The federally subsidized Conrail freight railroad could lose $2.6 billion over the next five years unless major changes are made to the system, a bleak report by the United States Railway Association concludes.

The association, created by the Regional Rail Reorganization Act (3R Act) to reorganize several bankrupt railroads into the Consolidated Rail Corp. and act as its banker, said that Conrail will have received $3.3 billion in federal aid by the end of next quarter, compared with the $2 billion originally projected, and still will be nowhere near self-sufficiency after four years of subsidy. Future funding for Conrail will depend on additional congressional action.

"As presently constituted and operated, Conrail has not become self-sustaining as contemplated by the 3R Act, and it is unclear whether it can ever become self-sustaining in its present form," the report says.

Although USRA Chairman Stephen Berger emphasized at a press conference that USRA was making no recommendations until a report due in April, the pessimistic assessment of Conrail's performance so far in the report released yesterday made clear that the railroad association undoubtedly will call for significant changes in Conrail's future.

Burdened by inferior productivity and traffic levels that fall far below expectations, Conrail does not come close to the performance of other railroads, the report suggests. "If Conrail serves almost a third less traffic than expected, and with little improvement in productivity, then the wrong-sized railroad may have been created, requiring too many assets and human resources to service its available traffic base," the report says.

"I think we're saying it's got to be smaller, yes," Berger said, in answer to a question.

The report said Conrail's rate of improvement might seem encouraging except for the wide gap between average annual losses during the last four years and the profit levels necessary for self-sufficiency. "For a company that has so far to go, Conrail does not seem to be moving very fast," the report said. "In these circumstances, persuasive evidence of a turnaround is needed before risking additional federal investment."

USRA's gloomiest outlook for Conrail was based on assumptions that its size and structure were unchanged and that the economy of the Northeast remained poor. But its outlook for a smaller Conrail wasn't terribly optimistic either, even though it assumed that Conrial would be well run in the future -- Berger called incoming Conrail chief Stanley Crane "a superb railroad man" -- and would use the pricing freedoms available to it through the deregulation act.

"The bottom-line judgment is that costs remain the problem," Berger said. "Revenue relief would not be enough."

Berger and the report emphasized that the area covered by Conrail -- the Northeast and the Midwest -- cannot be without a freight rail system. The region still represents 40 percent of the nation's economic activity -- the "heartland of the American economy," Berger called it.

But he suggested that Conrail's future may require others -- state and local governments, shippers and labor -- to share in a funding partnership to replace the single-source financing the federal government has engaged in over the last four years.