1942: Railroads

Emergency Traffic Due to War.

The success of the railroads of the country in meeting the demands placed upon them as a result of the war seems to have met with a more widespread acclaim than almost any other phase of our war effort. Not only were those increases in freight and passenger traffic that might normally be expected to accompany a war economy successfully handled, but the railroads did an outstanding job in meeting certain extraordinary, and for the most part unforeseen, demands.

Achievements of the latter type included the transportation of an immense volume of transcontinental traffic which would normally move by water and the transportation into the eastern states of about four times the volume of oil and gasoline which had originally been expected of them. The handling of a large volume of emergency traffic, both freight and passenger, as a result of shortages of tires and gasoline, and the successful meeting of the problem of the reversal in the normal west to east flow of traffic caused by a Pacific war were also outstanding accomplishments.

Car loadings.

Because of significant changes in traffic conditions during the year, the volume of car loadings of revenue freight has almost entirely lost its significance as a measure of railroad activity. Car loadings of revenue freight in 1942 showed only a 2 per cent increase over the figure for 1941, whereas ton-miles of freight hauled increased by about one-third, or from 475,000,000,000 ton-miles to 630,000,000,000. A further increase of 10 to 15 per cent in ton-miles is expected in 1943. Improvements in equipment and operating efficiency are clearly indicated by the fact that the volume of freight handled in 1942 was about 55 per cent greater than in 1918, the peak year of World War I, whereas the railroads had 27 per cent fewer cars in service in 1942.

Passenger Traffic.

Passenger traffic continued the rapid expansion which had started in 1941, and rose to a new all-time high of 53,000,000,000 passenger-miles, an increase of about 80 per cent over 1941, and of 13 per cent over 1920, the previous record year. Huge troop movements, high rate of business activity and employment, and the strict rationing of tires and gasoline for private use are of course the major explanations of this phenomenal increase. It is expected that 1943 may show increases in passenger traffic even exceeding those estimated for freight traffic.

The tremendous volume of business being done by the railroads is of course putting a severe strain upon rolling stock and track facilities. As a result of priorities, the railroads are able to get only a small part of the additional equipment and material they feel they need. Starving the railroads in this respect might result in serious consequences if the physical burden upon them is much increased, or if it should continue for a very long time.

Financial Report.

The sharp increase in the volume of business in 1942 was directly reflected in the financial results of the railroads for the year. The effect was intensified by an increase averaging about 5 per cent in freight rates and 10 per cent in passenger rates allowed by the I.C.C. in March 1942 as an offset to wage increases which had been granted near the close of 1941. It is estimated that gross operating revenues in 1942 exceeded $7,000,000,000 as compared with $5,325,000,000 in 1941, and about $6,500,000,000 in the peak year of 1926. In the first 10 months of 1942, net operating income of 136 Class I railroads amounted to $1,160,000,000, as compared with $850,000,000 in the corresponding period of 1941. Net income after all charges for the same periods was $709,000,000 and $417,000,000, respectively. In 1940 the corresponding figure had been only $104,000,000. It is estimated that this figure for the full year 1942 will substantially exceed $900,000,000, and that it will probably be the largest in the history of the industry, exceeding the peak figure of $897,000,000 reached in 1929. In spite of their high level of earnings, however, the return to the railroads is still less than 6 per cent on their property investment. Railroad taxes in the 12 months ended Oct. 31, 1942 totalled $1,077,000,000, or nearly double the figure of $547,000,000 for the calendar year 1941.

The high rate of earnings in 1942 has had several important effects upon the railroad picture. There have been a few notable dividend actions taken during the year, among them being the payment of the first dividend since 1931 on New York Central common stock, the resumption of dividend payments upon Southern Railway preferred stock, a substantial increase in the rate of dividend paid on Atcheson common stock, and the first payment in 76 years on Erie Railroad common stock. The fanfare accompanying the latter action was quite misleading since the present Erie common stock was given to former bondholders in the recent reorganization of the road; the equity of the former common stock was entirely wiped out in the reorganization.

In general, however, a very small part of the increase in railroad earnings reached the stockholders. Many of the roads followed the wise policy of using large earnings to reduce substantially the amounts of current and funded debt outstanding. In other cases tremendous cash balances are being built up as a cushion to any future financial difficulties that may arise. Another effect of the abnormally high current level of earnings has been to make the holders of junior securities of railroads in reorganization highly dissatisfied with reorganization plans promulgated by the I.C.C. in recent years when earnings were substantially lower.

Appeals from several of the plans have been taken to the Supreme Court, and the result of the railroad prosperity of 1942 has thus been a further delay in the winding up of the receivership proceedings in which about 30 per cent of the railroad mileage of the country is still involved. Progress during 1943 will presumably depend to a large extent upon the decision of the Supreme Court in the cases now before it. If the proposed plans are remanded to the I.C.C. for further study in the light of recent railroad earnings it will presumably mean that similar action will be taken in a large number of other plans in various stages of development.

During 1942 receivership proceedings were ended in the case of only four railroads, not of outstanding importance. These were the Minneapolis & St. Louis, the Norfolk & Southern, the Wabash, and the Ann Arbor. All were in equity proceedings; one receivership, that of the Minneapolis & St. Louis, had been in the courts since 1923. Section 77 of the bankruptcy act has proved a distinct disappointment as an expediter of railroad reorganizations. The Chicago & Alton was the only addition during 1942 to the list of bankrupt railroads.

The assignment of proper weight to past and present earnings in setting up reorganization plans is a difficult process. The market places a very low value upon current high earnings. Some of the leading solvent railroads, such as the Southern Pacific, have common stock which is actually selling at substantially less per share than its earnings per share in 1942. The common stock of an investment favorite such as the Pennsylvania railroad is selling at only 3½ times its indicated per share earnings in 1942, and it is yielding more than 10 per cent on the basis of the current market price and dividends paid in 1942. The Dow-Jones average of 20 railroad stocks closed 1942 at 27.39 as compared with 25.42 at the close of 1941 and 28.13 at the close of 1940. This is an excellent measure of the skepticism with which the current high level of railroad earnings is regarded. The index of high grade rail bonds rose during 1942 from 90.49 to 92.57, and that of second grade bonds from 48.85 to 53.16.

Legislation.

Legislation during 1942 favored the railroads. The Railroad Reorganization Act of October 1942 set up special procedure by which a road that was not insolvent could put a capital reorganization into effect with the approval of the I.C.C. and two-thirds of its creditors, including the holders of at least a majority of each class of affected claims. This was a re-enactment, effective until Nov. 1, 1945, of Chapter XV of the Bankruptcy Act, a temporary measure under which the most important capital reorganization had been that of the Baltimore & Ohio.

The Revenue Act of 1942, approved in October, also had important effects upon the railroads. In the first place, it levied a 3 per cent tax on freight shipments, and a 10 per cent tax on railroad passenger fares. More important from the standpoint of the roads, however, the Act authorized them to retire debt by purchase of bonds at a discount without the necessity of reporting the amount of discount as taxable income. This was a great stimulus to the use of large accumulations of earnings to retire debt.

Major Problems.

At the close of 1942 three major problems were arising to confront the railroads. Railroad labor was asking substantial pay increases, the Office of Price Administration was requesting the cancellation of the rate increases granted by the I.C.C. in March 1942 and the Justice Department was preparing to indict many rail and motor carriers for alleged rate-fixing in violation of the anti-trust laws. It was announced on Jan. 4, 1943, that this latter action was being postponed at the request of heads of the War Department, the Navy Department, and the Office of Defense Transportation. Any pay increases that may be granted will presumably be substantially less than the $600,000,000 per annum requested, and much of the impact would fall upon taxes in any event. The I.C.C. has agreed to reopen hearings on the rate increases of last March. In general, then, with further increases in traffic expected in 1943, the outlook is for a continued high level of railroad earnings.