State of Rails

Last week railroad stocks sold down to a new low since April 1933. January earnings were thoroughly depressing. Though gross revenues were up slightly, net operating income of the first 51 roads to report showed a drop of 22%. That was a pronounced extension of a trend that set in during 1934 when the 147 Class I carriers reported a gain of nearly 6% in gross revenues, but a decrease of 2 1/2% in net. Plainly, the U. S. Railroad System was boxed in its race against rising costs.

As a whole the U. S. railroads failed to earn their fixed charges last year by $35,000,000. No less than 30 failed to earn their out-of-pocket operating expenses. Of course, many a road like Pennsylvania, Union Pacific, Atchison, Chesapeake & Ohio, Virginian and Bangor & Aroostook earned not only fixed charges but dividends besides, but the great majority were deep in the red. A wage increase of 5% will take effect in April, topping two preceding raises of 2 1/2% since last July. Traffic is not expanding. And while Jesse Jones might assure the carriers, as he did last week, that his RFC would continue to lend on acceptable security, there is a bottom to even the best road's strong box. Furthermore, Mr. Jones sometimes depresses investors, as he did last week, with peremptory demands that debt-ridden roads reorganize.

Day by day as stock and bond quotations melted, railroad investors grew fearful that some headline calamity was imminent. One Southern Railway (mileage: 8,017) bond issue dropped eight points in a single session, and New York, New Haven & Hartford (mileage: 2,072) issues sank five points to new lows for the year, around 25-c- or 30-c- on the dollar. New Haven's new president Howard S. Palmer, who succeeded John Jeremiah Pelley last autumn, felt obliged to announce: "We are not contemplating any reorganization at this time."

More notable was a pronouncement from Southern, not because of its content but because any statement from President Fairfax Harrison is so rare as to be almost historic. A scholarly, aristocratic gentleman of 65, with a name that works magic throughout the South, Mr. Harrison divides his time between his country seat at Belvoir in Virginia's Fauquier County and the Washington headquarters of his road, writes learned treatises on Roman farm management under the pseudonym "A Virginia Farmer." Though he has lately given up reading daily newspapers as a waste of time, President Harrison last week unbent enough to give the Press nine words: "There are no financial difficulties facing the Southern Railway."

With reassurance from Messrs. Palmer & Harrison, railroad securities rallied briskly. But for the rest of the week there was a deluge of railroad news, good & bad:

P:RFChairman Jesse Jones announced a final plan for his pet railroad project, partitioning of Minneapolis & St. Louis (mileage: 1,627) which has been in receivership for twelve years (TIME, Oct. 29). About 500 mi. of this decrepit carrier will be junked, the rest parceled out among eight adjacent systems. Though details were still secret, Illinois Central will apparently be the chief gainer, acquiring a direct entrance over its own rails into Minneapolis. Mr. Jones will provide the big carriers with a total of $7,200,000 to buy the individual pieces.

P:Chicago Great Western is a 1,518-mi. "Granger" road sprawling over the rich farm territory directly west of Chicago. Small in comparison with Grangers like Burlington or North Western, it is strategically important as a connection between the Transcontinentals and Chicago. Its president is Patrick H. ("Pat") Joyce, who declared on taking office in 1930 that the "trouble [with the road] is too damn many men wearing the seats of their pants shiny." And under the hard-boiled Joyce management Great Western was one of the few U. S. roads to show a bigger profit in 1930 than 1929. But even for burly, forthright "Pat" Joyce there is a limit to the profits to be taken out of shiny pants. Last week Great Western marched into court, petitioning for a voluntary reorganization under the Bankruptcy Act. Reason: no funds to pay bond interest; no means of borrowing them.

P:At the turn of the year Denver & Rio Grande Western (mileage: 2,571) defaulted on a $40,000,000 bond issue but under the terms of the indenture was allowed a 60-day period of grace to make good. Last week that grace period expired without action. Though the bondholders may now throw the road into receivership, the directors hastily announced that a reorganization plan would be ready within a month.

P:Even when a railroad goes into receivership, it usually continues to pay interest on underlying mortgages. When it cannot do that it generally honors its equipment trust issues so that it will not lose its rolling stock.* So deep in receivership is Seaboard Air Line (mileage: 4,309) that last week it submitted to the courts a reorganization plan not only to adjust the interest on underlying bonds, not only to refund equipment trust maturities, but even to refinance receivers' certificates, which take precedence over every other outstanding security.

*But last year the receiver for Florida East Coast (mileage: 917) told equipment trust holders to come and get their cars and locomotives if they wanted them. They did not. In good times railroad equipment is readily salable but today there is no market at all.

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