Racing Toward an Urgent Rescue

ANY Congressman, investor or shipper who might have thought that the Government solved U.S. railroads' financial problems a year ago, when it took over the operation of most passenger trains, has been getting a rude awakening. Congress is now studying six major bills that would extend further help, and industry spokesmen are warning that the legislators must race in order to rescue the nation's rail system from a threatened collapse. They do not seem to be crying wolf; the railroads' plight is bad enough to have won the sympathy of their chief competitors. Truck lines and many barge operators are backing one of the bills because they fear that a final breakdown of the U.S. rail network would force Congress to nationalize the system--and such a move would set an ominous precedent for the whole transportation industry.

Five of the nation's 69 Class I railroads--the major companies that account for 99% of rail traffic--already are bankrupt. The Interstate Commerce Commission last month listed another twelve, including the Chicago and North Western, Erie Lackawanna and Rock Island, as "marginal," meaning that they could go broke at any moment. As a whole, the industry is making money, but pitifully little. Railroad net income in 1971 totaled $355 million, or 2.7% of revenues--and much of that came from non-railroad operations. That is not enough to attract the loan money necessary to repair and modernize the railroads' vastly overbuilt network of tracks, yards and systems. Transportation Secretary John Volpe, a dedicated free-enterpriser, warns that large chunks of the railroads' total mileage must be scrapped immediately to save costs or the whole system will wind up broke and/or nationalized "within three to ten years."

The major railroads have no trouble borrowing to buy new cars: the cars make splendid collateral if a loan goes into default. The result is that the companies operate modern covered hoppers, flatcars and gondolas over roadbeds that are rapidly deteriorating. The roads have been able to show what profits they have largely by deferring maintenance that is essential. For example, rails are being replaced on a schedule that assumes the average rail will last 120 years, although it actually remains serviceable for only half that long.

The results are becoming apparent.

Between 1966 and 1970, derailments doubled to 2,394 a year. Santa Fe President John Reed likens the situation to maintaining a house in good repair: "If you don't do a little every year, it eventually starts coming apart all at once." Volpe estimates that in order to keep up with expected increases in traffic, railroads will have to spend an awesome $36 billion or more on yard and track rebuilding and new rolling stock in the next ten to twelve years. That is roughly double their current annual rate of capital expenditures.

Placing the blame for this mess is not a simple task. Labor unions, rail management and the Government all share the responsibility.

Labor costs now consume 600 of every dollar spent to move freight by rail. The industry deals with 15 major unions that are never hesitant to strike. Right now, the United Transportation Union, representing engineers, brakemen, firemen and conductors, is planning to strike Penn Central in June, when a Government-imposed cooling-off period expires. Seventy-year-old work rules force railroads to pay train crews a full day's wages for every 100 miles traveled --a distance that the fastest diesel locomotives cover in two hours. Some states require trains to carry "full" five-man crews. Says Alan Boyd, former Transportation Secretary and now head of the Illinois Central: "We know we can run a safe train with two men."

Management policy has been equally archaic. Railroads have rarely attempted to put an aggressive salesmanship effort behind their services, a trick that truckers were quick to learn. That failure goes far to explain the drop in the railroads' share of intercity freight traffic to 39% now from 56% in 1950. Some railroads also have paid out in dividends more than they earned in profits, a practice that did much to bring the Penn Central down.

The Government also has bled money from the railroads. Under Section 22 of the Interstate Commerce Act, passed in 1887, railroads have been pressed into hauling Government freight free or at reduced rates. That hurts because the Government is now the railroads' largest customer. Through the ICC, the Government has further sanctioned an impossibly complicated railroad rate structure. The ice maintains an unindexed file of 43 trillion different rates on varying weights of varying commodities moving varying distances. The general level of rates is both too high and too low: too high to prevent traffic from fleeing to competing carriers; too low to generate much profit on what freight is left.

Cash Transfusion. None of the six bills that Congress is now considering have much chance of passing intact, but portions of two stand a fifty-fifty chance of reaching President Nixon's desk by year's end. The two are the industry's proposed Surface Transportation Act --supported by the railroads' competitors--and the Administration's pending Transportation Assistance Act. Each would provide an immediate transfusion of cash through a Government guarantee of loans. The industry's bill seems preferable because it would provide $5 billion in guarantees for loans that could be used largely to rebuild tracks and yards. The Administration's bill would guarantee $3 billion in loans that could be spent only to buy new rolling stock--hardly the railroads' sole worry. In other respects, both would attack basic problems. The Administration and the industry would permit the railroads to abandon tracks that produce little or no profit, speed up and simplify rate-making procedures, and forbid discriminatory taxation of railroads by states and localities. The Administration, in addition, would eliminate the preferential treatment given to Government freight.

That seems a minimum program to give the railroads a chance to pull out of their difficulties. It certainly will not solve all the problems: railroad management must learn more modern ways, and the Government must get tougher with rail unions that insist on featherbedding forever.

The technology exists to build a modern rail network. The Santa Fe now boasts a $12 million automated yard in Kansas City that can handle switching for 3,000 cars a day with only three men to uncouple them. It is technically feasible to run trains with no crewmen except an engineer to blow a warning whistle in dangerous situations. At present, though, these developments only make more painful the contrast between the advanced rail system that the U.S. could have and the dilapidated one that exists.

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