Railroads: Rates and Regulations

by William Zebina Ripley

It should be observed in passing that the relative distribution of outgo above mentioned, varies greatly both as between different railroads and, on the same road, as between different years.[33] During lean seasons the imperative need of reducing expenses generally induces the heaviest inroads on expenditure for maintenance of way. Nearly one-third of these expenditures can probably be postponed for short periods without serious detriment to operation; but, of course, there is for each property an irreducible minimum at which economy must halt. On the other hand, the cost of moving each train, that is to say, the outlay for fuel and wages, cannot be greatly cut, although some discontinuance of freight trains may take place. The most readily postponable outlay is therefore found in the department of maintenance of way. Two hundred ties per mile may be annually renewed instead of twice that number for a year or two. Heavy decreases in the wage account for road and track men may be effected, sometimes at the cost of public safety perhaps, but none the less effectively from an immediate fiscal point of view. A series of hard years thus always results in heavy proportional curtailments of maintenance of way expenses. In 1895, for instance, midway between the two worst years of the depression of 1893-1897, only 19.82 per cent. of operating expenses was devoted to maintenance of way, with 15.76 per cent. expended for maintenance of equipment.[34] Six years later, in the full tide of prosperity, the outlay for maintenance of way had risen to 22.27 per cent. With over 350,000 freight cars idle on sidings, as during the spring of 1908, expenditures on repairs of equipment may temporarily be postponed. Depreciation rather than wear takes place. An economy of about five per cent. may temporarily be effected in this wise. It is only with the return of prosperity that the temporary postponement of this expenditure makes itself felt. Economy at the expense of efficiency is poor business policy in the long run. With the revival of activity on the other hand, as in 1898, there may be witnessed a sudden concentration of the postponed expenditures of the preceding years. The Illinois Central was spending $1,400 per mile on maintenance of way in 1905, as against only $1,150 in 1897. A succession of fruitful years may, however, find the property so thoroughly kept up that some measure of relaxation in expenditures may ensue. During these good years with heavy traffic, it is the maintenance of equipment charges which tend to rise. Locomotives and cars are constantly in need of repair owing to hard usage. This was a noticeable feature during the four years after 1900. The Illinois Central, expending only $866 per mile for maintenance of equipment in 1897, laid out $2,200 per mile for the same purpose in 1907.

Sometimes, as in January, 1903, or November, 1906, general wage increases all along the line take place. These, of course, affect all branches of the service. Supplies of all kinds may also enhance in price. It was doubtless the rise in the price of coal which increased the proportionate importance of the fuel item in the railroad budget of the United States from 9.8 per cent. in 1900 to 11.8 per cent. in 1904. The tremendous rise in expenses of all kinds in 1907 was not at first appreciated because of the large volume of traffic. It was only when the sharp decline in business following the panic in October of that year took place, that the full influence of this factor became apparent.

As between different roads also, the relative proportion of the various elements of cost will vary according to circumstances. Northern lines are exposed to heavy maintenance of way charges, owing to snow, ice, and frost. In rugged districts or with heavy grades, expensive operation is apparent in high conducting transportation expenses. On the Pennsylvania trunk line, rising to 2,100 ft. above sea level and with many curves, the distribution of expenditures is quite different from that on the New York Central, which operates a straighter line at about water grade. On the Union Pacific, movement expenses have been at times over fifty per cent. higher than on the St. Paul road, which operates in level country. It is a combination of high grades and poor equipment, which undoubtedly keeps the relative cost of conducting transportation so high on the Erie. The proportion of local to through business is of importance in this connection.[35] Railroads like the Boston & Maine or the St. Paul system before 1908, because they have so much local business, contrast strongly with others like the Chicago Great Western, the Erie or the old Fitchburg Railroad. On the latter roads the distribution of expenses is different, because their large volume of through traffic carried in bulk is so much cheaper to handle. Obviously, the expense incident to frequent stops and loss of time, as well as in loading and unloading local business, will be much greater than in long haul trainload traffic. The cost of large items like fuel will vary greatly in different parts of the country from perhaps $1.25 per ton for coal in Pennsylvania up to $7 or more on the Pacific coast. Since the recent discoveries of petroleum in Texas and California, economies have been effected upon the Southern Pacific, which by comparison with Northern Pacific, still using coal, may be of great importance. More than six-tenths of the cost of locomotive service is for fuel, so that a reduction of cost from $4 a ton to an oil equivalent at $1 per ton may aggregate a large sum. It has been estimated that such a saving on 1,600,000 tons of coal would pay five per cent. on an additional capital of $100,000,000. Similarly the character of the freight, whether it be like coal, iron ore or grain, cheaply handled, or merchandise which must be carefully housed and treated; its regularity, whether it flows evenly the year round like the dressed beef business, or as on the cotton and cattle range roads, is concentrated in a short season and all moves in one direction;[36] the relative proportions of freight and passenger business—in New England about on an equality, while in the West and South nearly nine-tenths freight; and, finally, the efficiency of management, in the use of rolling stock, making up trainloads and keeping all equipment busy; all of these factors will influence the proportionate distribution of expenditures. The operation of each road thus constitutes an interesting problem in statistical analysis by itself.[37]

RELATION OF TRAFFIC TO MAINTENANCE OF WAY COSTS ON REPRESENTATIVE EASTERN AND WESTERN ROADS—1910

The relation of course between density of traffic and the distribution of expenditures is direct. Heavy and frequent trains increase the wear and tear as distinct from mere depreciation from age and weather. This is demonstrated graphically by the following diagram.[38] The solid black horizontal belts to right of the centre show how low is the density of traffic on the five upper western roads by contrast with the five carriers in trunk line territory. The left hand horizontal belts show proportionally in dollars the outlay per mile of road for maintenance. Naturally the expense of such maintenance is likewise less on the western lines. But when stated, not absolutely in dollars per mile of road but in terms of utilization, as by the shaded belts to right of the centre, the true state of things appears. Density considered, in other words, the western roads are all as well kept up as those in the East. The necessity at all times of interpreting such expenditures, not in absolute figures but in terms of utilization, is obvious; and yet it is not always done in practice.

Up to this point it has appeared as if, in making distinction between the constant and variable expenditures of a railroad, it was the latter only which grew as the volume of traffic increased. This is not absolutely, but only relatively true, not only of the so-called constant operating expenses, but of fixed charges as well.[39] Everything depends upon the length of time under consideration. Many expenses follow the fluctuations of business, not evenly but by jerks. Up to the full limit of utilization of the existing plant, each increment of traffic seems to necessitate but a very small increase in the so-called variable expenses, with hardly any change at all in the constant ones. A branch road can haul more and more tons of freight with a given outfit of cars and locomotives by merely increasing slightly its outlay for fuel, train service, wages and supplies. But after a certain point more rolling stock must be provided to accommodate the growing business. As each of these additions to property occur, they contribute new quotas to the fixed charges and to the so-called constant expenses of operation, such as maintenance of roadway and the like. Nor can these new expenses be allocated to the new business alone. The moment the old traffic has outgrown the existing plant, the new expenditure becomes chargeable to all the business alike. The new outgo must be distributed evenly over the entire volume of traffic thereafter handled. Each ton, both of old and of new traffic, beyond the haulage capacity of the locomotives then in service, is equally responsible for the expense of new equipment purchased. Although the old business could have been handled without a million dollars spent for double-tracking or terminal enlargement, this addition to the expense of maintenance of way or to the fixed charges is equally attributable to every ton of traffic hauled.

A concrete example may aid in making this important principle clear. The new through-freight trunk line built by the Pennsylvania Railroad since 1900, paralleling its old four-track one, represents both in the cost of maintenance and capital charges, a sudden jump in the expense of transporting each ton of freight on both lines, until such time as the new business grows to a point where it can support the new line by itself alone. The relation between increasing returns and density of traffic is well illustrated in this instance. With six tracks in operation nearly all the way from Pittsburg to Philadelphia, the four old tracks are sometimes almost fully utilized for passengers and fast freight. The extraordinary density of traffic appears in the statement that this road in 1911 on 3534 miles of track handled one-third more ton miles than the Union Pacific—by far the most worked of all the western lines—handled on 13,674 miles of track. The two new low-grade Pennsylvania freight tracks are used only for slow traffic; largely coal and westbound steel empties. Not-withstanding the extraordinary density of traffic on this extra two track line, it probably does not meet the fixed charges on cost of construction of the line. Yet the new double track was absolutely necessary, regardless of its profitableness, in order to relieve congestion on the old four tracks. In other words, the demands of the service forced an expenditure which in and of itself was not financially self-supporting. But the profit from the old lines would be sufficiently enhanced to take care of the whole. The bearing of such cases upon the capital needs of the future is obvious. A resolutely conservative policy of finance becomes imperative under such circumstances.

In much the same way, the general condition of congestion reached in 1903-'05 on the eastern trunk lines and in the West and South in 1906-'07, manifested mainly in the need for more tracks and terminals, represented the permanent outgrowth of the old plant; and necessitated a readjustment of capital expenses for the purpose of enlargement. Viewed in a large way over a term of years, nearly every expenditure, even the fixed charges which appear constant or independent of the volume of business, thus become in reality imbued with more or less variability.