In the first two columns the percentages given relate to the operating expenditures alone, without reference to the total expenses—eliminating, that is to say, the large group of fixed charges, and treating these operating costs entirely by themselves as if the others were non-existent. In the third or right-hand column, it will be observed, the main groups are again given in percentages, not of the operating expenses alone, but of the total outgo, including capital expenditures in the nature of fixed charges. It should also be noted, of course, that only a few of the large or more important items are here included, and in the right-hand column no details, other than for the four main headings, have been computed. The constancy in the distribution of these groups of railroad expenditures over a term of years is graphically shown by the opposite diagrams.[32] The perpendicular line for each year is divided proportionately to the relative importance of each designated item of expense for that year. Thus the course of the horizontal lines, dividing the four main percentage zones, represents the ups and downs in the relative importance of each item. Occasionally, as in the years following 1895, the proportion of so-called general expenses decreased appreciably; but, in the main, all the items moved more or less in unison subject to the movements of wages and prices. This relative constancy proves how fundamental the arrangement of groups is.

The attempt to differentiate the constant from the variable expenses of railroads on the basis of the foregoing operating statistics may now be made. What proportion of each item in the table for each of the large groups is fixed in amount; and what proportion fluctuates more or less in connection with the volume of traffic?

Under the first category, Maintenance of Way and Structures, absorbing about one-fifth of operating expenses, over one-half is incurred for so-called "repairs of roadway." It is evident that a large part of this expense is due not to wear but to weather. A costly plant is exposed to every vicissitude of flood, fire, and waste. Re-ballasting and realignment may be somewhat more expensive where traffic is heavy; but certainly all general repairs, the wages of track walkers, the removal of snow, ice, and weeds, must be attended to entirely irrespective of the number or size of passing trains. Of the second item, renewals of rails, it is probable that this expenditure is directly traceable to wear and tear in large part. The more trains, the heavier the locomotive and cars or the higher the speed, the more rapidly must these rails be replaced. But even so, the proportionate amount is small, constituting generally between five and ten per cent. only of the group expenditure for maintenance of way. With ties, an item about twice as important as rails, the case is exactly the reverse. Ties rot out rather than wear out. They have a natural life varying from four to fourteen years, as influenced by climate, ballast, and drainage. The necessary expenditure per mile for them by different roads varies greatly, as might be expected; but it seems to bear little relation to the density of traffic. As for the principal remaining items under Maintenance of Way, such as repairs of bridges and buildings; if properly designed to withstand their loads and strains, most expenses of their up-keep such as repainting and reroofing should be practically independent of the volume of business. A recent elaborate discussion of these matters in 1907 in the Wisconsin Two-Cent Fare decision, reached the conclusion that all of the cost of rails, one-third of the ties and ten per cent. of expenditures for roadway, track and bridges, are all that can properly be charged to wear from traffic, as opposed to natural depreciation. Acworth illustrates this point by comparison of the Midland & Great Western Railway of Ireland and the Lancashire & Yorkshire Railroad. These two are of about equal length, approximately 530 miles. The latter carries forty times the traffic of the former road, and yet its expenses for maintenance of way are only eight times as much. It seems safe, in general, to conclude that in this first large group of expenditures for maintenance of the fixed plant, probably not over one-third are variable to any considerable degree. Acworth for England estimates this proportion at about two-fifths.

The proportion of variable expenditures for Maintenance of Equipment—the second group—is probably higher than in that of maintenance of way. This is due to two causes. Rolling stock is, of course, subjected more directly to wear and tear in service than are bridges, cuts and fills and buildings. Rolling stock, moreover, is susceptible to change of type and improvement. Its effective life is thus shortened both by use and by replacement. Before being worn out it may have become antiquated. More powerful locomotives and larger cars suited to new requirements of the business may necessitate scrapping otherwise good equipment. This very fact, however, imposes upon the management the need of intensive service while it lasts. All the mileage possible must be extracted from each vehicle before it goes out of date, and this implies a higher proportion of wear-out than of mere rust-out. Yet the fact is still true that many of the items in this class are unaffected by the mileage or tonnage performance. There is little difference in wear on a freight car as between light and moderately heavy loads; and as for passenger cars, the actual wear assignable to the paying load is a negligible quantity. We may, at all events, risk an estimate in the statement that probably not over half of all the expenditures of a railroad for maintenance of equipment vary with the volume of the business.

The direct effect of a changing volume of business is most clearly seen in the third group of operating expenses, having to do with Conducting Transportation. This is very important, comprising as shown by the table on page 49, no less than fifty-five per cent. of operating outlay and forty per cent. of total expenditures including fixed charges. At first glance it would appear as if, at last, one had here to do with a direct relativity between cost and volume of business. Surely the cost of fuel for motive power will vary with the tonnage moved! This item, amounting in 1905 to no less than $156,000,000 for the railroads of the United States, was the largest in the budget, constituting eleven per cent. of all operating expenses. Yet brief consideration shows that even here much of this expense is constant and invariable. A locomotive will burn fully one-third as much coal merely to move its own weight as to haul a loaded train. Five to ten per cent. of its total daily consumption is required merely for firing up to the steaming point. Twenty-five to fifty pounds of coal per hour go to waste in holding steam pressure while a freight train is waiting on a siding. Every stop of a train going thirty miles per hour dissipates energy enough to have carried it two miles along a level road. In brief, expert evidence shows that of this important expenditure for coal, from thirty to fifty per cent. is entirely independent of the number of cars or the amount of freight hauled. The largest wage items in this group of conducting transportation expenses are for engine and roundhouse men, and conductors and brakemen. This expense is, of course, even more independent of the volume of business than the cost of coal. No more engine men or conductors are needed for a heavy through express or freight train than for a single car tram on a branch line. And the extra cost for service of more brakemen as the size of the train increases, is relatively unimportant when modern equipment with air brakes is used. Appreciation of this fact is largely responsible for the great increase in train loads in recent years. Train-mile costs can be economized most effectively by distributing the wages of a train crew over as large a tonnage as possible of paying freight. As for the wages of station men, switch and flag men, they are largely, and often entirely, independent of the amount of business. From all these considerations, it appears that at a conservative estimate, no less than fifty per cent. of the cost of conducting transportation constitutes a fixed charge upon the property once it is in operation, irrespective of the volume of business transacted.

The group of general expenses, which alone remains for analysis, is relatively small in amount. It is obvious that these outlays are a constant burden but slightly influenced by the variation in traffic. Salaries may indeed be reduced somewhat during hard times—a few clerks may be laid off; but, on the other hand, this being an expense of organization, the general staff must be maintained at about a certain standard of efficiency regardless of business.

Summarizing our estimates thus far, we may reconstruct a table, distributing expenditures theoretically according as they are constant or variable in somewhat the following way:

Thus one arrives at the general conclusion that approximately two-thirds of the total expenditure of a railroad and more than one-half of the actual operating expenses are independent of the volume of traffic. The remaining third of all expenditures, or what amounts to the same thing, the other half of the operating expenses, are immediately responsive to any variation in business. Applied to the railroad net of the United States, this means that only about one-third of the $2,000,000,000 disbursed in 1905—an amount equal to about two and one-half times the national debt—was susceptible of variation according as the traffic expanded or decreased. This provisional estimate, defective principally because of inadequacy of the returns as to depreciation and replacement, agrees in the main with computations based upon other data. The Vice-President of the Southern Pacific Railroad, in 1892, after extended investigation, arrived at precisely the same general conclusion. The great German authority, Sax, estimates that one-half of a road's operating outlay is constant and that this operating outgo equals about half the total expenditure, the other half being capital cost and hence constant. This calculation places the constant factors even higher than ours, viz., at about three-fourths of the total expenditure. Eaton states that half of the operating expenses respond to changes in the volume of traffic. Our estimate, above detailed, seems to be in accord therefore with good authority, and differs but little from any of the reliable writers.

It should be observed in passing that the relative distribution of outgo above mentioned, varies greatly both as between different railroads and, on the same road, as between different years.[33] During lean seasons the imperative need of reducing expenses generally induces the heaviest inroads on expenditure for maintenance of way. Nearly one-third of these expenditures can probably be postponed for short periods without serious detriment to operation; but, of course, there is for each property an irreducible minimum at which economy must halt. On the other hand, the cost of moving each train, that is to say, the outlay for fuel and wages, cannot be greatly cut, although some discontinuance of freight trains may take place. The most readily postponable outlay is therefore found in the department of maintenance of way. Two hundred ties per mile may be annually renewed instead of twice that number for a year or two. Heavy decreases in the wage account for road and track men may be effected, sometimes at the cost of public safety perhaps, but none the less effectively from an immediate fiscal point of view. A series of hard years thus always results in heavy proportional curtailments of maintenance of way expenses. In 1895, for instance, midway between the two worst years of the depression of 1893-1897, only 19.82 per cent. of operating expenses was devoted to maintenance of way, with 15.76 per cent. expended for maintenance of equipment.[34] Six years later, in the full tide of prosperity, the outlay for maintenance of way had risen to 22.27 per cent. With over 350,000 freight cars idle on sidings, as during the spring of 1908, expenditures on repairs of equipment may temporarily be postponed. Depreciation rather than wear takes place. An economy of about five per cent. may temporarily be effected in this wise. It is only with the return of prosperity that the temporary postponement of this expenditure makes itself felt. Economy at the expense of efficiency is poor business policy in the long run. With the revival of activity on the other hand, as in 1898, there may be witnessed a sudden concentration of the postponed expenditures of the preceding years. The Illinois Central was spending $1,400 per mile on maintenance of way in 1905, as against only $1,150 in 1897. A succession of fruitful years may, however, find the property so thoroughly kept up that some measure of relaxation in expenditures may ensue. During these good years with heavy traffic, it is the maintenance of equipment charges which tend to rise. Locomotives and cars are constantly in need of repair owing to hard usage. This was a noticeable feature during the four years after 1900. The Illinois Central, expending only $866 per mile for maintenance of equipment in 1897, laid out $2,200 per mile for the same purpose in 1907.

Sometimes, as in January, 1903, or November, 1906, general wage increases all along the line take place. These, of course, affect all branches of the service. Supplies of all kinds may also enhance in price. It was doubtless the rise in the price of coal which increased the proportionate importance of the fuel item in the railroad budget of the United States from 9.8 per cent. in 1900 to 11.8 per cent. in 1904. The tremendous rise in expenses of all kinds in 1907 was not at first appreciated because of the large volume of traffic. It was only when the sharp decline in business following the panic in October of that year took place, that the full influence of this factor became apparent.

As between different roads also, the relative proportion of the various elements of cost will vary according to circumstances. Northern lines are exposed to heavy maintenance of way charges, owing to snow, ice, and frost. In rugged districts or with heavy grades, expensive operation is apparent in high conducting transportation expenses. On the Pennsylvania trunk line, rising to 2,100 ft. above sea level and with many curves, the distribution of expenditures is quite different from that on the New York Central, which operates a straighter line at about water grade. On the Union Pacific, movement expenses have been at times over fifty per cent. higher than on the St. Paul road, which operates in level country. It is a combination of high grades and poor equipment, which undoubtedly keeps the relative cost of conducting transportation so high on the Erie. The proportion of local to through business is of importance in this connection.[35] Railroads like the Boston & Maine or the St. Paul system before 1908, because they have so much local business, contrast strongly with others like the Chicago Great Western, the Erie or the old Fitchburg Railroad. On the latter roads the distribution of expenses is different, because their large volume of through traffic carried in bulk is so much cheaper to handle. Obviously, the expense incident to frequent stops and loss of time, as well as in loading and unloading local business, will be much greater than in long haul trainload traffic. The cost of large items like fuel will vary greatly in different parts of the country from perhaps $1.25 per ton for coal in Pennsylvania up to $7 or more on the Pacific coast. Since the recent discoveries of petroleum in Texas and California, economies have been effected upon the Southern Pacific, which by comparison with Northern Pacific, still using coal, may be of great importance. More than six-tenths of the cost of locomotive service is for fuel, so that a reduction of cost from $4 a ton to an oil equivalent at $1 per ton may aggregate a large sum. It has been estimated that such a saving on 1,600,000 tons of coal would pay five per cent. on an additional capital of $100,000,000. Similarly the character of the freight, whether it be like coal, iron ore or grain, cheaply handled, or merchandise which must be carefully housed and treated; its regularity, whether it flows evenly the year round like the dressed beef business, or as on the cotton and cattle range roads, is concentrated in a short season and all moves in one direction;[36] the relative proportions of freight and passenger business—in New England about on an equality, while in the West and South nearly nine-tenths freight; and, finally, the efficiency of management, in the use of rolling stock, making up trainloads and keeping all equipment busy; all of these factors will influence the proportionate distribution of expenditures. The operation of each road thus constitutes an interesting problem in statistical analysis by itself.[37]

The relation of course between density of traffic and the distribution of expenditures is direct. Heavy and frequent trains increase the wear and tear as distinct from mere depreciation from age and weather. This is demonstrated graphically by the following diagram.[38] The solid black horizontal belts to right of the centre show how low is the density of traffic on the five upper western roads by contrast with the five carriers in trunk line territory. The left hand horizontal belts show proportionally in dollars the outlay per mile of road for maintenance. Naturally the expense of such maintenance is likewise less on the western lines. But when stated, not absolutely in dollars per mile of road but in terms of utilization, as by the shaded belts to right of the centre, the true state of things appears. Density considered, in other words, the western roads are all as well kept up as those in the East. The necessity at all times of interpreting such expenditures, not in absolute figures but in terms of utilization, is obvious; and yet it is not always done in practice.

Up to this point it has appeared as if, in making distinction between the constant and variable expenditures of a railroad, it was the latter only which grew as the volume of traffic increased. This is not absolutely, but only relatively true, not only of the so-called constant operating expenses, but of fixed charges as well.[39] Everything depends upon the length of time under consideration. Many expenses follow the fluctuations of business, not evenly but by jerks. Up to the full limit of utilization of the existing plant, each increment of traffic seems to necessitate but a very small increase in the so-called variable expenses, with hardly any change at all in the constant ones. A branch road can haul more and more tons of freight with a given outfit of cars and locomotives by merely increasing slightly its outlay for fuel, train service, wages and supplies. But after a certain point more rolling stock must be provided to accommodate the growing business. As each of these additions to property occur, they contribute new quotas to the fixed charges and to the so-called constant expenses of operation, such as maintenance of roadway and the like. Nor can these new expenses be allocated to the new business alone. The moment the old traffic has outgrown the existing plant, the new expenditure becomes chargeable to all the business alike. The new outgo must be distributed evenly over the entire volume of traffic thereafter handled. Each ton, both of old and of new traffic, beyond the haulage capacity of the locomotives then in service, is equally responsible for the expense of new equipment purchased. Although the old business could have been handled without a million dollars spent for double-tracking or terminal enlargement, this addition to the expense of maintenance of way or to the fixed charges is equally attributable to every ton of traffic hauled.

A concrete example may aid in making this important principle clear. The new through-freight trunk line built by the Pennsylvania Railroad since 1900, paralleling its old four-track one, represents both in the cost of maintenance and capital charges, a sudden jump in the expense of transporting each ton of freight on both lines, until such time as the new business grows to a point where it can support the new line by itself alone. The relation between increasing returns and density of traffic is well illustrated in this instance. With six tracks in operation nearly all the way from Pittsburg to Philadelphia, the four old tracks are sometimes almost fully utilized for passengers and fast freight. The extraordinary density of traffic appears in the statement that this road in 1911 on 3534 miles of track handled one-third more ton miles than the Union Pacific—by far the most worked of all the western lines—handled on 13,674 miles of track. The two new low-grade Pennsylvania freight tracks are used only for slow traffic; largely coal and westbound steel empties. Not-withstanding the extraordinary density of traffic on this extra two track line, it probably does not meet the fixed charges on cost of construction of the line. Yet the new double track was absolutely necessary, regardless of its profitableness, in order to relieve congestion on the old four tracks. In other words, the demands of the service forced an expenditure which in and of itself was not financially self-supporting. But the profit from the old lines would be sufficiently enhanced to take care of the whole. The bearing of such cases upon the capital needs of the future is obvious. A resolutely conservative policy of finance becomes imperative under such circumstances.

In much the same way, the general condition of congestion reached in 1903-'05 on the eastern trunk lines and in the West and South in 1906-'07, manifested mainly in the need for more tracks and terminals, represented the permanent outgrowth of the old plant; and necessitated a readjustment of capital expenses for the purpose of enlargement. Viewed in a large way over a term of years, nearly every expenditure, even the fixed charges which appear constant or independent of the volume of business, thus become in reality imbued with more or less variability.

The preceding considerations hold good not alone of increased facilities, but of their curtailment as well. This point is often neglected in respect of capital outlay, which once made cannot be recalled. Rotting of ties we have held to be a constant expense of operation. It goes on steadily, whether traffic conditions be good or bad. But, on the other hand, those ties, if they be under a third or fourth track, would never have been laid had not there been a promise of business sufficient to render the added investment profitable. As Lorenz observes, "the question is not, What expenditures would disappear if a certain proportion of the traffic should be discontinued? but What expenditure would not now be incurred if that traffic had never been called forth?" Viewed in this way, even the necessary replacement of ties under a (temporarily) little used extra track, is an expense determined at some time, even if not always, by the volume of the business. In the long run, therefore, the percentage of total cost which we may assign to an increase in the volume of traffic, is higher than appears from a cross-section of expenses, taken, as was at first had, in a given year. Lorenz has illustrated this steady expansion of all groups of expenditure in relation to expansion of traffic by the following table, in which the actual figures for each year [brought down to date] are replaced by an index number based upon 100 for the year 1895. It would have been highly suggestive to continue all of this data alike to the present time; but, as noted on the table, certain items have been so modified by changes in accounting practice, that this could not be done.

According to this showing, maintenance of equipment, which we held in our analysis to be about one-half a constant expense and independent of traffic, especially after 1900, appears to have actually outrun the expansion of ton-mileage and passenger business. How largely this is due to actual purchases for the sake of future growth is not determinable. And maintenance of way outlay—one of our largely constant expenses—has increased, in fact, more rapidly than conducting transportation, which we held to be mainly variable. But these figures are confused by the failure to differentiate in the accounts, mere maintenance from actual improvements and additions to plant. Expenditures for these latter purposes, charged to operating expenses rather than to capital account, have been so enormous during these years of prosperity that they confuse the true facts utterly. It is to be hoped that now with the revised statistics since 1906, which will permit a clearer definition of these expenditures in detail, an analysis covering a series of years will bring out the real relationships. Equally important is the fact that these years have been characterized by rapid and extensive rises, both of prices and wages. Had our table covered a longer series of years the results would have been more clear. Until such an analysis be made, it will suffice for our purpose, viz., the analysis of the principles of railroad rate making, that we adhere to our first general conclusion, namely—that of the total expenditures of a railroad at any given time about two-thirds of them are constant, while only one-third vary with the ups and downs of the volume of traffic. Comprehending in survey a long period of years, it might happen, as Acworth concludes, that nearly one-half of the total expenditures were entirely fixed in character, leaving the other half as dependent upon the amount of transportation effected.

The manner in which heavy capital outlay for maintenance accompanies as well as partly accounts for a decline in the cost of conducting transportation on American roads, is graphically shown by the diagram on the next page.[41] During ten years a steady decline in direct operating costs has accompanied an equally marked upward tendency in expense of maintenance. The bearing of this on the problem of rate advances in future is direct. Profitableness results from two separate sources; economical operation such as longer trains and better loading, and also from far heavier capital investment in plant, by which such operation is rendered possible.[42] Both alike, however, attend upon increased volume of business. Heavy capital investment may lessen immediate maintenance charges,—lower grades and straighter alignment naturally wearing less; but, on the other hand, the burden of interest and other fixed expenses steadily grows. How will they stand toward one another by 1925 on the eastern trunk lines? Will growth of business bring lower rates or not? A fine field for further analysis is as yet unworked.

RATIO OF MAINTENANCE OF PROPERTY AND CONDUCTING TRANSPORTATION TO TOTAL OPERATING EXPENSE.