Business: Railroads: Danger Ahead

Of all major U.S. industries, none is more vulnerable to the bite of spiraling prices or the blight of softening business than the 114 Class 1 railroads, which carry roughly half of the nation’s products and raw materials. Last week the railroads were caught in a dangerous vise, whose jaws were both inflation and deflation, whose effects make a case study for economists. From the headquarters of roads from Boston to San Francisco came gloomy news of a sharp setback in earnings: a 40% decline for the Pennsylvania, the nation’s largest railroad, a 60% nose dive for the New York Central, 15% for the Santa Fe, 25% for the Rock Island, 11% for the Boston & Maine. All told, said the Association of American Railroads, railroad profits for the first six months of 1957 have declined $61 million from 1956 levels. Worse yet, twenty-one Class 1 railroads even failed to earn enough to pay their debt interest and rental expenses.

Costs & Carloads. Like many another industry, the roads have paid out a lot more in 1957 to take in a little less. While operating revenues declined only one-tenth of 1% in the first six months, operating expenses rose by $73 million, or 1.8%. Inflation’s mischief hit the railroads where it hurts most—in wages, which account for 63% of all operating costs. Though the railroads actually trimmed more than 56,000 employees from their payrolls during the past year, they paid 12.5% more in wages, hiked payrolls by nearly $28 million. The railroads were also hard hit by increases in the price of materials and supplies to keep the trains running. A special price index compiled by the Association of American Railroads (based, like the Government’s consumer price index, on a 1947-49 base of 100), soared to 143.2 in April, a hike of 6.5% over last year. With interest rates at 5% v. 2% six years ago, the lines must pay much more for the money they need to expand and modernize.

What makes the inflationary spiral particularly crippling is that carloadings, the bread and meat of railroading, have fallen 2.9% up to mid-August, partly reflecting some tapering off in the economy, partly bad weather (floods and crop failures). Livestock and products, though only a small part of loadings, dropped 24.5%; lumber and other forest products, hit by a decline in housing starts, were down 12.9%. Coal was down 1.1%, merchandise shipments of less-than-carload quantity down 8.7%. Most important, the miscellaneous category that includes almost all U.S. manufactured goods and makes up roughly 50% of all loadings dropped nearly 5%.

Speed Limit. Railroaders hope that the recent 4%-to-7% rate increases granted by the Interstate Commerce Commission will help to balance out high costs. Yet many presidents are leary of hiking rates to the limit for fear of driving shippers to other carriers. Instead, they are betting on a reversal of the year’s first-half trend in the fall, when the economy traditionally enjoys an upturn after the summer slump. And they are going ahead full power with modernization programs designed to trim operating costs still further, will invest an estimated $273 million in the third quarter v. $222 million for the same period last year. Says Chicago & Northwestern’s Vice President Larry Provo: “The general situation in rail earnings will improve by the end of the year. Everybody thinks so. But then, they thought so in the second quarter too.”