PERCENTAGE DISTRIBUTION OF OPERATING EXPENSES, 1890—1906
In the first two columns the percentages given relate to the operating expenditures alone, without reference to the total expenses—eliminating, that is to say, the large group of fixed charges, and treating these operating costs entirely by themselves as if the others were non-existent. In the third or right-hand column, it will be observed, the main groups are again given in percentages, not of the operating expenses alone, but of the total outgo, including capital expenditures in the nature of fixed charges. It should also be noted, of course, that only a few of the large or more important items are here included, and in the right-hand column no details, other than for the four main headings, have been computed. The constancy in the distribution of these groups of railroad expenditures over a term of years is graphically shown by the opposite diagrams.[32] The perpendicular line for each year is divided proportionately to the relative importance of each designated item of expense for that year. Thus the course of the horizontal lines, dividing the four main percentage zones, represents the ups and downs in the relative importance of each item. Occasionally, as in the years following 1895, the proportion of so-called general expenses decreased appreciably; but, in the main, all the items moved more or less in unison subject to the movements of wages and prices. This relative constancy proves how fundamental the arrangement of groups is.
The attempt to differentiate the constant from the variable expenses of railroads on the basis of the foregoing operating statistics may now be made. What proportion of each item in the table for each of the large groups is fixed in amount; and what proportion fluctuates more or less in connection with the volume of traffic?
Under the first category, Maintenance of Way and Structures, absorbing about one-fifth of operating expenses, over one-half is incurred for so-called "repairs of roadway." It is evident that a large part of this expense is due not to wear but to weather. A costly plant is exposed to every vicissitude of flood, fire, and waste. Re-ballasting and realignment may be somewhat more expensive where traffic is heavy; but certainly all general repairs, the wages of track walkers, the removal of snow, ice, and weeds, must be attended to entirely irrespective of the number or size of passing trains. Of the second item, renewals of rails, it is probable that this expenditure is directly traceable to wear and tear in large part. The more trains, the heavier the locomotive and cars or the higher the speed, the more rapidly must these rails be replaced. But even so, the proportionate amount is small, constituting generally between five and ten per cent. only of the group expenditure for maintenance of way. With ties, an item about twice as important as rails, the case is exactly the reverse. Ties rot out rather than wear out. They have a natural life varying from four to fourteen years, as influenced by climate, ballast, and drainage. The necessary expenditure per mile for them by different roads varies greatly, as might be expected; but it seems to bear little relation to the density of traffic. As for the principal remaining items under Maintenance of Way, such as repairs of bridges and buildings; if properly designed to withstand their loads and strains, most expenses of their up-keep such as repainting and reroofing should be practically independent of the volume of business. A recent elaborate discussion of these matters in 1907 in the Wisconsin Two-Cent Fare decision, reached the conclusion that all of the cost of rails, one-third of the ties and ten per cent. of expenditures for roadway, track and bridges, are all that can properly be charged to wear from traffic, as opposed to natural depreciation. Acworth illustrates this point by comparison of the Midland & Great Western Railway of Ireland and the Lancashire & Yorkshire Railroad. These two are of about equal length, approximately 530 miles. The latter carries forty times the traffic of the former road, and yet its expenses for maintenance of way are only eight times as much. It seems safe, in general, to conclude that in this first large group of expenditures for maintenance of the fixed plant, probably not over one-third are variable to any considerable degree. Acworth for England estimates this proportion at about two-fifths.
The proportion of variable expenditures for Maintenance of Equipment—the second group—is probably higher than in that of maintenance of way. This is due to two causes. Rolling stock is, of course, subjected more directly to wear and tear in service than are bridges, cuts and fills and buildings. Rolling stock, moreover, is susceptible to change of type and improvement. Its effective life is thus shortened both by use and by replacement. Before being worn out it may have become antiquated. More powerful locomotives and larger cars suited to new requirements of the business may necessitate scrapping otherwise good equipment. This very fact, however, imposes upon the management the need of intensive service while it lasts. All the mileage possible must be extracted from each vehicle before it goes out of date, and this implies a higher proportion of wear-out than of mere rust-out. Yet the fact is still true that many of the items in this class are unaffected by the mileage or tonnage performance. There is little difference in wear on a freight car as between light and moderately heavy loads; and as for passenger cars, the actual wear assignable to the paying load is a negligible quantity. We may, at all events, risk an estimate in the statement that probably not over half of all the expenditures of a railroad for maintenance of equipment vary with the volume of the business.
The direct effect of a changing volume of business is most clearly seen in the third group of operating expenses, having to do with Conducting Transportation. This is very important, comprising as shown by the table on page [49], no less than fifty-five per cent. of operating outlay and forty per cent. of total expenditures including fixed charges. At first glance it would appear as if, at last, one had here to do with a direct relativity between cost and volume of business. Surely the cost of fuel for motive power will vary with the tonnage moved! This item, amounting in 1905 to no less than $156,000,000 for the railroads of the United States, was the largest in the budget, constituting eleven per cent. of all operating expenses. Yet brief consideration shows that even here much of this expense is constant and invariable. A locomotive will burn fully one-third as much coal merely to move its own weight as to haul a loaded train. Five to ten per cent. of its total daily consumption is required merely for firing up to the steaming point. Twenty-five to fifty pounds of coal per hour go to waste in holding steam pressure while a freight train is waiting on a siding. Every stop of a train going thirty miles per hour dissipates energy enough to have carried it two miles along a level road. In brief, expert evidence shows that of this important expenditure for coal, from thirty to fifty per cent. is entirely independent of the number of cars or the amount of freight hauled. The largest wage items in this group of conducting transportation expenses are for engine and roundhouse men, and conductors and brakemen. This expense is, of course, even more independent of the volume of business than the cost of coal. No more engine men or conductors are needed for a heavy through express or freight train than for a single car tram on a branch line. And the extra cost for service of more brakemen as the size of the train increases, is relatively unimportant when modern equipment with air brakes is used. Appreciation of this fact is largely responsible for the great increase in train loads in recent years. Train-mile costs can be economized most effectively by distributing the wages of a train crew over as large a tonnage as possible of paying freight. As for the wages of station men, switch and flag men, they are largely, and often entirely, independent of the amount of business. From all these considerations, it appears that at a conservative estimate, no less than fifty per cent. of the cost of conducting transportation constitutes a fixed charge upon the property once it is in operation, irrespective of the volume of business transacted.
The group of general expenses, which alone remains for analysis, is relatively small in amount. It is obvious that these outlays are a constant burden but slightly influenced by the variation in traffic. Salaries may indeed be reduced somewhat during hard times—a few clerks may be laid off; but, on the other hand, this being an expense of organization, the general staff must be maintained at about a certain standard of efficiency regardless of business.
Summarizing our estimates thus far, we may reconstruct a table, distributing expenditures theoretically according as they are constant or variable in somewhat the following way:
| Per cent. of operating expenses | Per cent. of total expenses | |||||
|---|---|---|---|---|---|---|
| Both | Constant | Variable | Both | Constant | Variable | |
| Maintenance of way | 20 | 13.4 | 6.6 | 15 | 10 | 5 |
| Maintenance of equipment | 20 | 10 | 10 | 15 | 7.5 | 7.5 |
| Conducting transportation | 56 | 28 | 28 | 40 | 20 | 20 |
| General expenses | 4 | 4 | — | 3 | 3 | — |
| 100 | 55.4 | 44.6 | ||||
| Fixed charges | 27 | 27 | — | |||
| 100 | 67.5 | 32.5 | ||||
Thus one arrives at the general conclusion that approximately two-thirds of the total expenditure of a railroad and more than one-half of the actual operating expenses are independent of the volume of traffic. The remaining third of all expenditures, or what amounts to the same thing, the other half of the operating expenses, are immediately responsive to any variation in business. Applied to the railroad net of the United States, this means that only about one-third of the $2,000,000,000 disbursed in 1905—an amount equal to about two and one-half times the national debt—was susceptible of variation according as the traffic expanded or decreased. This provisional estimate, defective principally because of inadequacy of the returns as to depreciation and replacement, agrees in the main with computations based upon other data. The Vice-President of the Southern Pacific Railroad, in 1892, after extended investigation, arrived at precisely the same general conclusion. The great German authority, Sax, estimates that one-half of a road's operating outlay is constant and that this operating outgo equals about half the total expenditure, the other half being capital cost and hence constant. This calculation places the constant factors even higher than ours, viz., at about three-fourths of the total expenditure. Eaton states that half of the operating expenses respond to changes in the volume of traffic. Our estimate, above detailed, seems to be in accord therefore with good authority, and differs but little from any of the reliable writers.