EARNINGS & EXPENSES
A comparison of the movement of gross earnings with operating expenses introduces still another disturbing factor, namely, the changes from year to year in the level of freight rates as well as in the character of the traffic handled. The effect of fluctuating costs of production of transportation having just been considered, we may now turn to the fiscal returns as affected by the price obtainable for the service given. Any long-time comparison of results reflects the influence of the steady decline of freight rates during the generation prior to 1900. Thus comparing 1880 with 1898, as shown by the preceding table, operating expenses grew in the ratio of 100 to 221, while gross income grew from 100 to only 190. Three fold the freight business produced less than twice the revenue. Pushing the comparison later, down to 1906, operating expenses grew after 1880 from 100 to 394, while gross income rose to only 346. This reflects the influence during the last few years of the rapid rise in prices and wages.
According to the opposite diagram, comparing 1890 with 1910, both operating expenses and gross income from operation seem to have moved together; the curve of gross revenue rising proportionately only a little faster than that for operating expenses. The latter have risen from a general figure of about $800,000,000 before the depression of 1893-1897, to $1,822,000,000 in 1910; the former from about $1,200,000,000 to over $2,750,000,000. Both alike somewhat more than doubled, therefore, in twenty years. At times, especially during the rapid revival of business after 1897, before rising prices began to affect costs of operation, extraordinary increases in earnings appeared, outstripping the growth of expenditures. Comparing the year 1899 with 1895 we find that the gross earnings of the railroads of the United States increased by twenty-two per cent. This involved an increased expense of operation, however, of only eighteen per cent. Similar comparison year by year, there having been an enormous expansion of business, shows an increase in gross earnings somewhat more rapid than the growth of operating expenses. This differential advantage has progressively lessened since 1902, and especially since the let-up in 1907. The official returns for 1911 with the marked decline in gross, show an even more distinct drop in net earnings. Whether the need of an increase of rates commensurate with the augmented operating costs is imperative, can only be ascertained after a return to more normal business conditions.
These relationships would be the more striking could we exclude the enormous expenditures for betterments which have been charged to operating expenses during these years. Comparisons of net earnings are vitiated by uncertainty upon this point. Working over these results by comparison per mile of line, it appears that the rate of increase in earnings per mile of line for five years prior to 1900, was approximately double the rate of increase of operating expenses per mile of line. The greatly lessened cost of performing additional business becomes at once apparent. But these latter conclusions, as has been said, cover only a brief period of time. Judging by the results over many years, it appears that changes both in the level of freight rates and of wages and prices have operated to leave the railroads not much better off than they were some time ago. The only thing which has saved them whole in the face of rising prices and wages since 1900, and especially since 1907, has been the rise of freight rates and the enforced improvements in operation. With the methods of transportation, such as size of cars and locomotives and train loads, as they were a decade ago, very real distress would be more widely apparent than it is. On the whole, the public seems to have shared in the benefits of these improvements to a considerable degree. This statement, however true for the entire railroad system of the country as a whole, does not by any means represent the facts for any single system. Moreover, it is not by any means clear how fully the railroad system of the country has been enlarged and improved out of surplus earnings. There is reason to think that foundations in some cases—the Pennsylvania road, for example—have been laid during these prosperous years, for largely increased tonnage in the immediate future without a corresponding growth of expenses chargeable to plant; in other words, that the transition to a distinctly higher grade of operation has been effected out of surplus earnings.
The comparison of gross and net earnings from operation, if expenditures have grown almost as fast as gross income, confirms the preceding conclusions. Surveying the chart for the period since 1890, it appears that net earnings for the railroads of the United States have more nearly trebled than doubled; the increase having been 177 per cent. up to 1910. This takes no account whatever of the immense volume of new capital added to the system. The entirely distinct question of the relative rate of return upon the investment will engage our attention at a later time. Examination of the years of rapid revival after 1897 by themselves, however, especially for individual companies, shows striking results. This is especially true of roads, not then developed up to a fair working capacity for their plants.
An interesting comparison with the previous decade, 1870 to 1880, exemplifies this relation still further. The gross earnings of the trunk lines of the United States decreased very greatly per mile of line from $7,211 in fact to $6,636 during the decade; but at the same time the net earnings steadily increased. This was due primarily to the great volume of business developed,—the ton mileage increasing more than three fold during these ten years. It happened despite the fact that the miles of line during the same period had more than doubled. The following decade, 1880 to 1890, was represented by an increase of only 82.7 per cent. in mileage, while the number of tons of freight hauled one mile increased by 132 per cent. Density increasing in this way, a corresponding ability to carry at a lower rate per ton was a necessary result. So indisputably has this law—that an expanding volume of business up to a certain point, may profitably be carried at a continually lowered cost—been proved, that it is estimated by so competent an authority as the Engineering Review that, provided sufficient tonnage be available for 2,000-ton freight train loads, a cost of one mill per ton mile can be attained. Its significance may be realized from the fact that the lowest revenue per ton mile reported for the United States is 2.21 mills per ton mile for the long haul soft coal business of the Chesapeake & Ohio.[58] This, of course, does not imply that any railroad in actual operation, carrying all kinds of freight including a large proportion of local traffic, can in the immediate future hope to attain this result. It is intended only to show that, provided the volume of traffic be large enough, the cost of operation tends to decline as a matter of course, until a condition of congestion for the existing plant has been reached. At this point a new cycle of costs of operation and of profits makes its appearance.
The most important single factor in the production of increasing returns upon a railroad is the density of traffic; that is to say, the amount of business which can be conducted with a given set of rails, terminals and rolling stock. In other words, it is the degree of effective utilization of the plant and equipment. It is too obvious to need demonstration, after what has been set forth concerning the nature of railroad expenditures, that economy of operation and, consequently, profits are more or less directly dependent upon this fact. Such effective utilization of the property may be secured in two ways: either by a large tonnage per mile of its line, or else by a concentration of such traffic as it may have into large train loads, which can individually be transported at low cost. The first of these economizes the fixed expenses for roadway and line which respond but slowly to enlargement of traffic, by distributing them thinly over a large tonnage; the second economizes the mere movement expenses which tend to grow less rapidly than the size of the trains. For neither fuel consumption nor wages of train crews expands pari passu with the paying load. Fortunate the lot of the railroad which enjoys both these advantages, of density of traffic per mile of line and of tonnage capable of such concentration in heavy train units.
Traffic density—the tons of freight carried one mile per mile of line—is readily computed. The ton mileage, representing the total transportation service, is merely divided by the number of miles of line operated. The following graded table illustrates the wide range of this figure, according to the location of different companies and the nature of their business, as well as the change in the last few years.[59]