Condition of Carriers

(See front cover) If one man were put in charge of all U. S. railroads, he would quickly become aware of the following outlines of his problem:

P:In 1934 U. S. Class I railroads took in about $3,500,000,000. Operating expenses and fixed charges used it all up and a little more besides. For that year the roads had a deficit of $16,887,000.

P:In 1935 the roads took in a little more than $3,600,000,000. But wages, material costs, other operating expenses also increased. Estimates of 1935 earnings vary from a $15,000,000 deficit (Bureau of Railway Economics) to an $8,000,000 profit (Standard Statistics). Even the $8,000,000 profit figure, however, indicated a profit of less than 1/10 of 1% on the roads' capitalization.

P:Early returns for 1936 continued an improvement shown in the closing months of 1935. Operating income for January 1936 was estimated at $35,875,000, a 63% increase over 1935.

P:The railroad problem during Depression and thus far in Recovery has been to coax enough net operating income out of greatly diminished gross receipts to cover almost inflexible fixed charges on a funded debt which in December 1934 stood at $10,560,000,000. In 1929 the railroads had gross receipts of some $7,000,000,000. That income has shrunk by nearly $3,000,000,000. If the roads were spending as much money on operations as they spent in 1929, receiverships would now be almost universal. They have, however, made extraordinary reductions in operating expenses. In 1934 maintenance charges were $1,000,000,000 under their 1929 total, and transportation costs were almost $1,000,000,000 lower than the boom-time figure. But when nearly $3,000,000,000 are taken off receipts and less than $2,000,000,000 off costs, the railroads are still about $1,000,000,000 under prosperity levels. And bonds clamor for interest in even the worst of times. The fixed charges, mostly bond interest, of U. S. railroads are still in the neighborhood of $700,000,000 a year. This is the hardest nut for railroaders to crack.

P:As the cumulative results of six bad railroad years, the administrator would find that during 1935 there were 16 rail-road receiverships or trusteeships.operating 29,018 miles of track. Biggest 1935 disaster was the Chicago, Milwaukee, St. Paul & Pacific with 11,123 miles of track and a $449,000,000 funded debt. The 16 casualties of 1935 brought the total to 89 companies with 71,658 miles of line-- almost 30% of total U. S. mileage.

Other administrative headaches would include the railroads' loss of passenger traffic to the motor car and the bus; the loss of short-haul freight business to the truck; the Railroad Retirement Act of 1935, the Social Security Act and the Guffey Coal Act; and the Interstate Commerce Commission's reduction of passenger fares last fortnight to a 2-c- a mile maximum on coaches and 3-c- on Pullmans.

Rate Reduction. The I.C.C. based its order cutting the base rate from 3.6-c- per mile and eliminating Pullman surcharges, on the theory that railway passenger travel, decimated by the automobile, would be partially restored by the lower fare, and that the extra volume of traffic would more than compensate for the lower rate. The I.C.C. declared that since 1926, railroads in general have made no money on passengers, that they lost $200,000,000 a year on passenger traffic in 1931, 1932 and 1933. I.C.C. figures showed that in 1922 the railroads carried 537,000,000 passengers, in 1934 they carried 187,000,000 (not counting commuters). Passenger revenue, in the same period, had dropped from $1,000,000,000 to $300,000,000. The I.C.C also pointed out that most of the Western roads are already operating under a 2-c--a-mile fare, that many Southern roads charge only 1.5-c- a mile. It cited the recent experience of the Southern Railway and the Seaboard Airline to show how lower rates had increased passenger revenue and turned a Seaboard passenger deficit into a passenger profit. The I.C.C. admitted that Eastern carriers were not running as many nearly empty coaches and Pullmans as Southern roads but argued that there was still plenty of room for more passengers. It did not think that Eastern carriers would lose as much revenue on the new rates as the difference between 3.6-c- and 2-c- would indicate.

Pre-eminent among roads hard hit by the new order was the Pennsylvania Railroad. With less than 5%, of U. S. railroad mileage, the Pennsylvania System carries nearly 20% of U. S. passengers. It operates in densely populated U. S. areas, with its New York-to-Washington mileage probably representing the heaviest non-commuting traffic in the country. New York, Philadelphia, Washington, Pittsburgh, Buffalo, Cleveland, Chicago and St. Louis are among its ports of call. It has a heavy Pullman traffic from New York to Chicago and is a great connecting road for traffic bound from New York to the South. Furthermore, its Long Island rail-road alone carried more than 79,000,000 passengers in 1935.

"Terrific Loss." It was thus not surprising that Pennsylvania's President Martin Withington Clement called the I.C.C. decision a "terrible disappointment," said it would mean a "terrific loss." True, the Pennsylvania did not actually get 3.6-c- a mile from each customer, as the 3.6-c- rate represented a standard from which large reductions were commonly made. Actual 1935 revenue per passenger per mile was 2.69-c-.* But this might drop to 1.7-c- a mile under the new dispensation.

Yet, despite the I.C.C. order, President Clement's outlook on life remained cheerful. The Pennsylvania has paid cash dividends in every year since its formation in 1847. The Pennsylvania System comprises, broadly speaking, about one-tenth of U. S. railroads. It takes in about one-tenth of the total railroad operating income. It operates a little over one-tenth of the total cars and locomotives. Its books carry about one-tenth of the total railroad investment. It handles rather more than one-tenth of total railroad traffic. Like other roads, the Pennsylvania has seen its income, largest of any road in the land, cut in two by Depression. It took in $731,000,000 in 1929, dropped to $380,000,000 in 1934, recovered to $400,000,000 in 1935. Yet deficits have still to appear. In 1932. dismal rail-road year, it made $13,500,000. By 1935 its profit had been stepped up to $23,800,000-- third best among U. S. carriers.

Pennsylvania's Past. History of the Pennsylvania Railroad falls into three general periods. From 1847 to 1874 the road went through a period of formation and expansion. Completing a continuous, one-track road from Philadelphia to Pittsburgh in 1852, the Pennsylvania grew by acquiring a financial interest in many a line west of Pittsburgh. Chief engineer from 1847 to 1852 and president from 1852 until his death in 1874 was John Edgar Thomson.

From 1874 through 1898 the Pennsylvania did not do much more than consolidate the structure whose foundation President Thomson had laid, although in this second period many new lines were acquired. By 1898, however, gross revenue (east of Pittsburgh and Erie) had risen to only $65,000,000, although the company was carrying 84,220,000 tons of freight and some 36,000,000 passengers.

Under its seventh president, Alexander Johnston Cassatt, the Pennsylvania pushed eastward into New York. In 1900 the Pennsylvania secured control of the Long Island Railroad. In 1901 it got permission from New York City to build tunnels under the Hudson and a great terminal on Seventh Avenue. Mr. Cassatt died in 1906, was succeeded by James McCrea, under whom the tunnels were, completed (1910) and the Pennsylvania Station was formally dedicated. Mr. McCrea also completed the East River tunnels and began work on the Hell Gate Bridge, which links the Pennsylvania to the New York, New Haven & Hartford and makes Manhattan a way-station between Washington and Boston.

Mr. McCrea was succeeded by Samuel Rea, who had been the active supervisor on the tunnel job. His administration extended through the completion of the Hell Gate project, the building of Manhattan's Pennsylvania Hotel, the War years, and the beginning of the 1920's. These were prosperous years for the Pennsylvania, which ran its gross income from $191,000,000 in 1913 to $672,000,000 in 1925.

Mr. Rea was succeeded by William Wallace Atterbury, who remained president until last April and continued as a director until his death last September. Mr. Atterbury will be best remembered for his electrification of the tracks between New York and Washington--a $270,000,000 project conceived in boom times but successfully carried out, with RFC and PWA assistance, through the worst Depression years. During his administration the Pennsylvania continued to buy interests in other railroads. In the Wabash and in the Lehigh Valley railroads alone the Pennsylvania paid $106,000,000 for stock which, at the time of Mr. Atterbury's retirement, had a market price of about $4,000,000.

Rodman Up. Martin Withington Clement is a big, broad-shouldered, genial six-footer with a much greater capacity for meeting the public than is commonly associated with presidents of the ''Standard Railroad of the World." Since President Thomson's time nearly every chief executive of the road has begun his career either as a rodman in the Pennsylvania engineering department or a mechanic in its shops. Mr. Clement followed the rodman tradition, taking his Trinity College (Hartford) B. S. degree into the Pennsylvania's engineering department in 1901. In 1926 he became vice president in charge of operations. He has light blue eyes, thinning grey hair a ready smile, a quick and sometimes sharp tongue. He lives in Haverford, Pa., rides in to Philadelphia daily on the Paoli Local along with many another Pennsylvania commuter, including five Pennsylvania Railroad vice presidents.

Corporate Cousins. Head of the Pennsylvania's 11,500 miles of track, Mr. Clement casts an interested eye on many another carrier in which his company has a considerable stock interest. Big but distressed friend of the Pennsylvania is the New York, New Haven & Hartford, which last autumn supplied New England's rail road news of the year by going into a Section 77B reorganization (TIME, Nov. 4). The New Haven cracked under the strain of trying to carry nearly $20,000,000 of fixed charges on an income which had shrunk to about $70,000,000. Climax came when the I. C. C. refused to approve an application for a $5,000,000 loan from RFC. The Pennsylvania controls about 17% of the New Haven but extended no help in New Haven's hour of need.

Though the Pennsylvania's New England investments have brought lean harvests, an infinitely more profitable excur sion has been its purchase of a 44% interest in Norfolk & Western. This road has an excellent claim to the title of best U. S. railroad property. It made $25,546,000 in 1935 -- a considerably better profit than the Pennsylvania itself could show. It made $20,464,000 in 1934 and went through Depression with large earnings and large dividends. Last year it declared its regular $8 per share common dividend plus a $2 extra, thus made a welcome addition to the Pennsylvania's treasury.

Super-prosperity of the Norfolk & Western results partly from its position as a great carrier of soft-coal from South ern mines. It operates about 2,200 miles of trackage, with the main line running from Norfolk, Va. to Cincinnati and Columbus, gets about 80% of its freight in the form of coal from Kentucky and West Virginia. Coal is an ideal railroad passenger because it is seldom in a hurry and travels in carload lots.

Norfolk & Western also profits from the able management of President Arthur Chase Needles, son of a Baltimore dry goods merchant. President Needles was once put out of Swarthmore College as a bad influence. He comes from a strict Quaker family, says he is still a Quaker. As there is no Quaker church in Roanoke, Norfolk & Western headquarters, Quaker Needles does not attend church services of any description. He is fond of dogs but fears to keep any lest they be run over. So he keeps goldfish. He likes poker. Scotch whiskey, used to be famed for parties given at his English Tudor house. Next year, when he reaches the age of retirement, he says he may take up the "damnable game of bridge." He goes to bed at 9 p. m., rises at 5 a. m. Often he wakes up around midnight, telephones various points of his line to see that everything is satisfactory, frequently startles employes by turning up, unannounced, in the hours before the dawn.

Competition. The two biggest competitors of the Pennsylvania--the New York Central and the Baltimore & Ohio-- have both been much more severely hit by Depression. In 1935 New York Central returned the pathetic profit of $115,046, equal to about 2-c- a share. Even this figure was a tremendous improvement over the 1934 deficit of $7,682,000. The New York Central closely reflects the general railroad situation, with its income dropping from some $600,000,000 in 1929 to some $300,000,000 in 1934, while fixed charges remained almost unchanged at nearly $60,000,000. Central owes RFC $15,600,000 and its demand loans from banks total $62,900,000. For months (TIME, Dec. 2) Central and RFChairman Jesse Jones have been bickering about the bank loans. Last week Central proposed a $62,900,000 bond-&-note issue to refinance the bank loans, save interest charges, and please Mr. Jones.

The Baltimore & Ohio remained in the deficit list with a 1935 loss of $3,181,000 against a 1934 loss of $3,825,000. Passenger traffic comes to less than 10% of the B. & O. revenue. Perhaps for this reason, B. & O.'s able though aging Daniel Willard welcomes the new Interstate Commerce Commission passenger rates, says he "expects to more than make up in volume the loss sustained by reductions in price."

* For the System, including the Long Island, income per passenger per mile was down to 2.19.

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