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little further increase in fares is possible without suffering an erosion in traffic which would wipe out the benefit of the fare increase.
In exhibit 11, I have furnished the committee with general passenger statistics for the years 1947 through 1963 in terms of passenger train miles, a breakdown of types of passengers carried, a breakdown by passenger miles and types of passengers carried and length of haul by types of passengers carried.
Finally, with respect to our passenger service. I have shown in exhibit 12 the mail and express revenues which have been received by the New Haven during the years 1947 through 1963. This revenue, as the committee undoubtedly knows, is credited to passenger service, since for the most part it is earned on passenger trains. It will be noted from the volume of mail revenue that, while the revenue is important to the New Haven, the New Haven must also be important to the Post Office Department and to the public in southern New England as a carrier of the mail.
While the bills being considered by the committee are concerned directly with passenger service, we, as trustees of the property of the New Haven, have had to concern ourselves equally with freight service and the public interest in its maintenance in southern New England, as testified to by Mr. Smith. In exhibit 2, previously referred to, I have shown the committee the volume of the New Haven's freight revenues for the last 11 years. These figures do not, however, tell the whole story.
While the bills being considered by this committee are concerned directly with passenger service, underlying our entire problem is the maintenance of our vital freight service because its continuance is dependent in large measure on the solution to the passenger problem.
So I would like to take a moment to refer to the importance, specifically, of that freight service. In one of the exhibits I have shown the volume of New Haven's freight revenue in the last 10 years. Let me state in 1964, freight revenues exceeded $67 million as compared with, roughly, $54 million in passenger and airline service.
But these figures do not tell the whole story due, primarily, to changes in the art, as well as a diversity of competitive factors. The significance to the public of the New Haven's freight service today must be measured less by the dollars of revenue than
by the volume of the traffic.
Even as the New Haven's revenues from freight service have decreased during the trusteeship, the total tons carried have increased. In 1964 the New Haven carried over 19 million tons, which represented about a 5 percent increase over the level of 1961 when the trusteeship commenced.
The need for continuance of the New Haven's freight service could not be better evidenced than by the testimony of various rail freight users who appeared voluntarily on their own behalf or through their various associations in the proceedings before the Interstate Commerce Commission with respect to the proposed merger of the Pennsylvania and New York Central Railroads.
There were shippers and users from each of the three southern New England States, representating such national firms as Raytheon, Kennecott Copper Co., United States Rubber, Bigelow-Sanford, Dow Chemical, Chesebrough-Pond's, Anaconda American Brass, Bridgeport Brass, American Hardware, Hubbard-Hall Chemical, Fuller Brush, Arnold Bakers, Time, Inc., Chas. Pfizer & Company, United Aircraft, and McKesson & Robbins.
There was a host of others whose operations are centered in southern New England and of extreme importance, together with the national firms which I have mentioned, to the economic well-being of this heavily populated area.
There was specific testimony with respect to the consequences of discontinuance by the New Haven of freight service in southern New England, as follows:
Hubbard-Hall Chemical testified that it would move its seven plants out of New England.
United States Rubber Co. testified that the consequence would be "quite disastrous.”
Senator PASTORE. As you name these firms, will you give their location as to States?
Mr. KIRK. I don't have them right here, Mr. Chairman. I can furnish them.
Senator PASTORE. All right. (The information follows:) States in which are located industries (principal plants only; branch activities may be in other States) :
Chas. Pfizer & Co., Connecticut. Mr. KIRK. Dow Chemical testified that it would be faced with an “almost impossible operating condition."
Chesebrough-Pond's testified that its expenses would be increased by $300,000 if forced to use motor carriers.
Anaconda American Brass testified that its transportation costs would be increased by about one-half million dollars annually.
Heublein, Inc., testified that its transportation costs on alcohol alone would be increased by over $1 million annually.
American Hardware testified that increased transportation costs would have a serious effect on its ability to function properly.
Arnold Bakers testified that it would force the company “to move elsewhere."
United Aircraft testified that it would "greatly hinder” its economical as well as physical operations.
In addition to rail freight users, citizens in responsible public positions appeared to testify to the adverse consequences of a termination of New Haven operations to their area.
For example, from Rhode Island there appeared a leading contractor, a prominent baker, a monsignor, and an official of United Steel Workers, all of whom pointed to the adverse economic and social consequences which would result. As put by the labor leader:
I have a broad interest here that goes beyond the pale even of my members in the State of Rhode Island. It concerns an entire community and the continuation of that community's economic life.
As the committee may know, during the years 1962 and 1963 the trustees were able to make considerable improvement in the New Haven's financial condition. In each of those years the trustees made substantial reductions in the New Haven's operating costs.
For example, railway operating expenses for 1962 were approximately $116 million compared with $122,500,000 in 1961. In 1963, railway operating expenses were further reduced to approximately $110,500,000. In 1964, however, we found our efforts to continue the improvement frustrated by increases in costs which to a large extent were beyond our control.
Senator LAUSCHE. What did they result from?
In 1964, for instance, we were faced with increased labor costs which, over the years 1964, 1965, and 1966, will add $14 million to our operating expenses.
Senator LAUSCHE. May I ask a question? Do you know whether in the negotiations for increased wages, the subject of the inability of this railroad to carry these increases was at all discussed ?
Mr. KIRK. I don't believe they were, sir.
Senator PASTORE. That is what we went through a year or two ago in this committee.
Mr. KIRK. Right.
Senator LAUSCHE. By how much did those wage increases add to your expenditure load. You have it here, I think.
Mr. KIRK. I said that the increase for 1964, 1965, and 1966 will add $14 million. Now, in 1964 alone, the figure is $3.5 million.
Senator LAUSCHE. Your operating expense statement on exhibit 3 shows that operating expenses jumped from $110 million, approximately, to $115 million. That would be $5 million, but there is only how much?
Mr. KIRK. Three and a half million dollars may be attributed to the wage increases. This estimate of increased wage costs is made after deduction of the savings anticipated to be derived from elimination of firemen pursuant to the national agreement.
The impact of these wage increases on our operations in 1964, together with increased maintenance costs which we could not avoid, is shown by our income statement for the 12 months ended December 31, 1964, which is marked exhibit 13.
For the year 1964, railway operating expenses increased to $115,204,000, some $5 million higher than 1963, and putting us back to the 1962 level of operating expenses. I also have available for the committee among the exhibits a balance sheet of the railroad as of December 31, 1964, which has been marked exhibit 14.
I have referred to the reductions in operating costs which we have made. Obviously this could only be achieved by a reduction in the number of employees, since to a large extent railroad operating costs are wage costs.
Senator PASTORE. May I ask a question at this point, Mr. Kirk? In these savings of operating costs, did we in any way sacrifice the safety of the road?
Mr. KIRK. Not one iota, sir.
Senator PASTORE. Insofar as the rails are concerned, the beds are concerned and the safety of the cars, themselves?
Mr. KIRK. I don't know of any factor of more importance in the operation of this railroad in the minds of the trustees than the factor of safety.
Senator PASTORE. Thank you very much.
Senator LAUSCHE. It is pertinent to this thought. How did you achieve the savings as between operating expenses in 1962 of about $116 million, dropped to $110.5 million in 1963 ?
Mr. KIRK. Senator, I think it is also axiomatic, if you will, that a new management going into a situation which has faced many difficulties brings with it a new broom and can do a lot of sweeping. This we intended to do.
We went up and down this railroad, looked under every rug and every corner to see what we could do internally to improve this situation, and we didn't leave any stone unturned with respect thereto.
Senator LAUSCHE. Merely, without causing any reflections, who was the head of the New Haven before you stepped in as trustees?
Mr. KIRK. At the time this railroad filed under bankruptcy, Mr. George Alpert was the president of the railroad.
The railroad, today, has approximately 2,100 fewer employees than the 11,650 on its rolls in August of 1961.
We are now faced again with a cash crisis of the nature which we faced when we first assumed trusteeship. At that time the actual cash loss from operations was building up at the rate of $1,500,000 a month and there was no cash in the till with which to meet the payroll.
We eliminated the cash loss in 1962 and 1963, and actually had improved our cash position at the end of 1963 over that which existed at the end of 1962.
In 1964, however, for the reasons which I have previously mentioned, we suffered a cash loss of $2,300,000 and, at year's end, still owed $1,700,000 in cash to our employees which remained unpaid under the nationally negotiated wage increases which were made effective as of January 1, 1964.
We have arranged to pay this $1,700,000 on an installment basis during 1965, as well as attempt to meet the higher wage costs on a current basis.
Our operating cash funds were reduced from $8,528,000 at the end of 1963 to $6,215,000 at the end of 1964. At a court hearing on February 4, 1965, we estimated that by July 1, 1965, these funds would be reduced to $4,400,000.
Subsequent to that hearing the court released to us $1,200,000 on deposit in the court's registry as the result of a successful litigation, and previously earmarked for other purposes. These funds will now be added to our operating cash.
Now we will supplement and have supplemented our cash position of funds to be derived from the issuance of the remaining balance of Government-guaranteed trustees' certificates and this is done this week.
We intend to invest the proceeds of the $4,500,000 trustees' certificates in short-term Government bills; and keep this fund in reserve against an emergency and, if needed, in aiding an orderly liquidation.
Senator LAUSCHE. With reference to the issuance of these trustees certificates guaranteed by the Government, I assume.
Mr. KIRK. Yes, sir.
Senator LAUSCHE. Are the holders of the certificates given priority over other equity holders ?
Mr. Kırk. There is an order of priority established under the Bankruptcy Act and certain certificates issued by the trustee are of the highest order of priority.
Senator LAUSCHE. It is an operating expense incurred by the trustees and therefore has priority over the rights of other lienors.
Mr. KIRK. That is correct.
Senator PASTORE. On that very point, Mr. Kirk, I understand there was a default before the trusteeship of about $28 billion. Is that correct?
Mr. KIRK. Of Government loans ?
Senator PASTORE. Now since the trustees have taken over and these bonds have been guaranteed by the Government, has there been a default?
Mr. KIRK. Not on the borrowings by the trustees; no, sir.
Senator PASTORE. In other words, you have been meeting your obligation on any bonds that were issued since you took over the management?
Mr. KIRK. That is correct.
Apart from the $4,500,000 from the sale of trustees' certificates which we feel must be kept in reserve due to the uncertainties with which we are faced, any objective appraisal of our cash position must be decidedly pessimistic, even without bad weather or other emergency situations, unless relief reaches us in the next few months.
Under current conditions, 1965 will see a further substantial erosion in our operating cash. In this connection, it must be borne in mind that our operating payroll, alone, is some $6 million a month.
In analyzing our cash situation for the committee, it is important to point out that we have been operating the railroad for 312 years almost wholly on a cash basis.
We have not paid real estate taxes or interest on the bulk of our funded debt. We have employed an installment basis in payment of tort claims and judgments. We have deferred payment of a portion of the amounts claimed against us by other railroads for freight car rentals, the so-called per diem charge, pending final resolution of litigation. It has been necessary for us to defer much-needed new capital investment and essential maintenance not affecting safety, of course.
Senator PASTORE. Mr. Kirk, I would like to go for a moment into this per diem situation. I understood sometime back a suit was initiated on the increased per diem rate that involved the New Haven Railroad. Where does that stand now?
Is there a likelihood here we might have to shovel out a tremendous amount of money in case the suit is adverse to the railroad?