Amtrak: What Do You Want Me to Be?

“It’s not about the profit for these long-distance national network trains,” Mr. Boardman said in an interview. “It’s about connecting our country together and taking care of the people’s needs in those areas that are being flown over.”

In the United States, intercity train travel is provided almost exclusively by Amtrak.  Though originally envisioned as being self-sufficient, Amtrak has relied on annual assistance from the U.S. government since it was formed in 1971 through consolidation of struggling private operators [1].  Today, the company is ostensibly run for profit, but its inability to shed money-losing routes and inherent operational challenges make it a popular target for those who revel in examples of government-sponsored mismanagement.

Amtrak routes

As currently constituted, Amtrak utilizes two models to serve distinct passenger segments on specific routes.  The Northeast Corridor, familiar to many at HBS for its high-speed Acela service connecting Washington DC to Philadelphia, New York, and Boston, is primarily a short haul service (under 400 miles).  The short haul routes are popular (over 11M riders annually), profitable ($479M in operating profit in FY15) [9], and cater to business and leisure travelers looking for more convenient alternatives to the cumbersome routine of traveling by air.  Amtrak has invested heavily in improving the customer experience on these routes, implementing dynamic pricing, electronic ticketing, expanded WiFi, and advanced locomotive telemetry to more accurately predict arrival/departure times [4].

Amtrak also runs medium and long-haul routes, including transcontinental service between the East and West Coasts, catering primarily to train enthusiasts and those who cannot fly for health or other reasons [5].  Long haul routes are more expensive to run and have lower load factors, and are therefore unprofitable ($495M operating loss in FY15) [9].  Although Amtrak executives maintain they keep these routes in order to deliver essential transportation service to underserved Americans in rural, mid-country communities, many suspect they are preserved to please members of the U.S. Congress, which must approve an annual subsidy to Amtrak exceeding $1B.  Anger the wrong senator or representative, the thinking goes, and risk collapse of the entire system through loss of the subsidy.

Amtrak financials

Apart from its unprofitable long-haul business, Amtrak also has other significant operational problems:

  • The company inherited its rolling stock and track system from predecessor companies, leading to wide variation and complexity in infrastructure maintenance [4].
  • In many parts of the country, Amtrak contracts for capacity on privately owned rail lines. When the freight companies owning the lines want to prioritize their own trains, Amtrak trains often wait and suffer extreme  delays on transcontinental routes [4].
  • Over 80% of Amtrak’s workforce is unionized, and the company must negotiate agreements with 14 separate unions on an ongoing basis, which results in overall higher operating costs and risks strikes. Amtrak workers were found to be 2.3x more expensive than their European analogues [2, 7].

The company reports only non-GAAP financials, adjusting its net income by removing depreciation expense from its statements before reporting.  This makes it hard to tell where all of the government subsidy goes and masks the true cost of the system [3, 10].  Some analysts believe that while its Northeast Corridor routes are in better shape than the others, the true capital expenditures and depreciation associated with these routes may be a much higher proportional share of its budget than financials suggest, leaving some to wonder if any passenger rail service can be operated profitably in the United States.

Under the leadership of Joe Boardman, CEO since 2008, Amtrak has made progress toward improving its performance, with a focus on safety, customer service, and financial excellence.  Costs have been reduced across central departments, and debt down by more than half since its peak in the mid-2000s.  The operating subsidy is also lower (though the overall subsidy remains about the same) [4].

A five-year transportation bill passed on December 3, 2015 will improve Amtrak’s ability to make operational improvements.  The company can now invest profits from the Northeast Corridor in enhancing those routes, where it was previously required to contribute those profits to cover losses on other routes [8].  The bill also creates a pilot program allowing private companies to operate Amtrak’s long-haul lines if they can do so at lower cost and the same or higher service levels than Amtrak [9].  Finally, the law locks-in $10B in support for Amtrak over the next five years, providing some near-term certainty regarding the government’s commitment to passenger rail [11].

Continuing with the status quo governance and funding model, with elected officials as veto-wielding board members, leaves Amtrak unable to fulfill the promise of becoming a profitable company.  However, one can envision a future in which a smaller Amtrak is permitted to bring the same kind of focus and service it offers in the Northeast to densely populated areas in California, the Great Lakes, and perhaps even Texas or Florida, where human geography and economics are favorable to trains, by dropping long-haul routes and investing (intensively) in better infrastructure.  In the latter cases, private consortia are already lining up to step in where Amtrak cannot [2].

 

Sources:

1] http://www.amtrak.com/servlet/ContentServer?c=Page&pagename=am%2FLayout&cid=1246041980246

2] http://www.nationaljournal.com/magazine/2015/04/17/how-washington-derailed-amtrak

3] http://www.amtrak.com/ccurl/593/119/FY15-Financial-Results-ATK-15-066.pdf

4] http://www.progressiverailroading.com/amtrak/article/Operate-Amtrak-like-a-more-nimble-customerfocused-business-The-railroad39s-leaders-believe-they-must–41291

5] http://www.economist.com/blogs/gulliver/2013/03/amtrak-long-distance-routes

6] http://www.economist.com/blogs/gulliver/2013/03/amtrak-long-distance-routes

7] http://www.washingtonpost.com/wp-dyn/content/article/2008/01/18/AR2008011803437.html

8] http://www.wnyc.org/story/amtrak-transportation-bill/

9] http://www.wsj.com/articles/amtrak-faces-prospect-of-private-competition-1449266250

10] http://www.foxbusiness.com/industries/2015/12/02/amtrak-operating-loss-widened-in-fiscal-year-2015/

11] http://abcnews.go.com/Politics/inside-congresss-305-billion-transportation-bill/story?id=35584379

 

Images:

1] Amtrak

2] Amtrak

Previous:

Advance Auto Parts: A Golden Opportunity Tarnished by Operational Missteps

Next:

Wayfair – Growing with little inventory

3 thoughts on “Amtrak: What Do You Want Me to Be?

  1. Thanks for the analysis on this important aspect of American transportation infrastructure. It was interesting to learn about the efforts that Amtrak appears to be taking to mask the unprofitable operations in its trans-continental routes through the Midwest from the broader public. As a semi-private for-profit company that relies on government funding I guess it is not surprising that they are using an explicit social mission to defend their continued operation of these routes.

    I wonder if any operating model synergies are being realized or are under appreciated between Amtrek and CSX (publicly traded U.S. industrial rail cargo transport company)? Also, it will be fascinating to see what increasing levels of and reliance on automation do to the industry in the coming decade.

  2. Amazing. I learnt so much reading this. ho

    1. It’s good to know that the Northeast Corridor and other short-haul routes are profitable. it’s hard to see how Amtrak can be losing money after charging so much, despite how slow it is.

    2. How much of the poor performance is linked to poor infrastructure? The lack of truly high speed trains limits the utility of the system. Often times, a drive and train journey to the same place are the same duration.

    Ultimately, great article. Good to know about these “hidden variables”, the congressmen who apparently make the entire country subsidise a few people’s convenience.

  3. Very interesting article, thank you. The shortfall of over 1 billion on 3.2 billion seems extreme to me (definitely not allowed to add back depreciation), even with a stronger management structure I wonder how much of this gap can ever be closed. The issue here seems to be an odd combination of an unclear business model combined with excessive constraints on the operating model. Do you think, even with these constraints, that there exists room to improve operations in the current model (without relief from congress)?

Leave a comment