1960 to 1970: what the heck happened?

[MichaelSol]

      What effect did the effect of the drying up of business on branchlines in the 60's have on railroad profits?  That seems to be about the time that most railroads were trying (unsuccesfully, mostly) to shed unprofitable branch lines.

Two points:

1. Did traffic "dry up"?

2) Did the 60s really represent a "movement" about branchlines?

You created several presumptions in your comment. Is there a basis for them?

I read that more as a question than comment - and read "drying up" as refering to a general reduction in branchline traffic (which had been going on well before the 60's. 

     Michael:  I think erikem perceived this more the way it was intended-as a question, not a definitive statement by any means.

     To be more general:  It seems the railroads had been trying to thin out their unprofitable branch lines from about WW II on.  The shippers involved, and the ICC seemed to resist this.  Did this greatly effect the fortunes of railroads in general,during the period we are discussing in this thread?

Well, the reason for my post was that railroads began the abandonment process in the 1920s, by my reading of the statistics. And, rather than anything necessarily negative about branchlines per se, the process appeared -- to me -- to represent a normal flexibility of a large network adjusting itself.

Certainly, as trucks replaced branchlines, this represented a change of technology that didn't hurt railroads, necessarily, but I'm reluctant to agree that it represented a "1960s" phenomenon.

Line segment analysis at MILW, for instance, during that period showed that several formerly "sleepy" branch lines suddenly became big revenue generators in the 1960s. Others went back to sleep. What I saw over a 27 year period was more of an "ebb and flow" rather than a decline of the financial contributions of branch lines per se.

Not done with that analysis yet, but that was a preliminary survey -- another 250,000 data points and I can offer a stronger opinion on the subject.

 

[Murphy Siding]

What I saw over a 27 year period was more of an "ebb and flow" rather than a decline of the financial contributions of branch lines per se.

      In that case, I would wonder if that "ebb and flow" of rail traffic turn all into ebb between 1960 and 1970?  That is a period when a lot of new highways, especially interstates, came on line.  They moved a lot of traffic and mail off the railroads.

[MichaelSol]

What I saw over a 27 year period was more of an "ebb and flow" rather than a decline of the financial contributions of branch lines per se.

      In that case, I would wonder if that "ebb and flow" of rail traffic turn all into ebb between 1960 and 1970?  That is a period when a lot of new highways, especially interstates, came on line.  They moved a lot of traffic and mail off the railroads.

Well, like I say, I've looked at that for one large Midwestern/transcontinental road, and that shift just isn't there. Maybe it was everywhere else but ....

The Rail industry is so full of "conventional wisdoms" and "received truths"  -- baloney in new packages --I am simply skeptical.

In many cases, railroads intentionally hung on to little used branchlines. Like a tree farm -- maybe of little value right now, but it could provide our bread and butter in the future. BNSF is hanging onto a couple of such lines nearby.

Branchline abandonment proceedings did represent that question at all times, and it wasn't an easy answer for railroads or for the ICC. The ICC was charged with protecting the overall integrity of the US Rail System from individualized cannibalization under a given management regime at a given railroad company. There was, and remains today under the STB, regulatory oversight to protect the future needs of the nation from cannibalization or destruction of what is becoming an irreplaceable resource, much like water, air, coal, and oil.

The process was somewhat perplexing. From one perspective, it makes sense. From another, it seems irrational.

The railroad needed to show that the branchline represented a financial drain on the resources of the company. Herein was the problem. Most of the time, they actually didn't -- or it was at least negligble in the broad scheme of things. That's the problem with gravel, steel, creosoted wood, and steel spikes -- they are fairly robust and particularly if they are not being stressed by use. Oh yes, eventually ... but that was a long time.

So, in order to show a "loss" which justified abandonment, the railroad had to go and spend some good dollars on some piddling work, fix a fence, or replace some ties -- then they could show expenses exceeding revenue. Until they did that, however, any kind of traffic at all on those lines showed them to be profitable -- and they were.

And there was a time frame involved in that. Many railroads had spent prodigously on maintenance, including branchlines, during WWII, since an "excess profits" tax was in place, and they might as well spend the money on something instead of to taxes. These branchlines, even in the post WWII losses to trucking, maintained their integrity for 20, 25, 30 years without needing much real maintenance.

Well, the timing of that of course put it right about when all sorts of other problems started to afflict the rail industry -- 1965-1980 -- and the "railbank" of branchlines began to require reinvestment if they were going to be used, or abandonment if they weren't. Too, that was the beginning of the point at which the write downs of remaining depreciation wouldn't kill the bottom line, and abandonments made more sense -- gradually -- from an accounting standpoint. Kind of a "fish-or-cut-bait" point in time.

The ICC still required the "loss" to be shown to meet the regulatory requirements for abandonment -- just the wrong time to ask managers to go out and waste some money installing new rail just so they could get permission to tear it out.

There was a logic to the system, and logic to the management frustration with that system, and, in each of their respective worlds, their logics seemed irrefutable and the other position ridiculous.

 

[Murphy Siding]

The above post contains some insight into things a guy doesn't think about often.  Thanks.

  

In many cases, railroads intentionally hung on to little used branchlines. Like a tree farm -- maybe of little value right now, but it could provide our bread and butter in the future. BNSF is hanging onto a couple of such lines nearby.

 

     I'm curious now which of the BNSF lines are you thinking of?

[MichaelSol]

     I'm curious now which of the BNSF lines are you thinking of?

Well, this isn't something I keep track of at all. In my neck of the woods, I "understand" -- that's a big qualification -- that four "lines" are unused, but not abandoned. One near Great Falls. Helena to Butte. Drummond to Phillipsburg. Homestake to Butte. On the last two, I notice that the rail and ties remain in place even though they have been unused for 20 years or more -- which suggests to me that there are original deeds out there with reverter clauses -- meaning salvage isn't an option unless they really want to lose the line completely.

 

[bobwilcox]

The FRA made it possible to show a "loss" without having to poor some money into track maintance.  In the 1970s the FRA came out with track standards saying the mininimum was Grade I. It would let you run at 10 MPH but you could not carry haz. mat. We would go into the hearing and prove the existing track was below Grade I and put into the costs the "expense" for binging the track up to the minimum requirement.  We also had a Federal case where a group of shippers tried to force us to bring a line up to Class I but thats another story.

[MichaelSol]

The 1906 date is very sharply scribed in railroad history. After that date railroad expansion and heavy reconstruction nosedived. (This is old hat, my friend. A.C. Kalmbach and D.P. Morgan co-authored the article “The Golden Age of Railroad Construction”: in the February 1949 issue of Trains that described and analyzed this watershed quite sufficiently.  Well, at least I thought they had!)

They hadn't.

After recovery from the Panic of 1907, 1909, most railroads began a period of extensive renovation and improvement. There was an explosion of investment in rebuilding and construction. The Milwaukee made improvements totaling approximately $318 million. The Great Northern made improvements of approximately $122 million. The Northern Pacific spent approximately $180 million, The North Western spent $212 million. The Burlington spent $192 million.

The Milwaukee laid approximately 2200 miles of additional track, compared to 507 for the NP, 1,264 for the GN, 363 for the "Q" and 802 for the North Western. The rate of return on the "new" investment average was .5% among the five railroads for this time period. The Northern Pacific suffered a negative rate of return of 4.2% on the money invested during this time; the Great Northern enjoyed a positive rate of return of 4.6%. The Milwaukee was just slightly better than the average of the five railroads, at .6%. This was during the period of government control, drought, and severe and sustained agricultural depression.

If the Hepburn Act had an effect on railroad investment, someone forgot to tell the railroads.

 

[nanaimo73]

 If the Hepburn Act had an effect on railroad investment, someone forgot to tell the railroads.

I have a feeling, with no proof whatsoever, that without the Hepburn Act the railroads would have built more than they did. I don't believe you could show what their investment would have been without the Act.

[MichaelSol]

 If the Hepburn Act had an effect on railroad investment, someone forgot to tell the railroads.

I have a feeling, with no proof whatsoever, that without the Hepburn Act the railroads would have built more than they did. I don't believe you could show what their investment would have been without the Act.

As I mentioned above, the contemporary literature for the period 1910-1914 shows railroads preparing to expand in all directions. Too, the additional investment in the period 1909-1924 shown for the roads above exceeds their investment, 1893-1906, by a considerable amount.

It may be true that no one can "prove" they wouldn't have spent more but for the Hepburn Act. But that's not an evidentiary question, because no one can prove a negative. The proposition is that the Hepburn Act caused a "nosedive" and yet it is the proof for that, not that even more may have been done, that is lacking in the statistical record.

I am sure you will see the logic that several railroads which invested heavily after 1908, and spent more than they did prior to the Hepburn Act, is a proof. And the "nosedive" went the wrong way for a nosedive.

Perhaps you meant to ask for proof of the nosedive and how it was connected to the Hepburn Act rather than the more obvious influences of the Panic of 1907 and the destruction of the European bond market, let alone the traffic losses to the Panama Canal after 1914?

 

 

[beaulieu]

     I'm curious now which of the BNSF lines are you thinking of?

Well, this isn't something I keep track of at all. In my neck of the woods, I "understand" -- that's a big qualification -- that four "lines" are unused, but not abandoned. One near Great Falls. Helena to Butte. Drummond to Phillipsburg. Homestake to Butte. On the last two, I notice that the rail and ties remain in place even though they have been unused for 20 years or more -- which suggests to me that there are original deeds out there with reverter clauses -- meaning salvage isn't an option unless they really want to lose the line completely.

 

Another item is that BNSF doesn't want MRL to reach Butte, or more specifically Silver Bow and the UP.  I think that if they abandon a line they have to remove bridges and perhaps seal tunnels too.  This could eat up money frome the salvage of rail and ties.

 

BTW - Thank you Michael for the idea of purchasing older Moody's Transportation Manuals. I bought a 1968 Edition as the result of our dicussion and there is a fascinating amount of information in there. The price for recent issues put me off, but used older copies are quite reasonable. 

[MichaelSol]

BTW - Thank you Michael for the idea of purchasing older Moody's Transportation Manuals. I bought a 1968 Edition as the result of our dicussion and there is a fascinating amount of information in there. The price for recent issues put me off, but used older copies are quite reasonable. 

Those things are addictive. There is so much good information all in one place.

[markffisch]

I love this thread.

 A couple of thoughts to ponder. The question was raised as to why the eastern roads were more impacted by the economy of the 60's and 70's than the western roads.  A possible factor was the traffic mix.  As was pointed out, manufacturing in the east headed south and west during this time frame.  Part of it was to avoid the highly unionized work force and partly to reduce other costs.  Another factor was the disappearance of coal as the primary heating fuel.  Up through WWII, coal was a major source of traffic for many eastern roads -- CNJ, LV, Erie, Lackawanna, PRR, CNE and the NH.  Transport of coal for heating is different than transport for power plants or heavy manufacturing -- it lends itself to support what otherwise would be marginal or unprofitable branch lines.

Another factor mentioned but not fully appreciated was the cumulative impact of more than a decade of high inflation.  Partly due to the oil price hikes in the 70s but mostly due to the way the Vietnam war was financed, inflation ran into double digits for a long time.  A fascinating study is how the government caused the inflation on one hand while seeming to fight it on the other.  I think this is where the impact of the ICC was most strongly felt.  The government was being pressured, through the political process, to hold the line on costs using the regulatory process as a weapon.  When costs in nominal dollars rise due to inflation, but a business cannot respond by commensurately raising its prices, it is losing real money.  If nothing else, the process required to raise rates (documenting higher costs and requesting approvals that took months if not years to obtain) guaranteed the regulated industries would fall behind.  It wasn't just the railroads.  The electric power and telephone industries faced a constant cycle of rate hearings where one filing would finally be approved with the next either already pending or waiting to be filed.  The public perception was that inflation was out of control.  Rather than attacking the true cause (deficit government spending) the political process responded with either half baked or truly detrimental responses.  Witness Nixon's implementation of wage and price controls or Ford's WIN (whip inflation now).  At the same time, labor used their allies in goverment to attempt to keep pace with rising prices.  For the railroads, and other heavy industries, it was a disaster.  A previous poster mentioned that basically the railroads started eating the seed corn.  By not maintaining the right of way and cutting back in investing (in real dollars) to replace the equipment acquired after WWII, it is not suprising that reliability went way down.  That gave the trucks an opening to start winning over shippers who may have been more economically served by rail but were spooked by the real problems.  And, just for fun, add in the post merger issues that many of the roads experieinced in that same time period.

A third factor is the quality of management.  If you assume 1906 as a starting point, by the 50s there would have been no one in management at any of the railroads who had operated in a non regulated environment.  Many of the managers would have, in fact, learned the ropes from managers who had only experienced regulation.  A previous poster noted that regulation tends to be blamed for what are primarily failures of management.  I could not agree more.  While regulation imposes significant obstacles to innovation, strong managers can thrive.  Weak managers build kingdoms complete with castles and moats to preserve the status quo.

My bottom line: an economic situation that was unprecedented in the managerial lifetimes of a marginal management force damn near wrecked a premier industry.  The fact that the government created the economic situation and was partly responsible for the regualtory framework through which management had to operate, made everything worse.