected in the prices of their securities. The Dow Jones average of 20 railroad stocks declined from 28.13 at the close of 1940 to 25.42 at the close of 1941. High grade rail bonds showed an average price decline during the year from 95.27 to 90.49. Second grade rail bonds showed very little change at the close of 1941 as compared with the close of 1940.

Government operation of the railroads in 1917 and 1918 naturally suggests the question as to whether Government operation is a likelihood in the present emergency. The railroad system of the country is so much better coordinated and so much more efficient today than it was in 1917-18 that there would seem to be no compelling reason as yet for following the earlier precedent. The roads are cooperating closely with the Government at the present time, and coordination with other forms of transportation is being attained by means of the recently established Office of Defense Transportation, headed by Joseph B. Eastman, Chairman of the Interstate Commerce Commission. On the basis of their record of accomplishment in 1941, the railroads of the country are looking forward with confidence to their ability to do a creditable job in 1942. See also BUSINESS; INTERSTATE COMMERCE COMMISSION; SOCIAL SECURITY; TRANSPORTATION.