STATEMENT OF HON. VAUGHAN J. GARY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA M- GAY. Thank you, Mr. Chairman. I am here merely for the se of presenting my constituent and friend to this committee. say to the committee he is eminently qualified by background experience to testify with some authority on this subject. re I came to the Congress 18 years ago I had some practice :eld of transportation. About that time a young man in Rich1 oktamed a pickup truck and organized what was known as the A-D) xe Lines. He started out with one truck. Today he is operat a common carrier-irregular route, with extensive operations in ga, South Carolina, North Carolina, and Virginia. His home still in Richmond. He has been a successful operator. He ved as president of the Virginia Highway Users Association, the organization of trucks in Virginia. i appearing here today as the president of the Common Carrier Irregular Route, of the American Trucking Associations, - I can say to you he is a person of absolute integrity. I have tom for many years and the committee can depend upon any ntation that he makes to them. !se great pleasure in presenting to you Mr. J. David Brothers. 7 @ CHAIRMAN, Thank you, Mr. Gary. We are pleased to have you M- GARY. Thank you, Mr. Chairman. - CHAIRMAN. Mr. Brothers, we will be very glad to have your STATEMENT OF J. DAVID BROTHERS, PRESIDENT, NEW DIXIE VERTHERS. Thank you very much, Mr. Gary. I certainly hope !st. appearing today as a spokesman for the American Trucking work very closely with the railroad industry in my own company. I simply am attempting to state the facts as I see them. My statement will be devoted to discussion of three major fallacies that underlie present efforts to seek major changes in our basic transportation law. The first fallacy is that there is a serious "crisis" in transportation requiring the proposed action. The second fallacy is that the proposed elimination of effective ICC minimum rate control would save the Nation's shippers billions of dollars in transportation charges. The third fallacy is that the Interstate Commerce Commission has not been sufficiently liberal in allowing the railroads to reduce rates on bulk and agricultural commodities and, therefore, the Commission's control over minimum rates must be removed. As has happened so often in the past, the Nation's railroads are seeking to have major surgery performed on the Interstate Commerce Act in order to solve what they claim is a "crisis in transportation." The railroad industry's cry of "crisis" has been echoing down the halls of transportation history for as far back as I can remember. It reminds me of an old proverb, heard often in the field of medicine. It is to the effect that the answer to a long life is to have a chronic illness and learn to take care of it. In many ways this has application to the railroad story. Their ever-present crisis in transportation is the railroad industry's chronic complaint. They have learned to keep it alive in the minds of the public, and to stay pretty healthy along with it. Let me, for example, quote the concluding paragraph from a story that appeared in a specimen issue of one of our national news maga zines. The story was referring to a statement made by the president of a large railroad and closed as follows: Railroad prosperity can be assured if railroads are encouraged to greater initiative in carrying on their work, if they are allowed to earn and pay a fair return to those who are willing to buy and hold railroad bonds and stocks, and if they have a margin of surplus as a credit basis to expand their facilities and equipment and to protect them against losses, depressions, and emergencies. When was this statement made? Yesterday, last month, last year! No. It was made in 1922 and I am quoting from a specimen issue of the first edition of Time magazine, dated December 30, 1922. There is no crisis in transportation today. However, let me hasten to add, with all the emphasis at my command, that while there is no crisis at this time there will be one, and one of serious proportions, if the railroads succeed in selling the Congress the deadly idea of cutting away the Interstate Commerce Commission's control over minimum freight rates. If Congress heeds the railroad complaint and takes the sharp surgical knife to the rate regulatory powers of the Commission we will be seeing the beginning of the end of effective transport regulation and of the transport system we have today. We would have real chaos in transportation, and this would be a crisis in the major sense of the word. Now, let me hasten to add that denial of the railroad industry's cry of crisis does not mean there are no problems in transportation. Transportation is a dynamic industry and we shall always have problems that require application of the best minds to solve. However, none of the problems is subject to solution in any way by a weakening the powers of the Interstate Commerce Commission. In fact, the pets that exist in transportation require a strengthening of the Interstate Commerce Act and of the Commission's authority rather a weakening of either. I actuality the "crisis" the railroad industry is crying about is not and problem in the overall sense of the word. What we have ay are "problem railroads" rather than a "railroad problem." If behind the generalizations regarding the railroad industry's on we find at once, like all industries, it is composed of comshaving varying degrees of financial success. There are good -a azd bad roads. The securities of some are "blue chips" ranking best on Wall Street; others are doing fairly well while still rers are not doing so well. Orinarily we would pay little heed to the railroads' cry of financial They have been making it so long it has ceased to be news. wever, since we are being asked to make drastic revisions in our transportation statute because of this plea, we should bring the to light and see just what the situation is. Tatay, the financial ills of any ailing railroad most often can be to two principal factors: profitable passenger service. : Heavy investment in obsolete facilities. Ironfable passenger service has been the albatross around the ad industry's neck for many years. In the 16-year period since 1 War II, 1946-1961, the class I railroads have had aggregate in passenger service amounting to more than $9 billion. Is the prime area of the difficulty faced by the railroads and Lana y of its impact quickly shows the variation in the relative of different railroads. It shows why it can be said that we have cem railroads." In order to bring these facts before the committee we have prepared a few m.ple charts to enable you to see the true impact of the rail-spasenger losses, and they are attached to my statement, Mr. Hat we have done is to take the total of 102 class I U.S. railroads treak them down into three groups, the yardstick being the amount nger service they perform. 1rt group are roads regarded as having heavy passenger traf5. with more than 8 percent of total gross revenues coming from zer service. The second group we call medium passenger traffic passenger traffic acocunting for 4.1 to 8 percent of total revThe third we classify as light passenger traffic roads, passen*e acoeunting for 0 to 4 percent of total revenues. data shown in all cases are for 1962. that I, group A, shows the operating results for 14 railroads, mert ng 56,093 miles of road. They had gross operating revenues million. These roads operated 26 percent of class I railroad rge and they accounted for 27 percent of total class I rail freight —and note this carefully-58 percent of the total passenger es of the class I roads. ism this group received 12.6 percent of their total revenue from erger service. But as a result of the heavy passenger burden, the net operating income was only 3.8 percent of total revenue from all services. Group B, the medium passenger traffic roads, consist of 22 roads operating 84,610 miles of road and having gross operating revenues of $3,334 million. They operated 39 percent of the mileage; accounted for 36 percent of the freight revenues; and 30 percent of total pas- . senger revenues. These roads derived 5.6 percent of their operating revenues from passenger service and their net operating income was 6.8 percent of total revenues from all services. Group C, made up of roads with light passenger traffic or none, consist of 66 roads, operating 77,982 miles of road. They had gross operating revenues of $3,246 million. They operated 36 percent of the mileage, handled 37 percent of the freight traffic but only 11.7 percent of the passenger traffic. Passenger revenues were only 2.2 percent of total revenues. For this group net operating income was 12.1 percent of total revenues from all operations. In quick summary, the heavy passenger traffic roads accounted for 30 percent of total class I railroad revenues and for only 15 percent of total net railroad operating income. The medium passenger tralie roads accounted for 35 percent of total rail revenues and 31 percent of net railway operating income. The third group, those with little or no passenger traffic, accounted for a little more than one-third, 35 percent, of total rail revenues and accounted for more than half, 54 percent, of net operating income of all class I roads. Chart II shows a regional breakdown of the 102 class I railroads. It shows generally the same information we have just discussed. What we believe comes forth quickly is the regional character of railroad difficulties, the eastern district, encompassing the Northeast and midAtlantic areas. This is the home grounds of the New Haven, the B. & O., the Pennsylvania, and the New York Central. What does this mean? We believe it means that the movement of freight traffic by railroad is still a pretty profitable business. It is only when the operating revenues from freight service are called upon to absorb the large deficits resulting from passenger operations that the financial picture of the railroads begins to worsen. Now this presents us with a paradox, if the problem of the railroads lies primarily with unprofitable passenger service how do they intend to cure it by seeking to establish lower rates on freight traffic? In fact, what logic is there at all in attempting to solve the passenger problem through manipulation of freight rates? It seems to me that the railroads are a good deal like the man who lost his collar button in the bedroom but went to look for it in the bathroom because the light was brighter there. It is also interesting to note that even with the burden of unprofitable passenger service the overall railroad picture does not look bad when compared with operations in other major industries. What I am referring to is the ratio of net income to gross revenue, or net income to gross sales. For the 10-year period, 1951-60, the class I railroads had an average net income to revenue of 7.19 percent. During this same period General Motors Corp. averaged 7.62 percent: General Electric Co., 5.62 percent; and United States Steel, 7.34 percent. In short, by this important financial yardstick, the railroad industry is not doing so badly. Now, I fully realize that these data will raise the blood pressure of e of my friends in the railroad industry. They will hasten to say e ratio of net income to gross revenue means very little. The imat thing, they say, is the railroad industry's return on investIn fact, the return on investment is the standard prop used - every performance attempting to show the poverty-stricken conof the railroad industry. Retread spokesmen never cease to quote the latest return-on-investgure as being too low but I have failed to find definite stateas to what would be satisfactory. However, assuming that al figure of 6 percent would be more acceptable, it is interestote that in only one year since 1922 have the railroads reached In 1942, a war year, the rate of return was 6.36 percent. of greater importance is that during the 1920's when their comzi was much less than it is today, they did not reach the 6 ↑ level I ditulty in this area lies not in the net income of the roads The investment base used to compute the rate of return. This and of the two points mentioned earlier in this statement, 1. in obsolete facilities. I don't take my word for the existence of unprofitable railroad Take the word of Mr. Jervis Langdon, Jr., now president Baltimore & Ohio. In June 1961, testifying before a congresal committee and speaking for the Association of American Railhe said: want to be able to contract the plant, the overall railroad plant, ¦¦ be large enough to serve the country and yet not so large as to be empacity of the traffic that we can get to support it. Mr James Symes of the Pennsylvania, Mr. Arthur Bayless of the A York Central and many another railroadman have expressed vr convictions, have said literally, or in effect, that we have too rvlroad structure for the business they can expect to get. for explicit, unmistakable terms listen to these remarks made fellow Virginian and friend, Stuart T. Saunders, president of Norfok & Western Railway Co., speaking at a Newcomen Society in New York. Said he: there is much surplus railroad mileage in this country today, and this 3 true in the East. of the approximately 225,000 mainline miles * mr je, 23 00 miles, or less than 10 percent, carry 50 percent of our fre ghit ton miles, and at the other extreme, 67,000 miles, or about 30 percent per clay 2 percent of the total freight business, In every hearing before the Congress that has dealt with transtemat or, questions involving the railroad financial condition, the rate star fas been cited as in need of immediate upward correction rulroads are to survive or avoid nationalization. The rate of - rot improved, the rails are still pleading but they are still g and remain out of the clutches of Government ownership. gest there is strong reason to suspect the rate of return, as tested and used by the railroad industry as being an incomplete ℗ misleading measure of their true condition. The possibility of ng the case aroused my curiosity to the point where I began tek other measures of financial stability. Not being a specialist `road finance I began to read the reports of those who are. My arh led me to Moody's Transportation Manual. I selected the |