Trains.com

1960 to 1970: what the heck happened?

9925 views
131 replies
1 rating 2 rating 3 rating 4 rating 5 rating
  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Wednesday, December 27, 2006 10:07 PM
 BaltACD wrote:

Strike three was the  building of the Interstate highway system that was conceived by the Eisenhower administration in the middle 50's but hit full construction stride in the 60's.  The Interstate system made long haul trucking a vialable alterative to rail for the high value cream of rail traffic, thus skiming the most profitable of rail traffic. 

If you have some data to support this, I would like to see it.

I don't have enough data to make a definitive conclusion, but at least some data. The Sixth (later, Fourth) largest RR in the country was virtually enveloped along its profitable routes by I-90 and I-94. Absolutely, it lost traffic to the Interstates. I testified before the ICC on carloading losses during that era. I recall that I used the word "hemorrhage."

What I hadn't looked at, and didn't know, was that as it did so, its Operating Ratio continually improved.

Now, how about that?

Apparently, it lost expensive short haul traffic in a greater proportion than it lost long haul traffic. There was a lot of expensive short haul stuff to haul around. Good riddance.

For long haul, admittedly, the Company had a Hotshot that beat the long haul trucks on time and price, and so perhaps it did not suffer the losses that other companies did. I can't extend the analysis any further than that observation for that particular Company except to note that my control railroad, the CBQ, suffered a declining OR during the same period, 1956-1969, but I am unaware of whether or not it had something comparable to Milwaukee's #261/262 to go against the long haul truckers.

 

 

  • Member since
    December 2001
  • From: Smoggy L.A.
  • 10,743 posts
Posted by vsmith on Wednesday, December 27, 2006 4:42 PM
Simple 
Roads and Planes
Vast improvements in both systems post-war thru to the 1970s were the primary reasons for the downturn. Their may be other factors as discussed that hastened the downturn, but the basic truth is that as each system expanded there was a corresponding decrease in RR traffic with passenger travel being absorbed by improved air travel and better autos and highways, and frieght traffic being syphoned off by higher capacity trucks operating on the new interstate systems, and particularly in urban areas where trucks could deliver goods faster and more direct than a switcher moving a box car could. The railroads did try to adapt, some successfully, other not or not quickly enough.

   Have fun with your trains

  • Member since
    May 2003
  • From: US
  • 25,292 posts
Posted by BaltACD on Wednesday, December 27, 2006 4:09 PM

Without wading through all of everyone else's theories....I'll present my personal observations....

 

The regulation provided by the ICC prevented the carriers from running their operations as a business...The carriers did not have pricing power as the ICC had to approve any rate changes and the carriers could not eliminate money losing operations (both passenger and freight) without ICC and other regulators approvals, which when granted took several years of continued mondy losing operations from request to approval. 

The second strike against the carriers was the relative downturn in basic industry within the US with the eventual virtual demise of the US steel industry....the raw materials and finished products of the steel industry were a floor of steady business that the rail industry counted on and the floor was continually sinking. 

Strike three was the  building of the Interstate highway system that was conceived by the Eisenhower administration in the middle 50's but hit full construction stride in the 60's.  The Interstate system made long haul trucking a vialable alterative to rail for the high value cream of rail traffic, thus skiming the most profitable of rail traffic. 

Put all three strike pitches together in the same plate apperance and you have the rail industry striking out.

 

Never too old to have a happy childhood!

              

  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Wednesday, December 27, 2006 10:13 AM
 futuremodal wrote:

Market share, increased revenues, increased dividends.........

Let's just say that I have yet to see anything that would convince me that there would be much profit in such an operation. 

"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    January 2003
  • From: Kenosha, WI
  • 6,567 posts
Posted by zardoz on Wednesday, December 27, 2006 10:11 AM
 futuremodal wrote:

 As I have pointed out time and again, coal and grain can move at 125 mph along with more time sensitive items...

Gee, I wonder how far from a signal I would have to apply the brakes to safely stop an 18,000 ton coal train, much less a mixed manifest train? 

Even with cab signals, EP brakes, and full dynamics, the entire signal system would have to be redone to accomodate such speeds, along with huge investments in track structure and perhaps even redesigning the basic freight car.

  • Member since
    March 2016
  • From: Burbank IL (near Clearing)
  • 13,540 posts
Posted by CSSHEGEWISCH on Wednesday, December 27, 2006 10:09 AM
 futuremodal wrote:
 Datafever wrote:

I'm not sure that the railroads have ever had much to gain by trying to keep every single transportation dollar.  Some of those dollars come with just too high a price tag.

Let's look at a Chicago to Denver haul.  That's about 1000 miles.  Dock to dock, a truck that averages 50 mph would take 20 hours.  Throw in some sleep and eat time, and maybe it would take 30 hours or so.

How about a TOFC attached to a passenger train?  First there is the time from the dock to the RR loading platform and the time to load the trailer onto the flatcar and secure it - probably at least an hour.  Then there is the wait for the scheduled train departure - another six hours?  Then comes the 12+ hour trip at an average of 80 mph.  At Denver, the flatcar has to get switched out and moved to an unloading platform - another couple of hours.  And then the trip from there to the receiving dock.  Even at optimum, maybe there have been 8 to 10 hours saved.

This is an example of what the railroads might have done in terms of wasting time and efficiency, but of course they wouldn't have had to do it in such a convaluted way.  First, who says the TOFC had to be attached to the passenger consist?  Run it as a second section of the passenger consist, aka a dedicated run.  If you have to run both in a single consist, use the TOFC terminals as the point to point reference, and let the passenger portion be switched in and out.

In other words, someone with some brain cells could have figured it out to make it work.

But at what cost?  What would the RR's gain be to keep this traffic?

Market share, increased revenues, increased dividends.........

As I alluded to in my previous post, ATSF did this with the Super C, although there wasn't any 90 MPH running, I believe that there was a lot of 70+ MPH speed involved.  Until they got the mail contracts, the Super C was an operating success and a marketing flop.  Not too many customers were willing to pay a premium rate for the extra speed.  Any increased revenues were offset by the increased costs and the the operation was discontinued shortly after the mail contracts were cancelled.

Increased market share sounds nice on paper, but a lot of airlines have put a lot of red ink on their balance sheets trying to maintain or increase market share.

The daily commute is part of everyday life but I get two rides a day out of it. Paul
  • Member since
    April 2005
  • From: Nanaimo BC Canada
  • 4,117 posts
Posted by nanaimo73 on Wednesday, December 27, 2006 10:00 AM

From the August 1972 Trains-

Last year these railroads lost money: Ann Arbor, Boston and Maine, CP Rail (International of Maine), Jersey Central, Fort Worth and Denver, Grand Trunk Western, Lehigh Valley, Long Island, Penn Central, Pennsylvania-Reading Seashore Lines, Reading, and Rock Island. On the other hand, Southern Railway posted record figures for revenue and net income after taxes, split its preferred and common stock 2 for 1, and reported more upward trends in the first quarter of 1972.  

Dale
  • Member since
    July 2006
  • From: Indianapolis, Indiana
  • 191 posts
Posted by G Mack on Wednesday, December 27, 2006 9:25 AM

Hello everyone!

In one of his previous post, Gabe mentions the Southern Railway as, in his opinion, one of the premier railroads. This is a company that I have followed through the years also. It always seemed to be one of the more successful companies, yet, one that you didn't hear much of, a "quiet" company. It never stood out like a New York Central or Union Pacific. And if you look at it's route structure, it didn't seem to serve an industrial region, but one that was rather rural. I once read that it was "the biggest railroad that went from nowhere to nowhere".

Any thoughts on this? I hope I'm not intruding onto the thread, but this is a question that has been in the back of my mind for some time and this thread brought it to the forefront when Gabe mentioned his observation.

G Mack

  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Wednesday, December 27, 2006 8:22 AM
 Datafever wrote:

I'm not sure that the railroads have ever had much to gain by trying to keep every single transportation dollar.  Some of those dollars come with just too high a price tag.

Let's look at a Chicago to Denver haul.  That's about 1000 miles.  Dock to dock, a truck that averages 50 mph would take 20 hours.  Throw in some sleep and eat time, and maybe it would take 30 hours or so.

How about a TOFC attached to a passenger train?  First there is the time from the dock to the RR loading platform and the time to load the trailer onto the flatcar and secure it - probably at least an hour.  Then there is the wait for the scheduled train departure - another six hours?  Then comes the 12+ hour trip at an average of 80 mph.  At Denver, the flatcar has to get switched out and moved to an unloading platform - another couple of hours.  And then the trip from there to the receiving dock.  Even at optimum, maybe there have been 8 to 10 hours saved.

This is an example of what the railroads might have done in terms of wasting time and efficiency, but of course they wouldn't have had to do it in such a convaluted way.  First, who says the TOFC had to be attached to the passenger consist?  Run it as a second section of the passenger consist, aka a dedicated run.  If you have to run both in a single consist, use the TOFC terminals as the point to point reference, and let the passenger portion be switched in and out.

In other words, someone with some brain cells could have figured it out to make it work.

But at what cost?  What would the RR's gain be to keep this traffic?

Market share, increased revenues, increased dividends.........

  • Member since
    March 2016
  • From: Burbank IL (near Clearing)
  • 13,540 posts
Posted by CSSHEGEWISCH on Wednesday, December 27, 2006 8:05 AM
Adding to datafever's points about going after every last transportation dollar:  in the example he cited, the "Denver Zephyr" ran 16 hours Chicago-Denver, averaging just over 60 MPH.  This implies a lot of 90 MPH running, a speed that most freight cars aren't capable of handling.  So you would need some specialized high-speed flatcars for the service and I wouldn't expect the 16-hour timing to hold up with the extra tonnage unless you really piled on the power, like ATSF did with the Super C, which drives up operating costs.  Any specialized high-speed equipment would have to operated in a dedicated pool, which increases capital costs.  And you would still have to match the truck rate to even have a chance to get the business, which isn't guaranteed by any stretch.
The daily commute is part of everyday life but I get two rides a day out of it. Paul
  • Member since
    June 2002
  • 20,096 posts
Posted by daveklepper on Wednesday, December 27, 2006 2:14 AM
Some railroads did go after this traffic.   Example overhight OAK POINT, NYC -BOSTON of the NYNH&H.
  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Wednesday, December 27, 2006 12:32 AM

I'm not sure that the railroads have ever had much to gain by trying to keep every single transportation dollar.  Some of those dollars come with just too high a price tag.

Let's look at a Chicago to Denver haul.  That's about 1000 miles.  Dock to dock, a truck that averages 50 mph would take 20 hours.  Throw in some sleep and eat time, and maybe it would take 30 hours or so.

How about a TOFC attached to a passenger train?  First there is the time from the dock to the RR loading platform and the time to load the trailer onto the flatcar and secure it - probably at least an hour.  Then there is the wait for the scheduled train departure - another six hours?  Then comes the 12+ hour trip at an average of 80 mph.  At Denver, the flatcar has to get switched out and moved to an unloading platform - another couple of hours.  And then the trip from there to the receiving dock.  Even at optimum, maybe there have been 8 to 10 hours saved.

But at what cost?  What would the RR's gain be to keep this traffic?

"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Wednesday, December 27, 2006 12:05 AM
 gabe wrote:
 MP173 wrote:

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

Thank you.  For a minute, I was fearful to point out the 2000 lbs, in this case pink, elephant in the room that I thought I was seeing.  I really do not understand the relationship between an 80 mph speed limit and the collapse of the rail industry that I seem to observe in the 70s. 

Whether a steamship is hauling intermodal containers for a three week voyage that then sits in a dock for a few days, whether it is grain that might take as much as a month to transport from a farmer's silo through grain bins and what not, or merchandise freight that dwells in a yard three days regardless of transit, I never saw how the 7 hour-benefit of an increased speed limit might rescue the industry.

Added speed might help capacity.  But, the issue of the 70s was getting rid of excess capacity, not making room for more.

Gabe

Well yes, this was pre 1960, but there was that *other* spector that haunted the rail industry - the loss of market share to OTR truckers.  Instead of nipping this unnatural economic weed in the bud, the railroads bungled it by characterizing trucking companies as the "enemy" rather than as a made-for-order customer.  Mastermiding an intramodel switch of freight from boxcars to TOFC trailers would have alleviated the railroads from the more mundane aspects of moving freight - consignment, dock loading and unloading, aka containerization before containerization became a buzz word - and would have allowed them to focus on the simplest and most lucrative aspects of transport.

In order for the railroads to keep the majority of trailerload traffic off highways, they'd of had to beat the between terminal transit times of OTR's to conpensate for the intermodal terminal delays.

Didn't the original Zephyr average around 80 mph between Chicago and Denver?  The average trucking time was probably more around 50 mph during the same period.  Thus, there seems to be more than enough of a rail speed advantage to make up for terminal transloading of trailers and still beat the OTR's dock to dock.

  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Tuesday, December 26, 2006 11:15 PM
 Datafever wrote:
Thank you, Mr. Sol.  That was quite enlightening.
 

Enlightenment --

"Ignorance means the absence of enlightenment, that is delusion.  ...[W]e speak of fifty-two stages, of which one [the first] is a stage where the mind attaches itself to any object it encounters.

"When I look at a tree, I perceive one of the leaves is red, and my mind 'stops' with this leaf.   When this happens, I see just one leaf and fail to take cognizance of the innumerable other leaves of the tree.  If instead of this I look at the tree without any preconceived ideas, I shall see all the leaves.  One leaf effectively 'stops' my mind from seeing all the rest.  But when the mind moves on without 'stopping,' it takes up hundreds of thousands of leaves without fail."

[Suzuki, Daisetz T., Zen and Japanese Culture, 1959, pp. 95-96]

 

It was a good thread.

  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Tuesday, December 26, 2006 10:52 PM
Thank you, Mr. Sol.  That was quite enlightening.
"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Tuesday, December 26, 2006 10:42 PM
 Datafever wrote:

Using the BN merger as an example (merely because I am a little more familiar with that one, which isn't saying much) --

NP and GN announced in 1960 of their plans to merge.  They filed in 1961.  The merger was completed in 1970.  That seems like an incredibly long process, even for a highly regulated environment.  Could you (or anyone else) elaborate on why that merger (or mergers in general) took so long back then?

Well, your timeline combines two proceedings.

A formal application was made to the ICC February 17, 1961.

A hearing examiner approved the proposed merger in a report issued August 24, 1964.

On April 27, 1966, the ICC rejected the proposed merger, stating that it was not "consistent with the public interest." This was based primarily on opposition from within the rail industry -- the process consumed five years.

On July 26, 1966 the Northern Lines asked the ICC to reconsider its decision; but at the same time they assiduously cultivated the managers of the Chicago and Northwestern and the Milwaukee Road -- the primary opponents of the orignal merger application. Essentially, this was the beginning of a second proceeding.

Given that the Northern Lines used tactics of negotiation rather than confrontation, the approval process of the resubmitted application moved much faster. Both MILW and CNW consented to the merger based on conditions accepted by the applicants. On November 30, 1967, the ICC approved, 8-2, the creation of the Burlington Northern Railroad. A little more than a year from reapplication to approval -- pretty fast for a big merger.  A formal merger date of May 10, 1968 was approved.

However, during that time, Department of Transportation economists had been studying railroad mergers, and concluded that "the economic evidence is that the cost savings arguments for large railroad mergers have to be very largely discounted, and must be applied to individual cases with very great circumspection." United States Government Department of Transportation, Western Rail Mergers (Washington, D.C.: U.S. Government Printing Office, 1969) p.13.

Based on the existing econometric studies, the US Department of Justice appealed the ICC 1967 decision through the federal court system. The United States Supreme Court approved the Northern Lines merger February 2, 1970, in a 7-0 vote. On March 3, 1970, the Burlington Northern Railroad formally came into existence.

 

  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Tuesday, December 26, 2006 10:08 PM
 MichaelSol wrote:

Well, the "cash" mght have gone out the door to dividends. Every railroad in serious trouble 1965-1980 had been engaged in very serious merger efforts during the 1960s. While I would agree that by and large the ICC's efforts to "get it right" backfired into time-consuming, time-wasting, proceedings, I also note that the rail industry itself bore a large burden for time-consuming objections, appeals, and argument, often based purely on obstructive litigation tactics rather than honest participation in the process.

Using the BN merger as an example (merely because I am a little more familiar with that one, which isn't saying much) --

NP and GN announced in 1960 of their plans to merge.  They filed in 1961.  The merger was completed in 1970.  That seems like an incredibly long process, even for a highly regulated environment.  Could you (or anyone else) elaborate on why that merger (or mergers in general) took so long back then?

 MichaelSol wrote:
 

I think railroads would have benefitted from infrastructure investment no matter what. High inflation was a boon to discounting debt, but an enormous obstacle to railroads genuinely growing during the 1970s, such as Milwaukee. Recall, railroads themselves were "investing" heavily in merger efforts during the 1960s. Infrastructure had to wait until the merger was resolved.

Econometric studies -- Kent Healy -- suggested that mergers would harm the industry, rather than help it. Penn Central proved it. Burlington Northern threaded the eye of a needle with a camel. It was close. Had it not been for the extraordinary planning by Robert Downing and Worthington Smith, the outcome could have been considerably different and almost was.

Did those studies pinpoint where the diseconomies of scale were likely to occur?  And under what circumstances that they would occur?

If so, would it not be possible to organize the merged company in such a way as to overcome the diseconomies of scale while still benefitting from economies of scale in other areas? 

"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    March 2004
  • From: Indianapolis, Indiana
  • 2,434 posts
Posted by gabe on Tuesday, December 26, 2006 10:07 PM
 MP173 wrote:

Just for fun...what were the strong railroads of that era (1960's -70's)?

And where are they now?  Are their franchises as solid as before? 

I will start out with NW.  Lets see in the early 1960's they made their $$ hauling coal, some have argued mainly downhill.  They had the foresite to expand beyond Appalachia and created one of the truly great mergers (IMO) with NKP and Wabash in 1964.  With that merger they gained access to Detroit and the automakers, Chicago and the western railroads, Northwest Indiana and another market for coal, St Louis and more western railroads, Kansas City and a longer haul.  Ok, the line to Omaha really didnt do much and the NKP line to St. Louis didnt really add much, nor did the Wabash Chicago - Toledo line, but overall they got pretty good jump on the merger wave.  Let's not forget the Virginian merger in the 50's.

It seemed they used their base of coal to expand and diversify. 

That merger with Southern in the early 1980's didnt turn out too badly either did it.

Sometimes the best deals are the ones you dont do...and that certainly was the case for not pulling the trigger on Dereco (EL and D&H) in the mid 70's meltdown.  They let the deep pockets sort out the problems of the day.  Their obligation was not to the industry, but to their shareholders. 

 

ed

As an aside, the premier railroads--at least in the early 70s--in my opinion were the SP and the Southern.  The Southern did quite well, the SP did not.  There was a pretty informative article that I read about the SP covering its decline . . . .

I think a great example of railroading in the 60s and 70s is the IC.  From everything I read about the IC, it was very stable during the 60s and was actually retiring debt.  In the 70s, things got pretty ugly fast.

Gabe

  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Tuesday, December 26, 2006 10:03 PM
 MP173 wrote:

Michael:

Regarding the operating margins of UP and GN, points well taken.

What were the margins on lets say Illinois Central in 1966 and CN in 2006?

As I stated previously, great thread.

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

Wellll, IC was not a railroad I ever had any reason to follow, but the annual report for 1966 in my file is, for some reason, the strangest annual report I have ever seen. It tells me nothing, except a big feature on the new "IC" logo. It has to be a defective mailing. The 1970 IC annual report for the railroad, separated out from IC Industries, shows a 12.31% operating profit -- railway operating income --

 

  • Member since
    March 2004
  • From: Indianapolis, Indiana
  • 2,434 posts
Posted by gabe on Tuesday, December 26, 2006 10:03 PM
 MP173 wrote:

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

Thank you.  For a minute, I was fearful to point out the 2000 lbs, in this case pink, elephant in the room that I thought I was seeing.  I really do not understand the relationship between an 80 mph speed limit and the collapse of the rail industry that I seem to observe in the 70s. 

Whether a steamship is hauling intermodal containers for a three week voyage that then sits in a dock for a few days, whether it is grain that might take as much as a month to transport from a farmer's silo through grain bins and what not, or merchandise freight that dwells in a yard three days regardless of transit, I never saw how the 7 hour-benefit of an increased speed limit might rescue the industry.

Added speed might help capacity.  But, the issue of the 70s was getting rid of excess capacity, not making room for more.

Gabe

  • Member since
    May 2004
  • From: Valparaiso, In
  • 5,921 posts
Posted by MP173 on Tuesday, December 26, 2006 9:54 PM

Just for fun...what were the strong railroads of that era (1960's -70's)?

And where are they now?  Are their franchises as solid as before? 

I will start out with NW.  Lets see in the early 1960's they made their $$ hauling coal, some have argued mainly downhill.  They had the foresite to expand beyond Appalachia and created one of the truly great mergers (IMO) with NKP and Wabash in 1964.  With that merger they gained access to Detroit and the automakers, Chicago and the western railroads, Northwest Indiana and another market for coal, St Louis and more western railroads, Kansas City and a longer haul.  Ok, the line to Omaha really didnt do much and the NKP line to St. Louis didnt really add much, nor did the Wabash Chicago - Toledo line, but overall they got pretty good jump on the merger wave.  Let's not forget the Virginian merger in the 50's.

It seemed they used their base of coal to expand and diversify. 

That merger with Southern in the early 1980's didnt turn out too badly either did it.

Sometimes the best deals are the ones you dont do...and that certainly was the case for not pulling the trigger on Dereco (EL and D&H) in the mid 70's meltdown.  They let the deep pockets sort out the problems of the day.  Their obligation was not to the industry, but to their shareholders. 

 

ed

  • Member since
    May 2004
  • From: Valparaiso, In
  • 5,921 posts
Posted by MP173 on Tuesday, December 26, 2006 9:41 PM

Michael:

Regarding the operating margins of UP and GN, points well taken.

What were the margins on lets say Illinois Central in 1966 and CN in 2006?

As I stated previously, great thread.

Dave:

Regarding your discussion of infrastructure speed limits,  for the most part those speed limitation have less effect on the overall transit time  than the terminal times involved in the operations.

ed

  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Tuesday, December 26, 2006 8:40 PM
 Datafever wrote:

Mr. Sol,

If I can try to recap what you have said:

Part of the problem that some railroads had (in the 60's/70's) was a lack of debt - debt that in a period of high inflation is paid back with cheaper dollars.  Those railroads that had encumbered themselves with debt in order to rebuild infrastructure found themselves in a cozier position than those railroads that had delayed infrastructure expense and had cash instead.

Well, the "cash" mght have gone out the door to dividends. Every railroad in serious trouble 1965-1980 had been engaged in very serious merger efforts during the 1960s. While I would agree that by and large the ICC's efforts to "get it right" backfired into time-consuming, time-wasting, proceedings, I also note that the rail industry itself bore a large burden for time-consuming objections, appeals, and argument, often based purely on obstructive litigation tactics rather than honest participation in the process.

But, your point is, I think, accurate.

So if the 70's had not been a time of high inflation, one could posit that the results would have been significantly different.  In that case, capital investment in infrastructure may have been an undesirable use of monies.

I think railroads would have benefitted from infrastructure investment no matter what. High inflation was a boon to discounting debt, but an enormous obstacle to railroads genuinely growing during the 1970s, such as Milwaukee. Recall, railroads themselves were "investing" heavily in merger efforts during the 1960s. Infrastructure had to wait until the merger was resolved.

Econometric studies -- Kent Healy -- suggested that mergers would harm the industry, rather than help it. Penn Central proved it. Burlington Northern threaded the eye of a needle with a camel. It was close. Had it not been for the extraordinary planning by Robert Downing and Worthington Smith, the outcome could have been considerably different and almost was.

Were there indications that inflation was going to be as bad at it ended up?  Could a savvy management team have foreseen that inflation was going to go "out of control" and acted accordingly? 

The argument about "Guns and Butter" starting with the Great Society and Viet Nam War of Lyndon Johnson in 1965 brought about exactly such predictions from the Chicago School Monetarists. The accuracy of their predictions -- shown conclusively with a vengeance during the 1970s -- fundamentally changed American political and economic thinking. Railroads, however, did not employ "economists" -- not a useful tool in that industry's mindset at that time.

But, what does any of that suggest about "regulation" during that time?

In 1981, it gained its "freedom." It merged, it gained market share, it created captive shippers, it abandoned useless lines, it consolidated traffic into high utilization corridors. It did everything that deregulation permitted.

Union Pacific Railroad earned a 12.2% operating profit in 1965 in an anemic economy operating underutilized track with multiple inefficient interchanges and running a large transcontinental passenger train service.

Forty years later (2005), after deregulation and historic productivity achievements, it earned a 7.6% operating profit in a booming economy.

Progress?

GN in 1968 -- 12.38%, operating at about half capacity, running a transcontinental passenger train service.

BN in 2005: 12.27%.

It is simply stunning what these companies achieved when the artificial burden of regulation was removed and they were finally unshackled to permit their creative management abilities to soar to new heights of corporate profitability.

 

  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Tuesday, December 26, 2006 8:16 PM

 Datafever wrote:
Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.

It was an interesting summary that put change, success and failure, squarely in the context of economic circumstances, not some generalized and ambiguous regulatory wrong.

  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Tuesday, December 26, 2006 7:38 PM

 Datafever wrote:
Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.

The pleasure is all mine.  Your posts are always a good read -- precise, measured, and collegial.

S. Hadid

  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Tuesday, December 26, 2006 7:25 PM
 MP173 wrote:

I believe we have differing opinions regarding the "efficiencies" of trucks v rails.  Sure, the cost of transporting via rail is considerably lower, but the efficiencies of trucking was (is) the flexibility it offered.  LTL trucking ate into REA business, it was much more efficient and quicker. Truckload offered the ability to ship from door to door via a single carrier.  Often railroad boxcar freight had to move thru several carriers...plus one had to fill a boxcar to get the rate.  Trucking offered rate structures which rewarded the movement of partial truckloads or "header rates".  Interchange between railroads was painfully slow, interlining between LTL carriers was much more efficient.  LTL terminals "cross docked" freight in hours, rail terminals took  much more time.

What I look at is the relative running speeds of the fastest highway vehicles vs those of the railroads.  1930's - 50 mph highways were still the exception, not the rule, but railroads were in seeming competition to break the 100 mph barrier with dedicated trains.  Granted, those were mostly passenger trains, but the standard was still set.  Thinking about it now, can you imagine what things would look like today if those 100 mph railroads had offered TOFC service in tandem with those passenger hotshots to haul those new fangled truck trailers?  The whole dock to dock dynamic changes in terms of transit time for OTR vs TOFC.

Fast forward to the 1950's - highway speeds are now up in the 60 mph range, but railroads have decreased their top speeds!

Again, the theoretical advantage in flexibility still favors rail transit over highway transit for all but the shortest hauls in the dock to dock race, but with what is offered/allowed today TOFC is only advantageous in the longer haul lanes, and that's only because of the new truck driver rules.

Finally...I am not sure if the HAL's was the main factor in the deterioriation of the ROW's or simply along for the ride.  Was it HAL's or the inability to maintain the track due to the deployment of assets in uncompensated endeavors such as branch lines with five member crews and 4 car trains?

Well, it does correlate.  The 264k car with 100 ton trucks came into it's own during the 1960's, so you have the efficiency gains over the 220k car with 70 ton trucks which correlate with the relative financial health of the railroads during this period.  Then by the advent of the 1970's tracks were starting to fall apart - could it be the move from 70 ton truck (55,000 lbs per axle) to the 100 ton truck (65,750 lbs per axle) was finally taking it's toll?  It may be the move to the 100 ton truck was seen as a short term gain for investors, with the usual tendency to bail before the longer term consequences came about.

 

  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Tuesday, December 26, 2006 6:19 PM
Mr. Hadid, thank you for your analysis.  It appears that the railroad industry has gone through several shifts over the past 150 years, some successfully, some fitfully, and some not very well at all.
"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    September 2006
  • From: Mt. Fuji
  • 1,840 posts
Posted by Datafever on Tuesday, December 26, 2006 6:14 PM

Mr. Sol,

If I can try to recap what you have said:

Part of the problem that some railroads had (in the 60's/70's) was a lack of debt - debt that in a period of high inflation is paid back with cheaper dollars.  Those railroads that had encumbered themselves with debt in order to rebuild infrastructure found themselves in a cozier position than those railroads that had delayed infrastructure expense and had cash instead.

So if the 70's had not been a time of high inflation, one could posit that the results would have been significantly different.  In that case, capital investment in infrastructure may have been an undesirable use of monies.

Were there indications that inflation was going to be as bad at it ended up?  Could a savvy management team have foreseen that inflation was going to go "out of control" and acted accordingly? 

"I'm sittin' in a railway station, Got a ticket for my destination..."
  • Member since
    April 2003
  • 305,205 posts
Posted by Anonymous on Tuesday, December 26, 2006 5:19 PM
 Datafever wrote:
 greyhounds wrote:

So, I think we've established that the economy of the 1970's had nothing to do with the Penn Central collapse or the other Northeast railroad bankruptices that brought on the much needed and benificial deregulation. 

As a side note, you bring up an interesting point.  I don't know for sure, but it appears that it was the eastern railroads that had the majority of the problems in the 70's (60's) as far as bankruptcies were concerned.  If that is so, why were the eastern railroads more heavily impacted than the western railroads?

For one there were a lot more of them in the Official Territory, so you first have to zero out for sheer percentage of the total. 

Second, they were compacted into a lot smaller space, so the traffic cannibalism was very high. 

Third, much of the traffic base these roads were built to handle had evaporated, notably passengers, anthracite, and New England textiles, brassware and shoes, whereas outside the Official Territory traffic was actually up as traditional resource bases for lumber, minerals, etc., shifted west and south following exhaustion in the East as well as population shift to the sunbelt. 

Fourth, western roads inherently had longer hauls due to widely separated and highly concentrated urbanization, whereas eastern urbanization is not widely separated and not highly concentrated, but worse from a railroad's point of view, is of sufficient mass to afford industrial economy of scale without requiring concentration.  Western geographic factors were very much in a railroad's favor whereas eastern population geography was very much in trucking's favor.  Ironically the long distances that made western roads such an iffy proposition in the mid-1800s turned out to be their greatest advantage by the mid-1900s.

Fifth, prior to WWII there was a substantial coastwise and intercoastal shipping business (more than 1,000 vessels) that ceased during the war (the ships were requisitioned) and did not restart after the War because its costs climbed so much faster than rail costs it was soon priced it out of the market for just about everything except crude oil and refined petroleum products.  The decline of coastwise shipping was highly beneficial to southern and western roads but actually hurt eastern roads because of the traffic shift away from traditional hinterland-to-port routes toward gateway routes where they had little investment.

S. Hadid

  • Member since
    October 2004
  • 3,190 posts
Posted by MichaelSol on Tuesday, December 26, 2006 5:17 PM
 erikem wrote:
 MichaelSol wrote:

We are not used to the idea in our current lifetimes, but the American economy, post-Civil War was a deflationary economy. Rates declined all during that period. Historian Gabriel Kolko documented how the origins of the ICC Act lay with the railroads themselves asking the government to regulate "destructive competition" and plummeting rates. The Panic of 1893 brought down more railway mileage than any time before or since -- an occurence related more to general economic conditions than regulation or deregulation but due in part to the corrosive effects of deflation on organizations that required substantial capitalization.

 

If you're talking about a geneal deflationary period, then  you're right in that the American economy hasn't experienced anything like it in the ast 100 years. On the other hand the electronics industry has been in a prolonged deflationary period for several decades. The reasons for this are very similar to what was behind the post Civil war deflationary period, a prolonged period of dramatically improving labor productivity. Railroad labor producitvity was increasing from larger locomotives, standard guage, air brakes and automatic couplers. In addition, the rapid axpansion of the economy was increasing utilization of the lines that had been built.

Labor productivity and inflation/deflation are two different things. The U.S. economy continually deflated 1873-1890, yet labor productivity increased by more than 2.5% per year -- a boom period for productivity. The next boom period was 1917-1927, when productivity rose nearly 4% per year, but opposite of the earlier period, this was a period of high inflation.

What deflation does is drive down the market. What the steel mill paid for to ship steel last year, the railroad can only charge 90% this year, and less in subsequent years as the value of each dollar increases.  The problem for capital intensive industries -- and it is a big, big problem -- is that bonds sold to finance construction and improvements are paid in current, more valuable, dollars -- not the value of the dollars that purchased the original construction. Each passing year brings lower revenues to pay debt, but the debt becomes relatively more burdensome. The solution: expansion and hope that new traffic and current debt stays ahead of deflation and old debt. This is why railroads "overbuilt" in those two decades prior to 1893 -- they were on a horse they couldn't stop in a horserace that wouldn't end. Over the long run, something breaks, and it broke for railroads in 1893.

"Morganization" was the process designed to break that cycle.

This is the opposite of the 1960s and 1970s, as inflation reduced the burden of existing debt and debt payments relative to income with each passing year. This is one of the conundrums of the 1970s -- bankrupt railroads had "monstrous debt loads" only in rail fan magazines.

In real life, by and large bankrupt railroads in the 1970s had the lowest debt service ratios in their histories at the times of their bankruptcies and better, for the ones I am familiar with, than their un-bankrupt peers. The paradox was that companies that had large debt saw the effect of that debt quickly inflated away -- but for those companies with small debt, that only meant that those companies hadn't invested in their physical plants and, ultimately, those companies could no longer compete effectively because of the inefficiency of their physical facilities.

Again, to me that underscores a philosophy of capital investment, not regulation. Those companies that had holding companies -- a sure signal that capital investment in railroad plant was not a priority -- did more poorly when the 1970s arrived than those companies which were independent railroads -- and which had to invest in the railroad as their number one priority.

What happened during the 1950s? The largest single capital investment in railroad history in the motive power change-over. By 1961, costs associated with motive power -- labor, maintenance, fuel, finance charges -- consumed on a sample Class I railroad 24% of revenues compared with 18% of revenues only a decade earlier. What went down in order to compensate for that substantial rise in that particular area of operating costs?

Maintenance-of-Way.

Railroads were consuming just as much capital -- they were just spending it differently -- and debt instead of long-tem became short term.

This process was something part smoke, something part mirror.

In the early 1950s, the motive power changeover promised 1-2% interest rates on 20 year depreciation property. By 1957, the depreciation period was revised downward to 14 years, at 5% interest rates.  Further actual experience lowered the depreciation period to eight years, at 8% interest.

The economic consequences were substantial, but also showed up in lowered railroad earnings as the result of accelerated depreciation of machines, rather than of investment in railroad track. Railroads appeared less profitable on paper, as more of their revenue was spent on a certain class of capital equipment, and the effect on the bottom line was even more significant than that simply because of accelerated paper depreciation deductions compared to both the former equipment class and for actual investment in the track.

What that process obscured was the undercapitalization of the physical plant. Well, that could only last so long, and the advent of the 100 ton car no doubt considerably shortened whatever period that might have been otherwise.

Were railroads unique? No, during the 1960s, Big Steel was coasting on merger savings -- substituting merger for investment. Rich, prosperous, they thought they could. American Motors was trying to make it on one or two car lines. Studebaker and Kaiser met their fates. Chrysler was already in trouble -- and began looking at AMC. GM was coasting on market share acquisition from consolidation of the industry -- then tried to catch up on investment at exactly the wrong time in the 1970s.

Recall that during the 50s and 60s, these were companies that thought they had everything figured out. Only the Japanese were hiring Edward Deming. The Penn Central stood for an announcement that diversification was the key -- and weren't those guys the leaders of the industry?

But for the most part, Companies willing to invest, generally made it.

Companies that did not invest, generally did not make it.

Managements that invested wisely generally made it. Managements that did not -- and that could include entire industries -- had a harder time of it.

There does seem to be a moral to the story.

 

Join our Community!

Our community is FREE to join. To participate you must either login or register for an account.

Search the Community

Newsletter Sign-Up

By signing up you may also receive occasional reader surveys and special offers from Trains magazine.Please view our privacy policy