Part 1

Mail Carrying Railways Underpaid

A Statement by the Committee on Railway Mail Pay representing 214,275 miles of Railway in the United States, operated by 268 companies, containing facts and figures which prove that Railway Mail Pay does not equal the operating expenses that it makes necessary, leaving nothing for return upon the value of the property.

THE COMMITTEE ON RAILWAY MAIL PAY

J. KRUTTSCHNITT, Chairman Director of Maintenance and Operation, Union and Southern Pacific Systems

RALPH PETERS, Vice-Chairman President, Long Island Railroad

CHARLES A. WICKERSHAM President and General Manager, Western Railway of Alabama

W. W. BALDWIN Vice-President, Chicago, Burlington & Quincy Railroad

W. W. ATTERBURY Vice-President, Pennsylvania Railroad

GEORGE T. NICHOLSON Vice-President, Atchison, Topeka & Santa Fe Railway

E. J. PEARSON First Vice-President, Missouri Pacific Railway

E. G. BUCKLAND Vice-President, New York, New Haven & Hartford Railroad

C. F. DALY Vice-President, New York Central Lines

W. A. WORTHINGTON Assistant Director of Maintenance and Operation, Union and Southern Pacific Systems

W. F. ALLEN, Secretary

H. T. NEWCOMB, Statistician

* * * * *

Mail Carrying Railways Underpaid

A STATEMENT

By the

Committee on Railway Mail Pay

representing

214,275 miles of Railway in the United States, operated by 268 companies,

containing facts and figures which prove that

RAILWAY MAIL PAY

does not equal the operating expenses that it makes necessary, leaving nothing for return upon the value of the property.

October, 1912.

TABLE OF CONTENTS.

Page

I. Scope of this Pamphlet 3

II. Railway Mail Pay Is About to be Forced Still Further Below the Level of Just Compensation, Unless Payments are Promptly Readjusted, on Account of the Additional Volume of Mail that will Result from the Inauguration, on January 1, 1913, of the Parcels Post 3

III. The Postmaster-General's Erroneous Assertion that the Railways were Overpaid "About $9,000,000.00" in the Year 1909, Rests Primarily Upon His Adopting an Unprecedented Theory which Allows Nothing for a Return Upon the Capital Invested in Railway Property 4

IV. The Mail Service Supplied by the Railways Costs Them More in Operating Expenses and Taxes than They Are Paid For It, and Leaves Nothing for Return on the Property 6

V. The Postmaster-General's Apportionment of Space Between the Mail Service and the Other Services Rendered on Passenger Trains Did Not Allow to the Mails the Space which They Actually Require and Use and this Had the Result of Unduly Reducing His Estimates of the Cost to the Railways of the Mail Service 9

VI. The Postmaster-General Ignored Data which He Had Obtained Showing Expenditures on Account of the Mails Largely in Excess of the Direct Expenses for that Service which He Reported 11

VII. The Month of November Is Not a Fair Average Month in Any Railway Year or One that Is Typical of a Year's Business and Its Use as the Sole Basis of the Postmaster-General's Calculations was So Unfavorable to the Railways as to Deprive the Results of Any Value Even If in All Other Respects His Methods were Beyond Criticism 13

VIII. A Commission of Senators and Members of Congress which, Between 1898 and 1901, Most Fully and Carefully Investigated the Subject, Ascertained and Declared that Railway Mail Pay was Not Then Excessive; Since Then there Have Been Many and Extensive Reductions in Pay Accompanied by Substantial Increases in the Cost and Value of the Services Rendered by the Railways 14

IX. The Administration of the Post Office Department Has Not, in the Last Twelve Years, Effected any Reduction in the Annual Total of Its Expenses for Other Purposes than Railway Transportation or in the Proportion of Its Revenues Required for Such Other Expenses, but the Whole Saving Which Has Nearly Eliminated the Annual Deficit of the Department Is Represented by the Reduced Payments, Per Unit of Service, to the Railways 17

X. The Continuous Refusal of the Post Office Department to Order Reweighings of the Mails Except After the Maximum Interval of Four Years which the Law Allows, the Demands for Station and Terminal Services that Are Rendered Without Any or Without Adequate Compensation and the Unjust Discrimination Against Compartment Cars Used as Railway Post Offices Are All Abuses, Seriously Injurious to the Railways, Which Have Grown Up Under the Present System of Payment and Ought at Once to Be Remedied 18

XI. The Postmaster-General's Proposed Plan of Payment Based Upon Operating Cost and Taxes, to Be Ascertained by the Post Office Department, Plus Six Per Cent. Is Seriously Wrong in Principle and Would Encourage and Perpetuate Injustice 20

_Appendices._

A. Extracts from the Postal Laws and Regulations 23

B. Classification of Operating Expenses 27

C. Receipts from Passenger and Freight Traffic by Months 28

D. How Railway Wages Have Increased 29

E. How Railway Taxes Have Increased 30

F. Letter dated September 11, 1912, from Hon. Jonathan Bourne, Jr., Chairman, Senate Committee on Post Offices and Post Roads 31

G. Reply made thereto by the Committee on Railway Mail Pay 32

I. SCOPE OF THIS PAMPHLET.

The Committee on Railway Mail Pay, representing railways whose lines include ninety-two per cent. of the aggregate length of all railway mail routes in the United States, believes that the payments to the railways for the services and facilities furnished by them to the Post Office Department are, and for a long time have been, unjustly low. This pamphlet contains a concise statement of the facts which prove that this belief is warranted and, incidentally, a refutation of the estimates made by the Postmaster-General, and reported to the Congress (House Document No. 105, Sixty-second Congress, first session), which led him to conclude that the basis of payment could now properly be changed so as to accomplish a present reduction of about twenty per cent. It will be shown that although the insufficient data and the erroneous methods employed by the Postmaster-General resulted in his making estimates of cost to the railways that are far below the real cost, his own figures and calculations, when properly analyzed and supplemented, demonstrate that the mail service has not been fairly remunerative to the railways.

Before proceeding to this demonstration it should, however, be noted that--

II. RAILWAY MAIL PAY IS ABOUT TO BE FORCED STILL FURTHER BELOW THE LEVEL OF JUST COMPENSATION, UNLESS PAYMENTS ARE PROMPTLY READJUSTED, ON ACCOUNT OF THE ADDITIONAL VOLUME OF MAIL THAT WILL RESULT FROM THE INAUGURATION, ON JANUARY 1, 1913, OF THE PARCELS POST.

Congress has provided for a vast and incalculable extension of mail traffic by creating a "Parcels Post," to be inaugurated on January 1, 1913, which, by opening the mails to many articles not previously accepted at the post-offices and by materially reducing the rates on mailed merchandise, is expected enormously to increase the volume of the shipments which it covers. The Government seems to have assumed that, under existing contracts, which were made before the meaning of the word "mail" was thus extended, the railways can be compelled, until these contracts expire, to carry this great additional volume of mail traffic WITHOUT ANY COMPENSATION WHATEVER. If the former practice of the Post Office Department is followed, no new contracts will be made until after the next quadrennial weighings in each of the four weighing sections, so that the position of the Government amounts to an assertion that the whole added volume of the Parcels Post mails will have to be carried without any compensation by the railways of New England for four years and six months (these railways are in the first weighing section but the weighing for the adjustment to be made on July 1, 1913, has begun and will be completed before the Parcels Post is inaugurated), by those of the second weighing section for three years and six months, by those of the third weighing section for two years and six months, by those of the fourth weighing section for one year and six months, and by those of the first weighing section, not located in New England, for six months. No presentation of the injustice of the mail pay received in former years suggests even the approximate extent of the losses which the railways will thus incur in the next four and one-half years, unless readjustments are promptly made on account of the Parcels Post.

III. THE POSTMASTER-GENERAL'S ERRONEOUS ASSERTION THAT THE RAILWAYS WERE OVERPAID "ABOUT $9,000,000.00" IN THE YEAR 1909, RESTS PRIMARILY UPON HIS ADOPTING AN UNPRECEDENTED THEORY WHICH ALLOWS NOTHING FOR A RETURN UPON THE CAPITAL INVESTED IN RAILWAY PROPERTY.

The Postmaster-General assumed that the railways would be properly compensated if they received a sum equal to the operating expenses and taxes attributable to the carriage of the mails plus six per cent. of the sum of those expenses and taxes. The calculation by which he obtained the sum which he assumed would have been proper compensation for the single month covered by his investigation was as follows:

His estimate of operating expenses and taxes on account of mail service (Document No. 105, p. 280) for one month $2,676,503.75

Six per cent. of above 160,590.22 -------------- Total, assumed to represent just compensation for one month $2,837,093.97

The railways having been paid, for the month selected, $770,679.16 in excess of the sum resulting from the above calculation, the Postmaster-General assumed that this excess over expenses and taxes plus six per cent. constituted excessive profit for that month. He multiplied this assumed excess by twelve to get his estimate of annual excess and stated the result, in round figures, as "about $9,000,000."

The mere statement of this method discloses the fact that it makes no allowance for any return upon the fair value of the railway property employed in the service of the public. This omission is, of itself, sufficient wholly to destroy the Postmaster-General's conclusion. Everyone recognizes that a railway is entitled to at least a reasonable return upon the value of its property devoted to the public service. The Postmaster-General ignored this universally accepted principle and adopted a theory which, if applied to the general business of the companies, would render substantially every mile of railway in the United States immediately and hopelessly bankrupt. The recently published report of the Interstate Commerce Commission on the railway statistics of the year that ended with June 30, 1910, contains data by which this statement is easily demonstrated, as follows:

Operating expenses of all United States railways, for the year $1,822,630,433

Taxes of all United States railways, for the year 103,795,701 -------------- Total $1,926,426,134

Six per cent. of above total 115,585,568 -------------- Total gross receipts permitted by Postmaster-General's plan $2,042,011,702

But if this plan had been in force, the railways would have had, for interest on mortgage bonds, a reasonable surplus as a margin of safety, dividends on stocks, unprofitable but necessary permanent improvements,[A] rents of leased properties, etc., etc., only the six per cent. or $115,585,568. This figure may be compared with the following, among others:

Interest obligations (on funded debt only) of all United States railways, for the same year $370,092,222

Rentals of leased properties, all United States railways, for the same year $133,881,409

[Footnote A: The necessity for providing, out of income, for some kinds of improvements is commonly admitted. The public constantly demands greater comfort and convenience which can be supplied only by improvements in property and equipment that bring in no additional income. A present example in the mail service, itself, is the great expense which the railways are now undergoing in substituting steel mail cars for those formerly in use. The old cars, which thus become a total loss were fully up to the most advanced standards of construction when built and they could continue for a long time to serve the purposes of the service except for the public demand for stronger cars.]

Plainly, the Postmaster-General's proposal is equivalent to an assertion that the railways would make a fair profit if they were enabled to collect the sum of $115,585,568 in addition to their operating expenses and taxes, but the figures given by the Interstate Commerce Commission show that this would be less than one-third of the sum necessary to meet interest charges which must be paid in order to prevent foreclosures of mortgages and, if bond interest could be ignored, is much less than the rentals that must be paid if the existing systems are not to be broken up. And, of course, it would allow nothing whatever for legitimate demands upon income for dividends, permanent improvements or surplus.

It is unnecessary to dwell upon the consequences of such a theory of "compensation" to railroad credit and to the public interest in efficient transportation service, to say nothing of the consequences to owners of railroad stock and bonds. Such a theory is not a theory of compensation--it is a theory of oppression and of destruction.

The fact that the Postmaster-General has found it necessary to justify his attack upon the present basis of railway mail pay by a theory so unprecedented and so unwarranted in principle and in law, raises a strong presumption against all his opinions and conclusions upon this subject.

IV. THE MAIL SERVICE SUPPLIED BY THE RAILWAYS COSTS THEM MORE IN OPERATING EXPENSES AND TAXES THAN THEY ARE PAID FOR IT, AND LEAVES NOTHING FOR RETURN ON THE PROPERTY.

It cannot be too strongly emphasized that the railway mail pay at present is insufficient to pay even its proper share of operating cost and taxes and does not produce any return upon the property. This will be demonstrated by any fair inquiry, as will now be shown. Reports submitted to the Postmaster-General by railways operating 2,411 mail routes, with a total length of 178,710 miles, showed that their gross receipts, per car-foot mile[B], from services rendered on passenger trains during November, 1909, were as follows:

From mail 3.23 mills From other services 4.35 mills

[Footnote B: A car-foot mile is a unit equal to moving one foot in car length (regardless of width or height) one mile. Thus to move a car sixty feet long one mile results in sixty car-foot miles; to move the same car three miles results in 180 car-foot miles, etc.]

Thus it appears that the space on passenger trains required for the mails is proportionately less than three-quarters as productive as that devoted to passengers, express, milk, excess baggage, etc., etc. As it is the general belief of railway managers, whose conclusion in this respect has rarely if ever been challenged, that the passenger train services, as a whole, do not produce revenues sufficient to meet their fair proportion of the operating costs and the necessary return upon investment, and therefore are not reasonably compensatory, it is evident that the mail service, the pay for which is more than twenty-five per cent. below the average for the other services rendered on the same trains, must bring in much less than reasonable compensation. Certainly railroad revenues as a whole could not be reduced twenty-five per cent. without destroying all return upon the property. If so, it must be true that there can be no compensation in a rate of mail pay that is twenty-five per cent. less than the rate of pay for passenger traffic which, as above shown, is relatively unprofitable.

No merely statistical comparison can, however, reveal the whole story for the railways are required to furnish many incidental facilities and to perform many additional services for the Post Office Department, which render the mail service exceptionally arduous and costly. These extra services include calling for and delivering mails at a large proportion of the post offices located at railway towns; supplying rooms, with light, heat and water, in railway stations for the use of the mail clerks; placing cars, duly lighted and heated, on station tracks for advance distribution, often many hours before the departure of trains; carrying officers and agents of the Post Office Department as passengers but without compensation to the extent of more than 50,000,000 passenger miles annually (this being, of course, in addition to the railway mail clerks on duty), etc., etc. Extracts from the "Postal Laws and Regulations" defining and demanding these services are given in Appendix A. No one can examine this appendix and not be convinced that the mail service is the most exacting among all those rendered by American railways.

The fairness of railway mail pay can also be tested by apportioning operating expenses between passenger and freight traffic, and then making a secondary apportionment of the passenger expenses between mail and other kinds of traffic carried on passenger trains. This method involves charging directly to each kind of traffic all expenses pertaining exclusively thereto, and the apportionment, on some fair basis, of those expenses which are common to more than one kind of traffic.

In accordance with the request of the Postmaster-General, the railways estimated the cost of conducting the mail service in the manner just explained and reported the results to the Postmaster-General. After first charging to each service the expenses wholly due to it they apportioned the common expenses between the passenger and freight services, following (with inconsequential exceptions) the method most generally employed for that purpose, namely the apportionment of these expenses in the proportions of the revenue train mileage of each service. Having estimated, in this way, the operating expenses attributable to passenger trains, the railways assigned to the mails the portion of this aggregate indicated by the proportion of the total passenger train space required for the mails. Using this method, 186 railways, operating 2,370 mail routes, with a total length of 176,716 miles, ascertained and reported that for November, 1909, the operating expenses (not including taxes), for conducting the mail service were $4,009,184. The Postmaster-General states (Document No. 105, page 281), that all the railways represented in the foregoing, and enough others to increase the mileage represented to 194,978 miles, were paid for the same month only $3,607,773.13. It thus appears that the pay was far below the operating expenses, without making any allowance for taxes or for a return upon the fair value of the property employed.

While different methods are in use for ascertaining the cost of passenger train service and the results produced by such methods may show considerable variation, yet the mail pay is so far below reasonable compensation, from the standpoint of the cost of the service and a return upon the value of the property, that no method can be reasonably urged which would not demonstrate the non-compensatory character of the present mail pay. This is illustrated by the method which the Postmaster-General himself employed, as the character of that method is such that it necessarily produces the very lowest estimate of cost for the passenger train service.

The Postmaster-General, by his method of apportionment arrived at a cost of $2,676,503.75

But this must be increased (as will be shown below, on account of his erroneous apportionment of car space (page 10), by 800,802.00

And also on account of his refusal to assign expenses directly incurred in the mail service (page 12) 401,126.00[C]

Total, according to the Postmaster-General's method of apportioning costs between passenger and freight traffic $3,878,431.75

[Footnote C: There may be some duplication in this item, but to eliminate it would require an elaborate computation which, in view of the broad margin of expenses over receipts, is wholly superfluous. Whatever duplication exists must be small in comparison with this margin.]

Thus even the Postmaster-General's method of apportioning costs between freight and passenger traffic produces an operating cost in excess of the total pay received by the railways, leaving nothing whatever for return upon the fair value of the property or necessary but non-income producing improvements.

There is no allowance, in any of these estimates of cost, for the large volume of free transportation supplied to officers and agents of the Post Office Department, when not in charge of mail, although this amounts to over 50,000,000 passenger miles annually and, at the low average rate of two cents per mile, would cost the Post Office Department more than $1,000,000 per year.

Moreover, as will presently be shown (pages 13-14) all the figures here discussed are for the month of November, a month which, because of the abnormally low ratio of passenger traffic to freight traffic, substantially understates the cost of the passenger train services, when figures derived from it are applied to an entire year.

It thus becomes evident that any inquiry which takes into consideration the necessary elements of the situation will demonstrate that railway mail pay is too low. It is only by ignoring essential elements of the service and of expense and the fundamental element of a return on the value of the property that any argument to the contrary can be constructed.

Thus the mail traffic does not pay its operating cost. That traffic is a substantial percentage of the total public service performed by the railroads. It should contribute a substantial proportion to the taxes which the railroads have to pay and to the return on railroad property which its owners are entitled to receive. Clearly no fair method can be devised which will fail to show that the existing mail pay is far below a fairly compensatory basis. Certainly this condition ought not to be intensified by adding the injustice of still further reductions. On the contrary, the unjust reductions of recent years should be corrected for the future, and the railroads should be relieved from the strikingly unjust methods by which they are at present deprived of anything approaching fair compensation.

V. THE POSTMASTER-GENERAL'S APPORTIONMENT OF SPACE BETWEEN THE MAIL SERVICE AND THE OTHER SERVICES RENDERED ON PASSENGER TRAINS DID NOT ALLOW TO THE MAILS THE SPACE WHICH THEY ACTUALLY REQUIRE AND USE AND THIS HAD THE RESULT OF UNDULY REDUCING HIS ESTIMATES OF THE COST TO THE RAILWAYS OF THE MAIL SERVICE.