A Federally sponsored system is an imperfect answer, especially with no more funds than appear to be available. But it's no answer, either, to expect the railroads to go on subsidizing passenger service with other earnings which, as in Penn Central's case, may disappear.

If the Government should do more in the passenger area, it also should do less in freight. Nearly a decade ago President John F. Kennedy proposed a major relaxation of railroad freight rate regulation, but the idea was sidetracked by opposition from barge lines and other rail competitors.

The opponents of greater rate freedom still argue that railroads hold vast monopolistic power that must be curbed by the rate-fixing activities of the Interstate Commerce Commission. That notion seems especially silly in the light of the current troubles of the Penn Central. In any case, the antitrust statutes should suffice to curb any railroad that did manage to act monopolistically. Emergency financial aid to the Penn Central could, as some of the critics claim, set a precedent for similar help in even more questionable cases. For that reason it's probably desirable to set up more systematic procedures to consider requests for aid, as Senator William Proxmire urged last week.

Helping out the Penn Central or any other large corporation, moreover, fuzzes the line between private and public enterprise. If, in the case of the railroads, the nation wants to avoid obliterating the line altogether, it's going to have to launch a broader attack on the problems than it has up to now.

And the solution to those problems requires much more than loan guarantees. What this bill says in effect is that we should act immediately-because we do face a crisis of liquidity in the rail industry-but that we should then step back and take a broad look at the causes of the present situation.

Mr. Chairman, this bill is not intended to bail out poorly managed corporations, and the distinction must be made between a loan guarantee which is essential to preserve operation in the public interest and any measure to compensate for managerial bungling, or water in the capitalization. The fact that the Penn Central has sought relief under a Bankruptcy Act is not in itself a cause for intercession by the Federal Government. What I do deplore, however, is a railroad bankruptcy situation unaccompanied by assurances that the government has the power to keep the bankrupt carrier's essential operations going or to prevent other, better managed, more credit-worthy carriers from going the same route. Absence of this power has all but guaranteed declining service on rail carriers to date. Absence of this power could also have an effect far beyond the rail carriers themselves.

The Penn Central crisis already has left its mark on short-term borrowing generally, and upon all borrowing by corporations with less than top credit ratings. It has sparked rumors of a general "liquidity crisis" affecting American business as a whole. Also, it has damaged the American competitive spirit, which traditionally has been motivated primarily by the expectation of profit rather than the fear of loss. The role of a loan guarantee program in this setting-with proper safeguards to the taxpayer-would be to restore confidence in the viability of our valuable national assets, assets which we cannot afford to have wasted.

Let me close by describing more specifically what could happen if we really neglect our rail assets.

The railroads are the nation's biggest hauler of freight, carrying 41 percent of intercity traffic, and they are major movers of raw materials to supply industry. For example, they deliver over 70 percent of the coal tonnage upon which the majority of electric utilities and manufacturers of iron, steel and elay products depend.

The economies of many regions are linked to rail transportation. Many products which are the backbone of area economies can compete in today's marketplace only so long as rail transportation is available. For example, railroads ship over 90 percent of the lumber and wood products from the Pacific states and 74 percent of the grain production in the North Central states. If we neglect our rail assets, these and other regions would be burdened with higher consumer costs or an inability to send goods to market at competitive prices.

Railroads carry much of the nation's export traffic to dockside. Without modern and efficient rail service, this nation's export sales and its balance of payments would be seriously damaged.

Over 500,000 commuters rely on the railroads each day in five of the nation's largest metropolitan areas.

The needs for rail transportation are growing, a fact which carries important implications for the necessity of maintaining railroads' ability to borrow for capital improvements. Forecasts show that by 1980 the railroads will handle nearly one-third more freight traffic than they do today-moving over one trillion ton miles per year.

To fill the future demands of the American economy, the demands of our transportation system-and this means our rail system as well-must not be neglected. These demands require a system which can meet present needs, and can modernize itself as technology points to improved ways to transport goods. Title I of our bill will help to avoid stoppage due to financial troubles in our rail carriers; Title II points the way towards essential Congressional initiatives to improve our rail assets. I urge this Committee to report favorably on S. 4014.

Senator HARTKE. Mr. Saunders. Senator Pastore, you have a chance here to talk to the man that you just referred to, but before that, we will ask him to proceed with his statement.

Senator PASTORE. I am not an F.B.I. agent. I just raised the question and I hope Mr. Saunders will answer it.

Mr. SAUNDERS. I would like to answer that question at the proper time, and I would like to comment because the facts are not correct. Senator PASTORE. That is what appeared in the newspaper.

Mr. SAUNDERS. Yes, sir, that has been in the newspaper.

Senator PASTORE. All right. Now, you explain it.

Mr. SAUNDERS. Later on?

Senator PASTORE. Yes, all right.

Mr. SAUNDERS. I would be glad to respond to any question that you have.

Senator HARTKE. Thank you. You may proceed with your state

ment.

STATEMENT OF STUART T. SAUNDERS, FORMER CHAIRMAN OF THE BOARD, PENN CENTRAL CO., PHILADELPHIA, PA.

Mr. SAUNDERS. Mr. Chairman and members of the committee, I am Stuart T. Saunders, of 40 West Ardmore Avenue, Ardmore, Pa. I appear here today in suport of legislation which authorizes Government-guranteed loans to railroads.

I started in the railroad business 31 years ago in April 1939, as assistant general solicitor for the Norfolk & Western Railway and was in this business continuously up to June 8, 1970.

For the first 10 years I spent the major part of my time in the law department of the Norfolk & Western, but for the past 21 years I have been working mainly on management and executive affairs for the railroads for which I was employed. I have served as chief executive officer of railroads for the past 12 years. For over 5 years I was president and chief executive of the Norfolk & Western and, if I may say so, it was one of the most successfully operated railroads in this country. I was chairman and chief executive officer of the Pennsylvania Railroad Co. and its successor, the Penn Central for about 7 years.

I would like to state I did not seek the job as chairman of the board of the Pennsylvania Railroad. A committee of its board of directors approached me and asked me to take the job. May I also say that nothing in this statement is to be construed as an attempt on my part to escape any responsibility or to blame anyone.

While I support this proposed legislation, I must say in all candor that it represents only one step which must be taken to keep the railroads operating under private enterprise. Such loans, in themselves, are only temporary medication which prolong the life of the patient but do not cure him. The basic problems of the railroad industry have been under study since last fall by a group of railroad chief executives and a staff of railroad experts under the direction of former Senator George Smathers. I was a member of that group and participated in the study.

This study throughly analyzes the problems which have placed a number of railroads in a precarious financial position and offers a comprehensive program of remedies for dealing with them. I subscribe to its recommendations. Since copies of this report have, I understand, been given to all members of this committee, I think it unnecessary for me to repeat the recommendations here.

I would like to give you some of the reasons why the Penn Central Transportation Co., in my opinion, was forced into reorganization under section 77 and to state what was done up to June 8, 1970, the date I retired as chairman, to avoid this. Many of the reasons for this reorganization were beyond our control and by and large they involve problems not of mismanagement but problems which were unmanageable.

First, let me outline the magnitude of the problems with which we were confronted. The railroad industry has been an ailing industry for many years. Not only have the Pennsylvania, the New York Central, and the New Haven, as separate railroads, and the merged Penn Central been beset with the problems of this ailing industry but in most cases they suffered from these problems much more acutely and they also had other problems which were not common to the industry generally.

The railroad industry and the Penn Central in particular have been hit very hard by the recession, inflation, tight money, and high-interest rates.

I stated in our Annual Report to Stockholders for 1969 that inflation had cost the Penn Central approximately $100 million in that year alone, and that there were other major adverse factors.

First was the spiraling cost of operating the railroad. In 1969, our level of labor costs increased 7 percent, or $74 million. Mind you, the total labor bill on the Penn Central alone is about $1 billion a year or approximately 60 cents out of every revenue dollar that we take goes for labor, and as I said, we had a 7 percent increase or $74 million, which was on top of a 9 percent increase in labor costs in 1968, or $90 million. And in 1970, there is every indication that this trend will continue. Our material costs also rose 5 percent in 1969, or $9 million.

Likewise in 1969, our fixed charges, which are mainly interest costs, increased by $34.8 million and in the first quarter of 1970, they were up an additional $9 million, or at an annual rate of about $36 million.

A second factor in producing this tragedy was the recession. The railroads are among the first to feel the impact of down-turns in the economy and this is especially true of the Penn Central because of

its heavy dependence on automobile, steel, and general merchandise traffic. The recession cost the Penn Central many millions of dollars in 1969 and this has continued in 1970 in terms of both revenues and earnings.

A third factor contributing significantly to this crisis is the inadequacy of revenues which Penn Central receives for its services and the time lag involved in getting freight rate increases. The impact of these items on Penn Central runs into many millions of dollars annually and, of course, correspondingly affects its earnings.

Most people do not realize how far freight rates charged by the railroads are out of line and how little they offset the effects of inflation and steadily mounting operating costs. The fact is that even with the freight rate increases which have been granted in the past several years, including the most recent one on June 9 of this year, freight revenues per ton-mile are actually lower than they were in 1958 on the American railroads, and it is true on the Penn Central. On the other hand, during the same time Penn Central's labor cost per hour worked has risen 65 percent.

I must say that the railroads themselves are in good part responsible for failing to secure adequate increases in their charges. But, this failure was not the fault of management of Penn Central.

As you no doubt know, generally speaking, freight rates are not within the control of individual railroads. There must be agreement on joint rates which exist throughout the country and on the level of competitive rates. As a practical matter, therefore, it has generally been necessary to make freight rate increases on a national basis. It is possible to make increases on a limited basis regionally, but they involve so many problems that it is not realistic, particularly without the cooperation of railroads in other territories to increase interterritorial rates. From time to time Penn Central did give consideration to a regional approach but due to conditions prevailing at the time we concluded that such an approach would not be effective, especially because of the delay that would be involved.

Even now, with the Penn Central in reorganization, it would be preferable to have a national approach but if that cannot be done, a regional basis might be feasible under current conditions, assuming the cooperation of lines in other territories in increasing joint rates to the East.

To indicate what I am talking about, permit me to cite what happened to the proposed 6 percent increase filed with the Interstate Commerce Commission on March 3, 1970. For months prior to that time, Penn Central tried to persuade the railroads to file an application for an increase with the Commission and for a long time certain key railroads would not even discuss any increase. Finally, they agreed to consider it and Penn Central, along with a number of other railroads wanted to ask for a 12 percent increase, which would not have brought it back up much above the 1958 level, which would have meant over $150 million annually to Penn Central, and practically all of this would be net income for Penn Central as it pays no Federal income taxes because of large losses on its railroad operations. A number of railroads, however, would not go along with a 12 percent proposal and the industry finally ended up with a 6 percent

proposal of which something under 5 percent was tentatively authorized by the Commission as of June 9, or less than half of what Penn Central had originally advocated.

In addition to the inadequacy of the freight rate increase which was requested, and the several months consumed by the railroads trying to decide what increase they would seek, several more months were consumed by the Commission in processing the case for decision. Time lags like this are very costly to the railroads. Each month of delay of say a 6 percent increase deprives Penn Central of about $7 million in revenues.

Senator PASTORE. May I interrupt you for a question. Why would the other railroads be reluctant to go for the increase that you suggested?

Mr. SAUNDERS. Well, as I say later in my statement, I am not speaking critically of these railroads. They have different competitive problems and their financial conditions are different. But let me point out several things to you, Senator, and I do come to it in my

statement.

The level of prosperity or earnings in the railroad industry varies very widely. Generally speaking, the railroads in the South are the most prosperous railroads in the country with the exception of say the Norfolk & Western, which is considered an Eastern railroad, and perhaps the C. & O. The Western railroads are relatively more profitable than the Eastern railroads.

The Eastern railroads have for decades been the unprofitable railroads, as you know. This is due primarily to a number of factors. First, is the passenger loss. If we had the same passenger operating deficit that the Southern Pacific has, our earnings, on the freight would compare very favorably with it.

Our freight operating ratio of the Pennsylvania last year was about 78 percent. Now, the freight operating ratio of the Great Northern was even greater than that. I have them here now.

Pennsylvania was 78.9 percent. The C. & O. Railroad, which is regarded as a relatively prosperous railroad, their freight operating ration was 78.8, just about one point difference. As I say, the Northern Pacific was 80.

So when you take out this passenger deficit that we have to deal with, we compare quite favorably.

Then, there are other factors.

Senator BAKER. Before you leave that, while you have the figures there, could you tell me what Southern's operating ratio was for freight, since I noticed in the newspaper the other day that Southern's first quarter earnings were the highest in 1969?

Mr. SAUNDERS. I do not have this other one, but it runs around 68 or 69 percent. But as contrasted, Senator Baker, the Southern Railroad's passenger deficit will run less than $7 million. Ours is $104 million. This is on the fully allocated basis. That makes a tremendous difference.

Senator HARTKE. Mr. Saunders, just to be fully aware of what we are talking about, there is quite a dispute as to whether or not the fully allocated basis loss is a true loss or not. The Interstate Commission disagrees with the railroad industry basically on that, is that not true?

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