CARRIERS: When If Ever a Profit?

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Book value of their securities is roughly $5,000,000,000. Delaying their reorganization into new, solvent corporations is the fact that preferred & common stockholders don't want to take their licking. They may be induced to throw in the sponge by the Supreme Court's recent (unanimous) decision in the Los Angeles Lumber case (TIME, Nov. 20) that, where stock is under water in reorganizations, it must be wiped out. Universally admitted is the fact that railroad mileage, revenue, equipment have shrunk substantially in the last ten years. Reasonable enough, therefore, is the contention that capitalization must be slashed proportionately. Unanswerable is the moral to be drawn from the drastic reorganization in the nineties of roads like the Santa Fe and the Union Pacific which have done well ever since. The same moral is reinforced by the case of the Milwaukee which came out of bankruptcy in 1927 with a higher capitalization than it went broke on, which was bankrupt again in 1935.

Rail reorganization, new style, is typified by the case of the Chicago & Eastern Illinois. The Interstate Commerce Commission recently approved the reorganization plan of the C. & E. I., and it needs only formal Federal Court approval to go into effect. C. & E. I.'s common stockholders are wiped out completely by this, the first reorganization plan to be completed under 776. Under reorganization the road's fixed charges have been cut from $2,274,000 to $657,000. Under reefed capital sail C. & E. I. bad a good chance to operate at a profit. For that it can thank its smart president Charles Thomas O'Neal, who pulled up the road's operating socks and combed its hair while its financial paunch was being reduced.

To get reorganization plans for these roads into the same shape as the plan of the C. & E. I., honest, scholarly, hardworking Chairman Joseph Bartlett Eastman and his colleagues of the Interstate Commerce Commission have many a busy year ahead. For a railroad reorganization is not a job to be whipped up in six months or a year. The roads now working under 776 have been years in working down to their plight, will be years working out of it again. For in beating down capitalization to a point where a road can make money, many divergent interests must be brought into agreement.

Consolidation. Exempt from strictures placed by investors on most railroads are a handful of blue chips: chiefly Pennsylvania, Union Pacific,, Norfolk & Western. Chesapeake & Ohio, Virginian—whose bonds sell for around 100, whose common is almost always on a paying basis. Of these top-notchers, the last three have the steady and lucrative business of moving bituminous coal from the famed Pocahontas fields. These roads have fat to live on during lean years. During the last bull market they went shopping for weak feeder lines into other territories, tried to expand their operations, ride the bull market into consolidation.

When the 1929 crack came, C. & O. was deep into the Erie and C. & E. I. (both now in bankruptcy) plus the weak Nickel Plate and Pere Marquette. The Pennsylvania had the New Haven, the Lehigh Valley, the Wabash.

There are several obstacles to consolidation on the basis of sober values.