Railroads: Healthy Among the Sick

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At 7:51 one morning last week, a big man in a wide-brimmed Panama hat got out of a chauffeur-driven Cadillac and pushed his way through the swinging back door of the eleven-story San Francisco office building that Westerners, half in awe and half in bitterness, used to call “The Capitol of California.” As usual, Donald Joseph McKay Russell, 61, president of the Southern Pacific Co.. was hustling to get to work before 8 o’clock. Explained the top man on the world’s most flourishing railroad: “It’s an old railroad operating man’s habit. If you wait until the night-shift man has gone, it takes all morning to catch up on what went on during the night.”

It was still not yet 8 when Old Railroader Russell stepped into the sixth-floor office of S.P. General Manager William Jaekle. Picking up a two-inch sheaf of papers that summarized the performance of his 22,394-mile line during the previous 24 hours, Russell skimmed rapidly through the data on passenger trains. (Russell’s undisguised opinion of passenger trains is that of 19th century Rail King James J. Hill: “A passenger train, sir, is like the male teat: neither useful nor ornamental.”) But his eyes brightened when he came to the figures on freight. Inked across one page in bold, red numerals was the figure 444. It meant that Russell’s railroad had delivered 444 consecutive trainloads of perishable produce from California’s Central Valley to the S.P. terminal at Ogden, Utah—from where the cars move north, south and east across the nation—without running so much as five minutes behind schedule.

Contented as an engineer barreling down a table-flat track, Russell gave one final glance at the latest barometer readings in the mountain passes, then climbed two stories to his own eighth-floor throne room. There, folding his 6-ft. 1-in., 207-lb. frame behind a golden-oak desk, he sat down to ponder his constant problem: how to keep profits healthy while engaged in the nation’s sickest major industry. Says one S.P. director: “Don spends 25% of his time thinking down the road.”

Rolling in the Red. These are times that have all railroaders trying to peer down the road ahead—and recoiling from what they see. In the 19th century, when they were the only practical means of mass transportation by land, the railroads thrust their iron tentacles into virtually every U.S. town, developed such vast capacity that today they could still carry all the nation’s freight—and then some. But for more than a generation, trucks and buses, barges and planes have been biting into the business of moving goods and people, until now the railroads’ share of total freight traffic is down to 44%.

Despite this, the Federal Government, with enthusiastic assistance from state and local governments, continues to ride the railroads as though they still possessed their igth century monopoly. In the urban East, where Government insistence on the continuance of money-losing passenger and commuter runs hurts the most, the 40 major roads actually rolled $110 million in the red in the first half of 1961. Overall, the 107 Class One U.S. railroads last year earned barely 2% on invested capital—less than during Depression years. The hapless New York, New Haven & Hartford is already in bankruptcy. And President Alfred Perlman of the giant New York Central predicts a similar fate for his line unless it is permitted to merge into an even larger Eastern system.

Heavy Feathers. While most railroaders blame the Government for their plight, many outsiders charge that the railroad men were too blinded by pride and tradition to see the crisis coming. Says the top transportation student on Capitol Hill, Florida Senator George Smathers: “The railroads were top dog for so long that they were disdainful of the competition as it appeared.”

A U.S. Senate committee, reporting last January on the industry’s woes, coldly concluded that for years railroad men had 1) slighted basic economic and market research; 2) rarely bothered to recruit bright youngsters on the campuses; 3) failed to develop adequate systems for determining the costs of their services. Added the report: “In most American businesses, any procedure which is 10 to 25 years old is automatically regarded with suspicion by management. In the railroad industry, if a practice is 50 to 75 years old it is ‘proved by time.’ ‘

But if many railroaders have failed to move with the times, so have public attitudes toward the railroads. Despite dwindling railroad profits, the powerful rail unions insist on preserving many work rules that date back to 1919, still keep some 35,000 useless firemen riding modern diesels. All told, the railroads estimate, union featherbedding costs them $500 million a year. Similarly, state and local governments continue to tax railroad property an average 9% of assessed valuation v. 3% to 4% for other property. Compared with competing means of transportation, the railroads claim to be overtaxed by $140 million a year.

The railroads suffer, too, from memories of the bad and fat old days when many of them arrogantly set their rates according to “what the traffic would bear”—a practice that not only opened the way for trucks to slip in and skim off the cream of the freight, but that also inspired the steady expansion of federal regulation of railroads. Nowadays, a railroad cannot raise or lower its fares, expand or contract its lines, merge or diversify its business without express approval of the slow-rolling Interstate Commerce Commission. Overworked and understaffed, the ICC itself harbors no illusions about its in adequacy to run the railroads. Complains one ICC commissioner: “When we get exhibits as big as a telephone directory and hear all sides tell their stories for weeks on end—I tell you, rate deciding gets to be as uncertain as psychiatry.”

Unequal Rules. With considerable justice, the railroads complain that the rules of the regulation game are rigged to favor their competitors. Of all the freight moving over U.S. highways, only one-third (transported by “common carrier” trucks) is subject to regulation similar to that imposed on the railroads. Helping out the politically potent farmer, Congress has provided that any truck carrying farm goods can travel anywhere and charge any price, even below cost, without fear of federal interference. The same applies to barges carrying any of a long list of bulk commodities, which means nine-tenths of all barge traffic. Over tax-built highways and tax-maintained waterways, the exempt carriers—including the growing fleets of private trucks used by merchants and manufacturers—now haul some 300 billion ton-miles per year, an increase of well over 300% since 1945. The railroads’ freight, meanwhile, has declined 16%—all of it moving over roadbeds that the lines must build, maintain and pay taxes on.

Adding to the railroaders’ outrage is the fact that the railroads, as Don Russell bitterly puts it. “must perform public services regardless of profit.” With their losses on passenger operations up to $313 million last year, the railroads have been steadily dropping passenger runs but cannot wangle ICC permission to shuck off nearly as many as they should from a purely economic viewpoint. Few railroad men deny that some passenger services, notably the commuter lines, are vitally necessary. But they do not see why they, rather than their passengers or the communities involved, should foot the bill.

The Man Called “Mister.” In the West, railroad horizons are a shade brighter than in the East. Blessed with longer hauls, fewer highways and waterways—and relatively few commuters—the 40 largest Western railroads usually make money. Most successful of all is Don Russell’s aggressively modern Southern Pacific. By pressing his men and machines to the limit and diversifying into other forms of transportation whenever the Government will let him, Russell last year managed to give the S.P. the biggest net income of any U.S. railroad: $65.4 million.

Part of this success story, as Russell freely admits, simply reflects the fact that, by railroad standards, the Southern Pacific is “a good property.” But to an even greater extent, the S.P.’s present strength reflects the talents and character of big, bluff Donald Russell. A deeply religious Roman Catholic who begins and ends each day on his knees in prayer, Russell is fundamentally an austere, self-disciplined man with a presence so commanding that not even his most senior executives would ever think of calling him anything but “Mr. Russell.” Loving his industry and his company as only a railroader can, he disdains such conventional management perquisites as stock options (“When you have options, management spends more time running up the price of the stock than running the railroad”).

But along with Russell’s austerity go a sardonic, deadpan humor and—invaluable in an industry encrusted with 130 years of tradition—a relentless mental independence that forbids him to take as gospel anything he has not thought through for himself. Above all, Russell is ruthlessly honest—especially with himself. Early in his presidency he topped the S.P. building with a huge, 40-ft. by 74-ft. neon sign that proclaims, in flashing red and blue: SP—YOUR FRIENDLY RAILROAD. There was an immediate and unfriendly public outcry, with editorialists and artists damning the sign as the vulgar ruination of the San Francisco skyline. In public, Russell never acknowledged the criticisms, but last week, in a private conversation, he ruefully admitted: “The sign was a mistake. It will come down some day before long.”

Smashup with Jenny. Born the third day after the turn of the century, Don Russell is the son of an immigrant Scots furniture salesman who died soon after the boy’s birth. Raised by his indulgent mother and maiden aunt in Oakland, Russell eased his way through a small Roman Catholic high school, was halfway into his freshman year at Stanford when he ran off to Canada to join the R.A.F. in 1918. Six months later, while testing a recently repaired Jenny, Pilot Russell put the ship into a tailspin at 4,000 ft.—and spun right on into the ground in a crash that broke his legs, arms and collarbone and badly mangled his features. Several painful operations rebuilt Russell’s face, but left him with a cowcatcher nose as a war souvenir.

Mustered out, Russell returned to Stanford but found college life something of an anticlimax. After a summer stint with the Southern Pacific as timekeeper for a Mexican labor gang, he dropped his books to take a fulltime job in the line’s engineering department. In his determination to get ahead, he gave up smoking as an energy waster, forswore hard liquor because of the railroad rule against drunkenness on or off duty. Says he: “I didn’t want to discipline men for doing something I would do.” He also made a habit —which he holds till this day—of bedding down every night at 9:30.

Just after he went steady with the Southern Pacific, Russell married vivacious Louise Herring, who grew up on a San Joaquin Valley ranch. Barely was the honeymoon over when $193-a-month Engineer Russell asked to be switched to a student foreman’s job at 50% less pay. “I noticed the engineers didn’t get very far unless they had track experience.” he explains. Following him to the High Sierras, where they lived in a small rented railroad car, Louise Russell made no complaint—even when dutiful Don took a railroader’s telephone headset into their bed every night and trained himself to recognize his emergency call sign even in his sleep. But she got even, years later. When Russell acquired a railroad president’s traditional, Pullman-sized private car, Louise demolished its businesslike atmosphere by appropriating one room and wallpapering it in shocking pink.

Loyal Rebel. For most of his first 15 years with the S.P. Don Russell supervised track laying and train routing in the mountain passes where the winter snows piled to depths of 50 ft. Mingling unshakable loyalty to his railroad with hog-on-ice independence, Russell more than once made way for moneymaking freight by sidetracking other trains in defiance of orders from on high.

Impressed by his aggressiveness—’I was always reaching out and taking anything I could get my hands on”—the home office finally put Russell on the executive escalator. Shortly before Pearl Harbor he was named assistant to President A. D. McDonald, proceeded to ram through, against the judgment of his superiors, decisions on equipment allocation that enabled the S.P. to haul more freight for the Pacific war than any other railroad. In 1952, when the S.P. needed a new president,the board inevitably turned to Don Russell, who, at 51, became the line’s youngest chief since the days of Founders Leland Stanford and Charles Crocker.

Off-Track Bets. Among S.P. oldtimers there is a mystic conviction that ”the Southern Pacific has always been able to find the right chief executive for the time.” In a time of diminishing importance for railroads, Russell has launched the Southern Pacific into as many off-track enterprises as the Government would allow. “We’re in the business of supplying transportation to our customers,” says he, “and if customers leave us, we have an obligation to follow them.”

Following the customers onto the highways, the S.P. runs a fleet of trucks that rang up profits of $900,000 for the first half of 1961.* Under Russell, the S.P. has also built, for $60 million, more than1,500 miles of pipelines that move 26 million bbl. of oil products yearly from California to points as far east as El Paso. The railroad even sells airline tickets from its own far-flung ticket counters, and now Don Russell is petitioning the ICC for permission to buy a 50% interest in the John I. Hay barge lines on the Mississippi and Missouri rivers. His grand plan is to form a “supermarket” of transportation.

More with Less. Russell’s greatest here-and-now contribution to railroading is his ax-swinging intolerance of any custom that wastes money. “We don’t take anything for granted,” he says. “We have to go back over everything and ask why we did it in the first place.”

Thanks to Russell’s ceaseless questioning and streamlining—a process known to Southern Pacific hands as “Russellization” —his railroad now handles a bigger load than it did a decade ago with little more than half the work force it then had. Fort night ago, the railroad telegraphers’ union indignantly complained to a presidential mediation board that Russell had shut down 149 stations in the last six years, closing and consolidating facilities that other U.S. railroads would have kept open much longer.

To an extent probably unmatched by any other railroad in the U.S., Russell’s Southern Pacific conscientiously tries to determine the actual cost of each of its many thousand runs and services. “That’s the key,” says Russell. “When you can do it one way cheaper than another, then you should do it the cheaper way. It’s the use you put things to that counts.”

Russell saved $1,000,000 a year by placing his inventories under the control of an electronic brain, a few weeks ago added a more capacious IBM 7074 computer (“It’s the latest thing”). To speed up freight handling at Houston. Russell built a $7,000,000 switchyard with a radar-electronic control system that shunts a car to its proper track, computes weight, wind resistance and distance to be traveled, then brakes the car to a gentle coupling. Other “Russellization programs” have enabled the S.P. to cut its freight schedules between Chicago and the West Coast from five days to four. When a train pulls into Tucson, the legally required brake inspection is performed by the drivers of two Jeeps that start from either end, meet in the middle, then roll back for a double check. (“It’s a lot faster than one man walking,” says Russell.)

Save & Spend. No economy is too small to escape Russell’s Scottish eye. Passing a Southern Pacific station that seemed too brightly illuminated, he once barked: “Who owns the electric-company stock in there?” In wide-open Reno he has introduced slot machines in the Southern Pacific station. But he never loses sight of the dollars for the pennies. By leasing out 2,400,000 of the S.P.’s 3,800,000 remaining land-grant acres for drilling, mining, grazing and timber cutting, he raised the line’s 1960 income from its real estate to more than $6,000,000.

For all his penuriousness, Russell does not hesitate to spend for new plant and equipment. For 1961 the S.P. has placed $47 million in orders for some 2,200 new locomotives and cars, many of them the “piggyback” carriers whose share of total freight volume has trebled since 1955, largely at the expense of long-haul trucks.

Russell is also ready to spend heavily for research, has turned many line problems over to the Stanford Research Institute, of which he is an active director. When the Southern Pacific’s auto-hauling business was endangered because car windows were shattering when freight cars slammed together, it was Stanford that developed a hydraulic coupling gear to cushion the shock. Like many another man who never finished college, Don Russell has deep respect for the utility of higher education. Every year he packs 50 or so bright young executives off to Harvard, M.I.T., Stanford and other universities for company-paid studies of from six weeks to a year. Says he: “They can study anything they like. Chinese, so far as I care. It’s broadening.”

The Risk of Freedom. Some of his admirers contend that Don Russell’s selfhelp shock treatment could work wonders with any U.S. railroad—even the moribund New Haven. But when it comes to how to get the railroad industry as a whole back on the economic track again, there are almost as many theories as there are railroads.

Two of U.S. railroading’s top figures—Northern Pacific President Robert MacFarlane, 62, and President Harry Murphy, 68, of the Chicago, Burlington & Quincy —call for judiciously increased freedom to cut rates. Snorts Murphy: “I don’t think the ICC should consider whether a rate will take business away from truckers or barge lines. It didn’t when they took business away from us.” Aggressive Ben Heineman. 47, chairman of the Chicago & North Western, calls for an even more complete return to free enterprise. Says he: “The Heineman solution is to eliminate all minimum-rate regulations on all forms of for-hire transportation. That would enable each form of transportation to find its proper place in the economy, and within a few years, the railroads would no longer be a problem.”

Less venturesome is the Great Northern’s John Budd, 53, who dreams—almost certainly in vain—of persuading the Government to slash radically its subsidies to competing modes of transportation in the form of publicly financed airports, waterways and highways. Freedom to trim rail fares, fears Budd, might lead to price fights among the railroads themselves. The Great Northern, says he, would not want to cut its own rates without first talking things over with the parallel Milwaukee Road.

The Mating Game. From President James M. Symes (rhymes with hymns) of the mighty Pennsylvania comes the most popular, one-word answer to the railroads’ problems: “Merger.” Working on the presumption that two can live cheaper than one, virtually every major U.S. railroad is today shopping for a mate. Tough opposition comes from towns that might lose services, unions that would certainly lose jobs, competing railroads that would be frozen out of the deals. The Government’s trustbusters are also wary, but the railroads argue that mergers would not make for monopoly because there is plenty of competition from wings, wheels and water.

Half a dozen major mergers are now under active discussion before the ICC. Cyrus Eaton’s lucrative Chesapeake & Ohio has designs on the struggling Baltimore & Ohio—and the New York Central, to the dismay of the B. & O. and C. & 0., would like to make it a threesome. Still another proposed merger would link the Great Northern, the Northern Pacific, the Chicago, Burlington & Quincy and the Spokane. Portland & Seattle in a single, 24,728-mile system, the nation’s longest main line.

How to Win. Having made most of the major internal economies possible for the Southern Pacific, Don Russell, too, is looking outward for another means of reducing overhead. More than a year ago, he quietly began buying up stock in the prosperous little Western Pacific, whose lines virtually parallel the Southern Pacific’s eastward out of Sacramento. When Russell finally announced last October that he owned 10% of the Western Pacific’s shares and was aiming for control, he kicked off the biggest brouhaha western business has known since before World War II. The loudest protest came from the S.P.’s historic rival, the Atchison, Topeka & Santa Fe, Reason: the Western Pacific is the Santa Fe’s key link to markets on the Pacific Coast.

Fighting back. Santa Fe President Ernest Marsh quickly bought 20% of the Western Pacific’s stock, won the support of the Western Pacific’s able president. Frederic Whitman, by offering to swap 1¼ shares of Santa Fe for every share of Western. As the battle lines formed, the Great Northern backed the Santa Fe (and bought 9½% of Western’s stock on its own account), while the Southern Pacific won the support of the Union Pacific. Last month the ICC opened hearings in San Francisco to judge the rival bids for control.

The hearing-room battle centered on an issue crucial to the future of all U.S. railroads. The Santa Fe, arguing for “end-to-end” mergers of interlocking lines, contends that “side-by-side” mergers of competing lines would only make for monopoly—a charge that evokes in many a Californian resentful memories of the days when the Southern Pacific was called ‘The Octopus.” Russell replies that railroads can compete with trucking only by radically reducing internal competition. “You’re not going to beat the Russians if you waste all that manpower and equipment.” he says. “Competition between railroads—that’s talked by people trying to maintain the status of their jobs or their business. The issue should always be this: What is the most economical way to handle something?”

Dine & Wine. The battle has grown personal. Russell and Whitman rarely speak to each other these days—even when, at San Francisco’s Pacific Union Club, they find themselves facing each other at the “big table,” where only the nobs of the city sit. All this presumably distresses Russell, whose favorite companionship is that of other chief executives. Not a gregarious man by nature, Russell delights in belonging to the Bohemian Club, an exclusive band of top businessmen, scientists and politicians (among them: Richard Nixon. Herbert Hoover) who meet once a year for a fortnight in California’s redwood country. His other close attachment is to the Business Advisory Council, where he can trade economic forecasts with other top U.S. industrialists.

To the chagrin of diehard railbirds, Don Russell usually travels by air when he goes to Washington or other distant cities. Wherever he goes, he makes a jocular point of dining on those foods that have been shipped the farthest (by rail, of course). Says he: “I always muss up the lettuce. And I squeeze the lemon. If you don’t do that, they might serve it to the next fellow.” But he draws the line at one of the S.P.’s most important long-haul items: California wine. Back in R.A.F. days he cultivated a taste for classic German Moselles, now ranks as an oenological connoisseur. “Good wines are a fetish with me,” says otherwise teetotaling Don Russell.

Apart from his Bernkasteler Doktor Thanisch or Wehlener Sonnenuhr (prices: $65 to $97 per case), Russell indulges in few luxuries for a man with a salary of $140,000 a year. On the fairly rare evenings when the Russells dip into San Francisco’s social swim, he is more likely than not, just before 9:30, to start glancing conspicuously at the huge gold railroaders’ pocket watch that he began buying on the installment plan ($5 every payday) when he joined the Southern Pacific 40 years ago. Then, jokingly roaring, “All aboarrrd!”, he chugs back to the eleven-room co-op apartment that he and Wife Louise have decorated with Currier & Ives prints of historic U.S. locomotives. For real relaxation, he favors romping with his daughter Ann’s seven children.

Easing the Rough Ride. Railroader Russell firmly holds these beliefs about his business: the railroads are the back bone of the nation’s transportation system; they will always be needed to carry the goods that feed and shelter and protect Americans; they can indeed compete profitably—if Washington will only let them compete. “The railroads are the most economical form of mass transportation,” says Russell. “But they have been trying to do 1961 business under 1920 regulations.”

How to update the rules? Russell frowns on the often-made proposal to create a Cabinet-level Secretary of Transportation, figures it would just add so much extra bureaucratic baggage. What is needed, instead, is simply a clear and equal national policy that would end discrimination among the various forms of transport. Last week President Kennedy moved toward just that. He ordered Commerce Secretary Luther Hodges to submit proposals by Nov. 1 for ways of easing the national transportation snarl. The guessing in Washington is that the troubled railroaders will get some—though certainly not all—of the new rules they want: a better tax break on rolling-stock depreciation, looser regulation of rail rates, and tighter regulation over those currently exempted highway and waterway rates. “The President’s action is bound to help,” says Don Russell. “It will focus the attention of Congress upon the necessity to do something. What the railroads need is freedom—freedom to give the shipper the kinds of services that he wants.”

*Having fortuitously secured trucking permits before diversification became tightly restricted in 1935, the S.P. can legally compete on the highways.