The Railroads Punish the Passenger

Fare Boosts Eleven years ago Robert R. Young led the assault on the Association of American Railroads for its failure to accommodate the passenger with comfort. Today he and other railroad presidents are protesting to high heaven that only by carrying freight can the railroads survive. A newspaperman who specializes in business, JOHN L. HESS writes a daily broadcast of financial news for metropolitan New York. For eight years he was a commuter, but he “got fed up with it last fall and moved into town, wife, three kids, and all.”

by JOHN L. HESS

1

THE railroad passenger, like the mournful cry of the steam locomotive, is fading from the American scene. He cannot go too soon, in the view of such rail leaders as Robert R. Young of the New York Central and James M. Symes of the Pennsylvania Railroad, who have come to the conclusion that their roads cannot survive unless they excise what Young has called the “cancer” of uneconomic services.

This represents something of a switch for Mr. Young, who once pitched his campaign against “Wall Street control” of the railroad industry on the slogan, “A Hog Can Ride Across the Country Without Changing Trains—Why Can’t You?” (Not so long ago, doomed commuters on his West Shore Division rode to work one day wearing rubber pig masks and bearing signs, “A Pig Can Ride — Why Can’t We?”)

Now Mr. Young has joined the dominant movement in railroading, which perhaps alone among American industries has decided that its salvation lies in contraction rather than expansion. Envied by roads still bearing the burden of human freight are such lines as the Rutland Railway, which closed its ticket windows for good in 1953. Its auditor reported, “We could not possibly have contemplated the tremendous simplification which resulted.” But he went on to say, “Abandonment of passenger service has taken all the fun out of railroading.”

If the loss were only sentimental, one might put it down as another sacrifice on the altar of progress. Rut is it progress? Will the railroads really be better off if they get out of the passenger business? And if so, can the nation afford to let them?

Oddly enough, for an industry that seems to run as much on paper as on diesel fuel, the crucial figures are hard to come by. The Interstate Commerce Commission requires any person with a complaint about service to submit sixty-three copies thereof, but the agency is unable to say how many trains it has permitted the railroads to abandon. Its tables do show, however, that during the first decade after World War II, on an average, 370 miles of Class I railroad were abandoned each year. In the same period, 4121 miles of road a year were withdrawn from passenger service. The mileage of railroad over which Americans could travel was reduced by one fourth — from 161,920 to 120,711 — in ten years.

The volume of passenger travel has declined more than twice as fast. Eliminating from consideration the war-swollen traffic of 1945, in the following ten years the number of passenger-miles traveled dropped 56 per cent, while the population was growing by 18 per cent, or about 25 million, and the mobility of Americans was becoming a national phenomenon.

These data at least make tenable the recent forecast by Arthur S. Genet, former traffic vice president of the Chesapeake and Ohio Railway and now head of the Greyhound Corporation: “In ten years, the railroads will have virtually abandoned the business of carrying passengers.”

While a number of outside factors have contributed to the decline of rail travel, it has had an eager assist from within the industry. In a threeyear study of passenger cost accounting undertaken by the Harvard Business School, Professor Dwight R. Ladd says, “No recent instance of any important new train service was discovered. . . . Permanent change [in railroad services] in recent years has largely involved train discontinuance.”

(It might be noted that the experimental light trains recently introduced with much fanfare — Talgo, Train X, and Aerotrain — were designed to cut costs, not to improve service. Those in use have replaced existing trains; none is equal in comfort and roadability to good standard cars. The fares are the same, however.)

If it is unfair to single out Robert R. Young as a symbol, he has at any rate not shirked the role. Railroad lawyers and accountants have been waging a quiet campaign of attrition—eliminating a branch here, a train there, obtaining a multiplicity of small fare increases — cutting off the dog’s tail an inch at a time. This process was too slow for the flamboyant Texan, whose demand for radical surgery made the front page. The story broke in the New York Times last July: “2 Railways Plan Fare Rise to Deter Pullman Travel.”

And the next month the New York Central and the Pennsylvania, with four associated roads, applied to the ICC for permission to raise firstclass fares by 45 per cent. The Times quoted Mr. Symes of the Pennsylvania as saying, “I’ve just about given up hope as to the future of long-haul passenger travel.” Another railroad president explained, “What they are trying to do is to dry up the Pullman service and switch the passengers over to the coach and airplane.”

Not all the industry went along with this philosophy. Southern and Western lines, in a move widely interpreted as a rebuke to the Central-Pennsy group, put in for a mere 5 per cent general fare increase. The ICC compromised; it granted the 5 per cent and then, in a six-to-five decision, gave the six Eastern roads an additional 15 per cent on firstclass fares.

Although the railroads are divided over the desirability of the Pullman passenger, they are unanimous in their distaste for his Monday-to-Friday cousin, the commuter, whom the head of one Eastern road has privately called “the rope around our necks.” While Mr. Young was content to demand 45 per cent more from the chair-car riders, he has applied for an increase of 390 per cent in commuter fares on one division, frankly conceding that he wants to do away with the line altogether.

On another division, the West Shore, Mr. Young has been engaged in a guerrilla war with the courts and commissions of two states (headline in the Times: “Central Defiant; Will Cut Trains”). When New York forbade him to drop certain trains, he halted them at the state line, more or less in the middle of nowhere. He quietly obtained permission from the ICC to abandon the ferry that carried West Shore commuters across the Hudson River to their jobs, on the ground that it was losing money. (Since the ferry was an essential part of the trip included in the fare, the nature of the loss appears a bit baffling.)

A reporter called the Central to ask how the passengers would get to work; an official confessed he did not know, but he accepted the suggestion that they might swim.

Many of these curtailments were suspended on court order. But as time goes on, the issue appears to become academic. The railroad comes into the hearing room showing that fewer and fewer persons are using the line, and it is therefore losing more and more money.

Are the roads cutting services because fewer persons are using them, or are the riders quitting the railroads because the services are getting worse and more expensive? The answer would seem to be yes to both questions. A spiral of declining travel and deteriorating service is under way, hastening the extinction of the railroad passenger.

2

THE railroads have a case. It is called the passenger deficit. In 1955, they report, the industry lost $637 million carrying passengers — according to ICC figures. This loss, it is said, was made up by freight charges. Indeed the railroads cleared $917 million after taxes, the greatest profit in their history.

The railroads’ argument here is weakened, though not destroyed, by the fact that hardly anybody in the industry believes the ICC figure — nor does the ICC itself suggest that the passenger deficit as given is more than an accounting assumption. Railroad analyst Stanley Berge of Northwestern University calls it “a fantastic phantom deficit . . . that has deluded railroads into pursuing negative policies resulting in further losses from passenger train operations.” The Harvard study is more reserved: “Some railroad officials accept this figure; many more suggest that ‘about half this figure is real’; while a few contend that the operation of passenger service actually made some contribution to railroad overhead and profits. There are some companies which regularly circulate internal reports showing two different figures for the cost of regularly scheduled trains.”

The Pennsylvania Railroad reported to the ICC that it lost $50 million hauling passengers in 1955. To a more sophisticated audience, President Symes said the “out-of-pocket” loss on riders was nearly $10 million. In any event, the Pennsylvania earned a net profit of $41 million. For 1956, Mr. Symes reported that the passenger deficit had gone up to $55 million; paradoxically, the net profit also rose, to $41.5 million.

The discrepancy between the passenger deficit and the out-of-pocket loss is a product of “the ICC formula,” an accounting system developed in consultation with the railroads generations ago and prescribed for the industry ever since. In analyzing railroad costs, the chief problem is that the bulk of the outlays cannot easily be broken down into passenger and freight services. The road must be maintained, the crossing guarded, and the president paid, whatever the ratio of freight to passengers.

Under the formula, roads are told to divide such costs pro rata, according to the dollar volume of passenger and freight business. While this may seem fair enough to the layman, cost accountants have clamored for years that it is no way to run a railroad. Without going into details here, it might be pointed out that if a road’s direct coats of running passenger trains come to $10 million a your and it sells $12 million of tickets, the riders may not be currying an arbitrarily fixed share of the overhead, but they are making a contribution.

There is, unfortunately, no reason to challenge the complaint that commuter fares, even after repeated increases, often do not pay the direct costs of train service. By the nature of commuting, large amounts of rolling stock must be maintained for two short trips a day once into the city and once out at night — and large numbers of employees must be paid for idle time between runs. This economic waste is reduced to some unknown degree by travel in off hours.

The question arises whether the railroads do not have to maintain the commuter cars anyway, for profitable peak travel periods, such as Christmastime. The extent to which commuting helps other railroad business by promoting the well-being of communities along the right of way is another unmeasured factor.

One trouble is that even the direct costs are hard to ascertain. The president of a large railroad complained to the Harvard researchers, “It costs us $8 a mile to operate a train, but when we take trains off we save only $4 a mile.”

In 1955 the Association of American Railroads turned down a proposal to undertake a cost study. But last year the New York Stock Exchange, worried about whether shareholders were getting accurate information, asked the American Institute of Accountants to study the “divergencies between accounting practices of railroads and generally accepted accounting principles of other industries.”

Leonard Spacek, head of the national accounting firm of Arthur Andersen & Co., has charged that the study was being impeded. He complained, as reported by the Wall Street Journal, that railroad executives had told the committee to “make sure that no recommendations are made which would affect the railroad companies adversely from the standpoint of regulation or income taxes.

The Harvard report quotes the fiscal officer of one railroad as defining his approach to the cost-analysis problem thus: “What do you want me to prove?” Professor Ladd notes that “much of the data available . . . have been prepared to support petitions to regulatory commissions, and these do not necessarily reflect the best railroad thinking on the subject.”

The data nevertheless affect railroad thinking. John M. Budd, president of the Great Northern Railway, has protested, “The loss under the ICC formula has led to a feeling outside the industry, and even some within, that the railroads should get out of the passenger business.”This caused “general confusion, some loss of public confidence in our industry, and regrettable harm to the morale of the men and women devoted to selling railroad travel.” In passing, it should be noted that the defeatism is not limited to the passenger service. Executives who have given up on the riders are not necessarily sold on the future of rail freight. Recently the New York Central set up a trucking subsidiary in competition with its own routes. The largest truck operator in the West is the Santa Fe Railroad. The Chesapeake and Ohio has bought an interest in an air cargo line.

While the physical volume of industrial production has gone up by about half since World War II, rail freight traffic has remained virtually unchanged; in other words, freight cars have lost ground to the truck at the same time as the passenger train has lost to the automobile. To be sure, railroad profits are close to a record high, but only as a result of repeated rate increases that have turned away a good deal of business, and as a result of postponing major maintenance and replacement outlays that cannot be postponed forever.

The railroads say they cannot raise the money because they earn less than 4 per cent on investment. Can they not make more on their properties as real estate? They sometimes can, and do. Abandoned switchyards, rights of way, and depots have been sold for handsome returns. Realism indicates that if the functions of the railroads continue to dwindle, the main lines themselves will be nibbled away and pass into folklore with the trolley tracks.

This process is in fact going on, and at an accelerating pace. One of our great national resources is vanishing before our eyes. And it cannot be justified as a case of survival of the fittest. It has been estimated that the railroads move five times as much freight per employee as do trucks. As for passengers, the railroad still is incomparably the most efficient invention in existence for moving masses of people overland.

3

THE tragic paradox of the decline of the fittest is explained in large part by the fact that the government assumes other lines of physical communication — the highway, the waterway, the airstrip— to be essential functions of social life, to he maintained without primary concern as to whether they pay their way or not. As the railroads never tire of pointing out, the competition is subsidized.

That the present network of railroads w as largely built with public money is, at the moment, an academic point. Of more pressing concern is the fact that, while the railroad companies may be able to get along without passengers and even without freight, the nation cannot get along w ithout the railroads.

A phenomenon comparable in significance to the passing of the frontier has recently been noted by observers of the American scene. It is the growing together of our great cities into vast metropolitan regions dubbed “Interurbia.” One such, stretching from Boston to Washington, contains 20 per cent of the nation’s population. No corresponding governmental entity exists, but the municipalities, counties, and states within Interurbia all have been struggling with traffic problems that threaten to strangle them.

Their piecemeal solution has been to widen a highway here, build a bridge there, and plow expressways through expensive real estate. Curiously, each improvement has created new problems at either end. Billions have been spent, for example, to expedite the flow of motor vehicles into the streets of New York City, whose congestion is driving business out. The solution has been to budget more hundreds of millions to bring more cars and trucks into the city. Meanwhile, the railroads deteriorate.

The prime example of a suburban area is Long Island, and the prime example of a commuter-ridden railroad is the L.I.R.R., which owns no freight cars at all. Since 1940 the population of Long Island has increased from 600,000 to more than 1.5 million. At the same time, the number of riders on the railroad has actually declined slightly. Wonders have been performed in expanding the network of parkways, but twice-daily traffic jams are still the lot of motorists. Lender the threat of a complete collapse of the railroad, the state and localities have halved its taxes and permitted it to raise its fares at will. This the railroad has done, driving more commuters to their automobiles, but it has not improved services. Some observers believe that the L.I.R.R. has increased fares as much to hold down the number of passengers as to improve income. To serve many more riders, the railroad would have to widen certain transit bottlenecks, an investment it feels it cannot justify.

An expenditure far less than that now budgeted for highway improvements would do wonders for the railroads and for the traffic situation. But who will pay for it? Although one may raise one’s eyebrows at their figures, one may accept the view of railroad executives, as hardheaded businessmen, that they cannot justify a further investment of their shareholders’ money. As for the states and localities, politicians are justifiably shy of taking on new or outlandish budgetary responsibilities; in any event, the problem crosses county and state lines.

A few railroad executives, aware of the grave implications (and the political difficulties) of abandoning the passenger field entirely, have proposed a compromise: that regional commuter authorities be formed to take over the service, paying the railroads “cost for the use of their properties. Any loss would be made up by a tax on communities served.

The proposal is, naturally, not altogether altruistic. Under the prevailing system of railroad bookkeeping, an expanded commuter service that assumed a large share of the overhead would be a considerable windfall. It is, nevertheless, an attempt at a solution, which is more than has been essayed by any high public official.

Any attack on the problem must begin with a decision as a matter of public policy that the railroads are a national resource, of equal status with our highways, airways, and waterways. Regulatory commissions must be charged with halting the erosion of this resource; where this threatens the interests of stockholders, they will have to be compensated.

But more than a halt to erosion is needed. A drastic rehabilitation is urgent. It might possibly be accomplished by direct subsidy, but the effectiveness of this means is open to question. Railroads have obtained indirect subsidies in the form of tax cuts; these have staved off cancellations but have not resulted in any improvements of service.

More suitable to the size of the task might be a series of ITA’s — Interurban Transport Authorities

that like the TVA would develop the resources of large areas. They would survey transport needs and prepare master plans for the most economical development of railroad, highway, water, and air communications. They might find it best in the long run to purchase most or all of the railroads in their areas.

While this action would add to the responsibilities and complexity of government, it need not add to the cost. The $33 billion federal highway program demonstrates that massive amounts of money are going to be spent willy-nilly to meet transport problems; the question is where they can be spent most effectively.

The railroads’ attack on the passenger problem has been a defensive one, to slash services and raise fares. Nobody has tried to improve services and cut fares. Who knows — such positive steps might even result in passenger service paying its own way.

In any event, action must be taken, and soon, or the railroad passenger will be deader than the dodo.