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I'm a little worried about this book
Sep. 24th, 2009 01:29 pmThere's no entry in the index under "depreciation" or "accounting". The book is Saunders' _Main Lines_, and in Chapter 1 he is recapping his previous book (which I haven't yet been able to lay hands on), _Merging Lines_. Specifically, he is talking about the downfall of Penn Central, itself the result of a merger between two troubled railroads, the New York Central and the Pennsylvania.
"The point of no return comes when a railroad can no longer hope to restore itself with its own resources. It begins with a bad year or two, perhaps a recession, when revenue falls. The decision is made to temporarily cut back on maintenance. Like a good highway, the railroad will remain sound for a while, but then low spots develop here and there, the result of normal rain wash and pounding trains. Speed over those sections is reduced to, say, 40 mph. In railroad lingo that is called a "slow order." Elsewhere, rotted crossties require more slow orders, and the first spots get worse. Speeds has to be reduced to 30 or even 20 mph. The productivity of train crews, locomotives, and cars falls because trains are taking too long to complete their journeys and deliver their goods. Labor costs rise. Connecting roads complain. Shippers complain. Shippers begin to divert traffic, and revenue falls further. As revenue falls, the company defers more maintenance, and the trouble spreads. All of a sudden, there is a cataclysmic downward spiral as costs rise, service deteriorates, shippers desert, and revenue plummets.
When revenues have fallen so low and operating costs risen so high, and there is no possibility of fixing the problem either out of earnings or by borrowing, the railroad has reached the point of no return." (p. 5)
This is lovely -- exactly what I was looking for to deal with a variety of objections to my criticism of the criminally incorrect accounting schemes the railroad was forced to operate under by the ICC until 1983 (replace/repair/betterment, or RRB). The ICC did not force them to adopt this accounting scheme, as it/they predated the ICC and its regulation of rail in the US. But the ICC did prevent the railroads from making accounting changes that had been requested decades earlier, and that would have gone a long ways to either (a) fix this problem or (b) punish the railroads stock price appropriately for failing to fix this problem, back when they might have recovered better. Slightly before this, the dividend history of the New York Central, Pennsylvania, and the merged Penn Central are also summarized (and make me want to go back in time and bash some heads together. Fortunately for them, everyone involved must surely be dead by now.).
But I'm not seeing any indication that this book/this author sees how the accounting affected the enterprise.
And that's what has me worried.
As a side note, it would not be unreasonable to predict that if we deferred maintenance on our highway system in favor of improvements to alternative transport systems (say, rail), users would switch wherever possible -- whatever their opinion of each transport system might be on its ideal-world merits.
"The point of no return comes when a railroad can no longer hope to restore itself with its own resources. It begins with a bad year or two, perhaps a recession, when revenue falls. The decision is made to temporarily cut back on maintenance. Like a good highway, the railroad will remain sound for a while, but then low spots develop here and there, the result of normal rain wash and pounding trains. Speed over those sections is reduced to, say, 40 mph. In railroad lingo that is called a "slow order." Elsewhere, rotted crossties require more slow orders, and the first spots get worse. Speeds has to be reduced to 30 or even 20 mph. The productivity of train crews, locomotives, and cars falls because trains are taking too long to complete their journeys and deliver their goods. Labor costs rise. Connecting roads complain. Shippers complain. Shippers begin to divert traffic, and revenue falls further. As revenue falls, the company defers more maintenance, and the trouble spreads. All of a sudden, there is a cataclysmic downward spiral as costs rise, service deteriorates, shippers desert, and revenue plummets.
When revenues have fallen so low and operating costs risen so high, and there is no possibility of fixing the problem either out of earnings or by borrowing, the railroad has reached the point of no return." (p. 5)
This is lovely -- exactly what I was looking for to deal with a variety of objections to my criticism of the criminally incorrect accounting schemes the railroad was forced to operate under by the ICC until 1983 (replace/repair/betterment, or RRB). The ICC did not force them to adopt this accounting scheme, as it/they predated the ICC and its regulation of rail in the US. But the ICC did prevent the railroads from making accounting changes that had been requested decades earlier, and that would have gone a long ways to either (a) fix this problem or (b) punish the railroads stock price appropriately for failing to fix this problem, back when they might have recovered better. Slightly before this, the dividend history of the New York Central, Pennsylvania, and the merged Penn Central are also summarized (and make me want to go back in time and bash some heads together. Fortunately for them, everyone involved must surely be dead by now.).
But I'm not seeing any indication that this book/this author sees how the accounting affected the enterprise.
And that's what has me worried.
As a side note, it would not be unreasonable to predict that if we deferred maintenance on our highway system in favor of improvements to alternative transport systems (say, rail), users would switch wherever possible -- whatever their opinion of each transport system might be on its ideal-world merits.