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Costs Of Transportation

( Originally Published 1939 )



No study of distribution and its costs can ignore transportation. The transportation of commodities between various steps in the distribution process was estimated to cost in the aggregate $8.8 billion, or about 23 per cent of the $38.5 billion total cost of distribution. Since "terminal sales" amounted to $65.6 billion, this means that on the average, about thirteen cents out of every dollar paid by ultimate buyers for finished goods goes for transportation costs at various stages in the whole process.

This charge, like other items of distribution cost, is paid for essential services performed. Without the function discharged by transportation agencies our economic system as we know it today could not exist. Transportation creates place utility, but it does much more; it makes possible the geographical division of labor. Without a far-flung and efficient transportation system the exploitation of mineral and agricultural resources in favored areas and the development of specialized manufacturing regions-indeed the machine economy in its present form-would be virtually impossible. Nevertheless the same question may be asked about transportation as about other phases of distribution: is this vital function performed as efficiently and economically as possible?

Costs Vary Widely

The amount which transportation charges add to the cost of commodities varies widely among different products. Naturally transportation accounts for a large part of what the consumer eventually pays for bulky and perishable commodities, especially food-stuffs shipped from distant producing areas. Transportation and transit costs for fresh fruits and vegetables,often amount to as much as twenty to thirty cents or more out of every dollar paid by the consumer.

Although extensive information on the proportion of the purchase price paid for transportation is not available for most commodities, a recent survey of commodity flow made by the National Bureau of Economic Research gives some figures in terms of freight revenue as related to producers' selling prices.' This study shows that transportation costs were a relatively unimportant item-amounting to less than 2 per cent of the producer's prices in 1933 for such products as cigars and cigarettes, dry-goods, automobile tires, industrial and electrical machinery, office and store equipment and stoves and ranges. At the other extreme, transportation charges added nearly 58 per cent to the producer's selling price for fruits and vegetables, and more than 20 per cent for fuel and lighting products.

All finished commodities covered in the survey had an average transportation charge amounting to 7.8 per cent of producers' prices in 1933 as compared with 5.4 per cent in 1928.

In spite of the fact that transportation charges constitute an important element in total distribution costs, distributors have limited control over them. For this reason, and because transportation is a separate and highly complex subject, it can receive only limited attention in this report.

The Nation's Transportation Facilities

Six principal types of agencies share in the freight handling business: steam railways, trucks, water-carriers, pipe lines, electric railways, and air carriers. Among these the railroads, which ac-count for about 65 per cent of the total interstate traffic, are by far the most important. According to a special report' on the transportation situation made to the President in December 1938, the rail-roads have suffered two major handicaps in recent years: economic depression and severe competition from other forms of transportation. Between 1926 and 1937 their share of the freight business declined from more than three-fourths of the total volume to less than two-thirds, a loss of more than 10 per cent. Motor truck transportation, pipe lines, air carriers, and inland waterways, all showed gains during the same period.

Leading authorities assert that the United States is oversupplied with transportation services. There is general agreement with a statement made by Commissioner Eastman in 1934 that there is today, and probably would be under normal conditions, an excess of carrying capacity of existing transportation facilities. This duplication of facilities and services and excessive competition among different transportation agencies must inevitably result in substantial wastes. In his first report to Congress the Federal Coordinator of Transportation characterized this waste, in the railroad field alone, as "a tremendous burden on the public."

Because a reduction of transportation charges can result in savings to the consumer through lower distribution costs it is clear that consumers as well as distributors have a stake in the elimination of unnecessary expenses and wasteful methods of operation and in the better coordination of the railroads, waterways, and highways.

a. THE RAILROADS

For many classes of goods-notably merchandise shipped in less than carload lots-the largest costs in moving freight are not on the road but at the ends of the run. A sample test made by the Pennsylvania Railroad showed that terminal and transfer expenses amounted to $4.80 per ton, or three-fourths of the total cost of $6.43. Road haul costs in this case were only $1.16 per ton, or 18 per cent of the total, and car maintenance and freight accounted for the remaining 7 per cent.' A survey made in 1932 by the Co-ordinator of Transportation showed that railroad terminal costs for merchandise freight averaged $7.28 per ton while truck terminal costs for the same year were $2.62 per ton. An analysis of comparative costs of terminal facilities in cities of varying size indicates significantly that the most economical operation was in cities of from 25,000 to 50,000 population. Both larger and smaller places had higher costs for a given amount of goods?

In considering terminal costs, it must be remembered that unless a company has its own siding, it must haul its goods to the freight terminal. This cost is part of the transportation bill. Trucking companies allege that the elimination of these and other handling costs is a principal reason for the rapid development of highway truck tonnage.

A conspicuous source of high terminal charges in the large cities is the investment in costly and frequently excessive terminal facilities. In a number of cities railroads have erected terminals that so obviously duplicated existing facilities as to be criticized by the Interstate Commerce Commission. Terminal facilities not necessary to handle the traffic and not used to capacity mean higher freight charges for the shipper. This type of terminal multiplication is socially wasteful as well as a drain on railway finances.

It is obvious from these facts that one of the most fruitful points of attack on rail costs is at the terminals. But it is much more difficult to prescribe the remedy than to diagnose the ill. Line-haul and terminal costs are interwoven in many cases; and the economies which might be achieved by establishing terminals on the out-skirts of the large cities and using motorized delivery have to be offset against the costs and difficulties of disposing of present terminal facilities.

(1) Cross-Hauling

In spite of the fact that line-haul costs are only a fraction of the total in many cases, the possibility of excessive costs between terminals cannot be ignored. Of these the one most often discussed is cross-hauling. Although ordinary railway statistics fail to show the amount of cross-hauling, several special studies show that it must be substantial. A study by the United States Forest Service and the Census Bureau shows a tremendous cross-hauling of lumber, and another investigation in the last decade of the movement of goods to and from the Pacific Southwest showed that the same kinds of goods moved in considerable amounts both into and out of the Pacific Southwest .9

How much of the total of railway ton-miles is traceable to cross-hauling is not known but the amount is probably large. Public acceptance of the desirability of competition, the attitude of regulatory commissions and the natural desire of the railroads to avoid a loss of traffic have all combined to discourage careful study of this practice. Even if the facts were known it is questionable whether there would be general agreement as to the extent to which cross-hauling is unnecessary and wasteful. A good deal of it is undoubtedly inevitable and desirable in facilitating the continuous adjustment of the supply of goods to the varying conditions of many markets.

However, it seems clear that much of the cross-hauling takes place, stimulated by the railroads in a natural desire to increase their traffic, and by public policy in order to promote competition. The basing-point pricing policies of the iron and steel and other heavy industries have also resulted in considerable cross-hauling. Without attempting to draw a sharp line between necessary and unnecessary cross-hauling it is obvious that some public discouragement of the most wasteful elements of this practice would be desirable, particularly where the competition within a region is already sufficient to protect the interests of consumers.

(2) Circuitous Car Routing

Another unnecessary cost in railroad operation is the circuitous routing of freight cars. One of the alternate routes between cities served by competitive railroads is often materially longer than another. The longer routes of course endeavor to carry as much of the business as they can get, even though it involves a longer haul.' Where cars must be switched from one line to another in order to reach the destination, the first road will keep the car on its tracks for the longest possible haul in order to get a larger share of the total revenue. Both types of practice result in increased costs of operation and higher freight charges.

The Coordinator of Transportation believes that circuitous routing often doubles the mileage that goods travel and says that, "millions of dollars annually are expended because of circuity in routing." 11 The National Transportation Committee in its report recommended that "circuitous haulage should be eliminated."

While there is little question that circuitous routing is a wasteful practice, some of it is necessary because the railroad with the shortest mileage between two cities may not have adequate facilities to handle the entire volume of traffic, particularly in peak load periods. Then too, many roads would be unable to maintain efficient service between points on their own lines were it not for the added revenue from circuitously routed traffic. For these reasons it is probably too much to expect that all "circuitous haulage should be eliminated."

From the railroad's own standpoint, it is desirable to reduce circuitous routing in order to shorten the time required to transport goods. This would help the railroad in its competition with trucks. From the public viewpoint, there is little justification for the higher rates and longer delivery time involved in unnecessary circuitous haulage.

(3) Empty Car Movement

Unnecessary empty car movement is one of the important wastes in railway operation. The volume of empty car mileage has in-creased quite consistently since soon after the war. From 1920 to 1933 the percentage of empty to loaded car-miles rose from 47.3 per cent of the total to 64.1 per cent. A large part of the empty car movement is obviously unavoidable and could not be eliminated without a radical re-location of many of our major industries. The volume of goods-mostly of a bulky nature-moving from agricultural and raw material producing areas which are distant from the centers of population and industry into consuming regions is much heavier than the movement in the opposite direction. For every ton of freight moving out of New England, for example, six tons move in. But three of the six incoming cars are filled with coal and these cars of course could not be used for much else on a return journey. New England is an extreme example of the unbalanced movement of goods arising from the concentration of our population and the existence of specialized producing areas.

There is a considerable movement of empty cars, however, which is unnecessary and wasteful. The Coordinator estimated that the annual excess empty car movement exceeded two billion car-miles and stated that "a conservative estimate of the operating savings possible by the prevention of this unnecessary movement is $75 million per year." The haphazard return system and the large number of empty car-miles necessitate investment in a sup-ply of cars considerably in excess of total national needs. Carrying charges on this extra investment have been estimated by the Co-ordinator at $25 million annually. The Coordinator has recommended a more complete pooling of car ownership and operation to reduce waste from this source, pointing out that mergers would result in the complete pooling of cars and would save unnecessary movement of empties.

(4) Unprofitable Facilities

Another possible source of economy in railroad operation lies in the abandonment-or rehabilitation-of antiquated or little-used facilities. Most railroads have some miles of lines which are no longer profitable because of shrinkage of traffic. Maintaining locomotives and other operating equipment on these lines adds to the cost-and to the waste. Often a single gasoline driven car would meet all traffic requirements and permit a large reduction in expense.

Since the maintenance of unprofitable lines adds to the cost of sending merchandise over main lines it would obviously be to the advantage of both the railroads and the public to encourage improvement of unprofitable lines with more efficient equipment, or if this proves impracticable, to permit their abandonment. There is no longer the need which formerly existed of maintaining these unprofitable lines. Automobiles, busses and trucks now reach all towns that would be left without rail facilities if these money-losing lines were abandoned. The railroads are not entirely free to effect these economies, however, for the changes which have to be made are of such a nature that they must be authorized by public regulatory authorities.

(5) Burden of Fixed Charges

The railroads, it must be recognized, have been burdened with many handicaps for which their managements cannot be held responsible. By preventing price (rate) competition, public regulation has forced competition to assume more wasteful forms such as excessive terminal facilities, empty car movement and circuitous routing. Regulation in terms of "public necessity" has made it difficult for the roads to eliminate unprofitable operations or to meet the competition of new forms of transportation which are often subsidized.

The heavy proportion of bonded debt in the capital structure of the roads and the consequent burden of long-term interest charges are additional factors making for inflexibility and high costs. Part of the blame for this situation obviously lies at the door of our legislators. For many years it was assumed that railway bonds offered the highest safety for life insurance and savings bank investment. As a result the roads were encouraged to raise capital by bond issues rather than by the sale of equities.

The railroads also suffer from other frozen conditions that make solution of their problem difficult. Rules and regulations on operations and labor have been passed to fit conditions of better days. Flexibility of management to meet current conditions has been impaired. Even labor is not free to move over to the newer motor services, for different unions rule in the two fields.

In spite of the difficulties that confront them railroad managements in recent years have demonstrated their ability to adapt their organizations to new conditions, to develop new and better equipment and methods and to lower costs and improve service. Experience has shown that the rail managers have increased operating efficiency in those fields where public authority leaves them a comparatively free hand. Evidence given before the Interstate Commerce Commission by leading railroad executives gives concrete examples of annual savings through increased efficiency in the period from 1928 to 1932. The eastern roads showed such savings amounting to $56 million a year and the western carriers made a showing that was almost as good. The southern lines also made a good record on a smaller scale.

b. INLAND WATERWAYS

Inland waterways accounted for nearly 20 per cent of the total interstate movement of commodities-aside from ocean traffic-in 1937. About 80 per cent of this traffic consists chiefly of bulky commodities carried on the Great Lakes. In addition there is a coastwise movement of goods estimated by the United States Engineers as probably equal in importance to the Great Lakes traffic.

Because of its importance and because of the enormous government subsidies it has received, inland water transportation is in need of a searching cost analysis. A recent estimate shows that from 1890 to 1931 the federal government spent about $790 mil-lion for inland-waterway development, exclusive of the Great Lakes and of seacoast harbor and flood control. With the addition of state expenditure the total public investment amounted to at least $1 billion by 1931, or about 4 per cent of the value of rail property as established by the Interstate Commerce Commission. The rail valuation, moreover, includes rolling stock and terminal structures, which the waterway does not.

Profitability of Waterways

In an attempt to discover whether or not inland waterways could be profitably operated, Congress in 1924 established the Inland Waterways Corporation to operate the public-owned barge lines started during the war, particularly on the lower Mississippi and Warrior rivers. Government operation increased the traffic on these rivers from 980,000 tons in 1923 to 1.9 million tons in 1928,17 but the net income earned up to the end of 1933 was only $707,000.18 Rates charged have had to be at a substantial discount -normally 20 per cent in order to attract traffic from the railroads.

Government barge lines on the lower Mississippi were conducted at a nominal profit during the period from 1925 to 1929, but the loss on other divisions which they were required by Congress to operate was so great that the government barge system as a whole showed an operating loss.

The Erie Canal is another example of a costly and unprofitable inland waterway financed out of public funds. The total capital cost of the present Erie Canal has been nearly $370,000 per mile as compared with an average cost of $188,000 per mile for rail-roads in the Eastern district, including of course their multiple tracks and expensive terminals 21 Improvement of the Ohio River is estimated at about $200,000 per mile, or about the same as the per mile cost of secondary rail lines handling similar traffic in that area. The capacity of a rail line is obviously greater than the warm weather capacity of a canal or of most canalized rivers, whose limiting factor is their locks, while some waterways cannot be operated at all in the winter. On the basis of capital costs the rails are generally more efficient than the best landlocked canal and as good as a fairly good canalized river.

Maintenance Costly

The maintenance of a waterway is also unexpectedly costly. With about half the traffic volume of the Erie Railroad, the New York Barge Canal system had a greater maintenance cost in 1930. This means that the maintenance cost per unit of traffic was twice as high by water as by rail without making allowances for the passenger business of the latter. In the case of the Ohio River, maintenance charges are greater per mile than for such neighboring railways as the Chesapeake and Ohio and the Norfolk and Wes-tern 22 The comparison includes terminal costs for the railroads, but not for river traffic, and makes no allowance for the meandering of the river which adds to the mileage of the waterway.

Public expenditures provide canals and rivers with free right-of-way, including maintenance, operation of locks, and free lights. In addition, the waterways have had differential freight rates and lower wage rates, yet their success has been so limited that the government has had to go into the business of operating them to demonstrate possibilities of cost reduction.

Actual transport costs of water tonnage are almost impossible to estimate because of the miscellaneous nature of the various carriers and the lack of adequate accounting systems. Costs must be judged by the rates and by data on earnings and operations. In general it may be said that the best water transportation-such as that on the Great Lakes-is cheap, while the worst is extremely expensive. The average appears to be much higher than that of competing forms.

The total costs per ton-mile on the Ohio River for effective distance covered, have been estimated for 19311932 at about 18.84 mills for transporting bulky commodities of the lowest grade of traffic. This compares with an average of 5.97 mills per ton-mile on the Chesapeake and Ohio Railroad and of 6.84 mills on the Norfolk and Western Railway. The average for roads of the Central Eastern region, which carry a higher class of traffic, was 10.32 mills per ton-mile. Costs on the Erie Barge Canal were about double the rates on competing rail lines in 1931 and were even higher in 1929.24 All in all, it seems clear that the subsidization of inland waterways by federal and state governments has been far from a profitable undertaking. To the extent that this program represents unnecessary expenditure it has added to the cost of distribution.

C. MOTOR TRUCKS

Motor truck transportation has grown by leaps and bounds in the last ten years. Indeed the loss of freight revenues resulting from diversion of traffic from the railroads to trucks is a contributing factor to present railroad difficulties. The proportion of total traffic movement handled by intercity trucks virtually doubled from 1926 to 1937, rising from 3.9 per cent of the total ton-miles to 7.7 per cent.

The trucks have become particularly important in the movement of livestock, as well as fruits and vegetables, butter and eggs and other perishable commodities. Livestock receipts by truck in seventeen leading markets were 52 per cent of the total in 1937 as compared with less than 25 per cent in 1929,25 while receipts by rail declined in the same proportion. The trucks have also made heavy inroads in two other fields which are among the important sources of rail revenue-short haul traffic, largely fast package freight, and shipments in less-than-carload lots.

By the end of 1937 motor trucks registered in the United States numbered 4,255,000, an increase of 26 per cent over 1929. Only a small portion of them, however, are engaged in public trucking and perform services comparable with the railroads. In the early 1930's it was estimated that about one million of the 3.5 million trucks in use were owned by farmers, while an additional two million were privately owned and not operated for hire. Of the remainder, 300,000 were contract carriers operating for hire or under hauling agreements and not observing fixed routes or schedules, while only about 200,000 were genuine common carriers. While no recent figures are available, the number of trucks operated for hire undoubtedly has increased at a faster rate than the growth in total truck registrations. Furthermore there has been a great increase in the capacity of trucks and a more extensive use of trailers, and many corporations operate fleets of trucks engaged exclusively in their own business.

The Nation's Trucking Bill

The total cost of trucking as an agency of distribution, as measured by the gross revenue of trucking concerns covered in the Census of Business, was more than $530 million in 1935.27 More than $200 million of this amount was received for local transportation such as moving goods from freight stations to stores and moving household furniture. Intrastate movement of goods ac-counted for $131 million, while interstate revenue was nearly $196 million. But the Census covered only 61,000 concerns operating 189,000 trucks of the estimated total of about 200,000 operators who would eventually come under federal regulation. Most of these are small enterprises; over 85 per cent of all truckmen own but one truck.

With the exception of the larger operators anything like rigid or uniform cost accounting has been unknown. Rates have not generally been established on the basis of cost, but appear to have been set at 10 to 20 per cent less than the comparable railroad freight rate. The experience of a firm in New York requesting bids on an annual contract basis is an illustration. Out of eight trucking concerns replying, three refused to bid on the ground that they could not compete with the rails. The bids of five concerns on identical specifications ranged from $26,500 to $96,000. Of the eight firms, only half showed that they were capable of analyzing the problem from the standpoint of equipment and personnel requirements or had an adequate knowledge of their own costs.

Although low truck rates often result from ignorance of real costs the trucks do possess certain basic cost advantages over the railroads. Perhaps the chief of these is the fact that truck operators, unlike the railroads, are called upon to bear only a share of the cost of the construction and maintenance of their right-of-way. For every $7 invested, the railroads collect about $1 annually in gross revenues. But for every $1 invested by one of the largest truck opera-tors the gross revenue is $3, while it is estimated that less efficient operators gross $2 for each $1 of investment.

The motor truck is more flexible and furnishes prompt door-to-door service which railroads cannot equal. Truck operators usually move their loads all the way from consignor to consignee while much of the rail traffic involves additional trucking and re-handling at each end of the haul. Until recently, moreover, the trucks have been free from restrictions imposed on the railroads by the federal government. Under pressure from the railroads, as well as the larger trucking concerns, Congress passed the Motor Carriers' Act in 1935. This Act provides for the complete regulation of all trucks engaged in interstate business even though the truckman merely handles the goods in transit. Official permission to operate must be granted by the Interstate Commerce Commission, which is also empowered to establish minimum and maximum rates and hours of labor and to set up whatever safety requirements it deems necessary. Although the Act has been in effect for more than three years its provisions have not yet been universally applied. The problem of determining the rate structure and of defining rates is obviously a gigantic one. While no one can anticipate the eventual effects of federal regulation there is little doubt that it will have profound effects on the competitive position of the trucking industry.

2. STORAGE AND WAREHOUSING COSTS

For many commodities, especially those of a seasonal or perish-able character, storage and warehousing charges are a substantial item of distribution cost. Most of the warehouse facilities, however, are owned by producers or dealers and the cost of the storage function is therefore included in their operating expenses. But many manufacturers and dealers employ the facilities of public ware-houses for the storage and distribution of their products.' According to the Census of Business for 1935 such commercial warehouses had a total revenue of nearly $98 million, of which the storage of general merchandise accounted for $29 million, farm products for $23 million, and cold storage for $27 million.;' While a small part of the revenues of warehouses was derived from trucking operations, this was probably more than offset by storage revenues obtained by businesses engaged primarily in trucking.

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