Should Amtrak Be Saved?

In the classic children’s tale The Little Engine That Could, the indomitable train chugs her way forward, saying, “I think I can, I think I can, I think I can.” After three decades of trying to live by that mantra, Amtrak is fast becoming the train system that can’t.

Indeed, the future of train travel in the U.S. seems to be on the verge of derailment. The cash-strapped passenger rail system’s near-term and long-term prospects are now the subject of contentious debate in several Congressional committees. Last year, Amtrak mortgaged Penn Station, and it has attempted to gain funds through equipment sale-and-leasebacks. Adding to the sense of chaos, after a four-year stint Amtrak president George Warrington recently announced that he is leaving to head New Jersey’s bus and rail operation, NJ Transit.

Created in 1970 by the Rail Passenger Service Act as a for-profit entity, The National Passenger Railroad Corporation (Amtrak) released freight companies from the burden of carrying passengers. Since its inception, however, the system has never made money, due in part, say some, to its contradictory missions: It has been expected to wean itself off federal aid while continuing to provide a national service that includes costly long-distance routes.

The numbers paint a clear picture of Amtrak’s problems. Although revenues have risen over the years, expenses have increased even faster. This has led to losses despite federal government subsidies, which have declined in recent years. In 1996 Amtrak’s revenues were $1.6 billion but expenses stood at $2.3 billion, leading to a loss of $600 million. By fiscal 2001, unaudited figures show that Amtrak’s loss increased to more than $1 billion, with $2.1 billion in revenues and $3.1 billion in expenses.

Amtrak hemorrhaged cash steadily through the 1990s, with annual net losses ranging from $183 million in 1990 to $318 million in 1997. Recognizing the seriousness of the problem, in 1997 Congress passed the Amtrak Reform and Accountability Act, mandating that the rail service reach operational self-sufficiency within five years. It also created the Amtrak Reform Council (ARC), an independent federal commission to recommend options to help Amtrak reach that goal and submit plans for a restructured national passenger rail system. Last month, the Council submitted its plan for revamping Amtrak, which suggests that infrastructure and operations be separated and that limited competition be allowed to replace the existing monopoly.

Amtrak’s survival is now up to Congress and the administration, which must decide whether and in what form a national rail service can continue. Ernest Hollings, a Democratic senator from South Carolina, has proposed legislation that would increase federal funding for Amtrak and provide for several rail upgrades. Former Presidential candidate John McCain, a Republican senator from Arizona, has offered a competing bill, largely based on the ARC plan, that favors the eventual privatization of the beleaguered rail system.

Historical Hiccups

How did Amtrak get into this sorry state? To some extent, it has always been this way. W. Bruce Allen, professor of business and public policy, regional science, and transportation at Wharton, says Amtrak was initially given an impossible task.

“At the time rail travel began in the U.S., there was no real competition except for stage coaches, ships, and so forth,” notes Allen. But as time went on, the automobile grew in popularity. “During the Second World War, trains enjoyed a bit of a renaissance. Gasoline was being rationed, and auto plants were being used to make tanks. But when the soldiers came home, the shift to a peacetime economy began – people had money and moved to the suburbs, so passenger rail traffic dipped,” he says.

“Freight railroads were losing money on passenger traffic. In the 1960s the situation was pretty bad, and they made a wholesale move to get out of that business,” says Allen. Supporting the creation of Amtrak in the early 1970s seemed to be a wise decision for the freights. “If a freight company signed on, it could abandon all passenger services Amtrak wouldn’t operate. Sure, it had to provide track priorities, but it seemed to be a fairly good exchange. However, a lot of political games were played. Amtrak was saddled with debt problems. Once the interstate highway system took off in 1955-56, and then jet aircraft later on, the handwriting was on the wall. Amtrak never made any money,” says Allen.

The result was that Amtrak failed to overcome the institutional problems it inherited. “It was dealing with political constituencies who would not let it manage the system the way a business manager could. Unions restricted the amount of time a person could work. Then there were equipment problems, and freight companies didn’t always maintain tracks to passenger standards. Sometimes they just paid the penalty for not giving the passenger trains priority, and let the freight trains go first if it made economic sense,” says Allen.

Lack of customer service was another problem from the get-go, he notes. Under Warrington, Amtrak introduced a Satisfaction Guarantee, a Guest Rewards program modeled after airline frequent flyer programs, and even took on mail and cargo services to bring in revenue. But all this was too little too late, says Allen: “They’re about 20 years behind on all this.”

Right of Passage?

The ARC report favors introducing at least some competition into the system. Supporters say separating train operation from infrastructure (Amtrak itself owns and maintains the Northeast Corridor rails, while freights control the rest) and phasing out trains that don’t make economic sense, will help. Opponents, however, worry that such a solution would just create the American version of the problem-ridden British rail system.

Vukan R. Vuchic, a professor of transportation systems engineering at the University of Pennsylvania’s School of Engineering and Applied Science, believes that privatizing the rail system and breaking it up isn’t a good idea. “There are two questions to ask,” he says. “The first is: Does our country need railroads? And the second is: Should it be Amtrak, or another organization?”

“The answer to question one is a vehement yes. There’s no way to imagine a country like the U.S. without railroads. To answer the second question – if we agree that we need railroads – it’s only rational to have the involvement of government,” he says. The fact that demand for Amtrak services has gone up over the years seems to support Vuchic’s point. In 1971, a year after Amtrak began operations, it transported 1.2 million people a month. By 1999, that figure had risen 45% to 1.8 million. Annual numbers tell a similar story. Amtrak ridership went from 13.7 million in 1972 to 23.5 million in 2001.

Vuchic argues that if the U.S. accepts gasoline and ticket taxes, why should it not do something for rail? “We subsidize certain industries because we think they are essential services and that they will have a multiplier effect on the economy. If we agree on that, there is no need to hide subsidies on other transport modes. We subsidize other modes, such as airlines and highways, but we don’t call them subsidies,” says Vuchic.

Unreasonably mandating rail self-sufficiency doesn’t make sense, he says. “Because of all those requirements, Amtrak is forced to have extremely high fares. That’s contrary to what railroads should be. Railroads should be a means of transport for everybody – not just laptop-toting business people, but students, seniors, everyone. We need to optimize each mode of transport for the particular role it plays – short-haul, long-distance, etc., and Congress should allocate a decent amount of money to each.”

International Lessons

ARC senior financial analyst Michael Mates, who received his MBA from Wharton in 1972, contends that the failure of deregulation and privatization in other countries would not necessarily be repeated in the U.S. He argues that even the setbacks in the U.K. have to be taken in context.

“The British rail system wasn’t really such a failure,” Mates suggests. “Some things were left untouched when Britain revamped its rail system. The British had contracts that made track access fees largely fixed. So operators thought to themselves, ‘What we have to do to be profitable is to run more trains.’ But there was no time or money to fix the tracks. In the 1970s and 1980s, the physical infrastructure was neglected. The private entities could not get enough money to support infrastructure improvements. But the operators are making money. Ridership has shot up to levels not seen since the Second World War.”

Mates supports the idea of increased competition, as proposed by ARC. “You don’t have to privatize everything. Sleeper and meal services are probably good candidates for privatizing. I would spin off the Northeast Corridor infrastructure into a new entity. Amtrak or any other operator could run over it. Congress could decide whether all costs should get passed to users or whether there should be some subsidies.”

Long-distance trains that don’t make economic sense don’t need to stay, says Mates. “Some trains in sparsely populated areas, for instance, carry an insufficient number of passengers. You can’t possibly recover the direct costs, to say nothing of the capital costs. The 18 trains that Amtrak could eliminate represent just about 18% of total ridership and a whopping 70% of the cost. Why are we pouring subsidies into these? Just for people who are afraid to fly or who want to have a life experience?”

Mates suggests that long-haul trains could be turned into high-end integrated vacation experiences, similar to what cruise operators do in Alaska. “Take overnight and full-service dining cars, franchise them out, and make it a luxury experience – a package deal,” he says.

Speed Dreams

While such steps might help attract a niche segment of travel customers, a major challenge Amtrak faces is whether it can compete effectively to gain the business of people who now travel by air or by highway around the U.S. In Europe and Japan, rail service providers have introduced high-speed trains that make traveling by rail competitive in terms of time and cost with air travel. Could high-speed trains represent salvation for Amtrak?

The recent advent of Amtrak’s Acela in the Northeast Corridor represented the system’s first foray into the new world of high-speed trains. Vuchic believes the introduction of such high-speed rail travel comparable to that in Europe is absolutely justified, and notes that letting the existing system go would mean building it from scratch at a higher cost later. Deirdre O’Sullivan, a public affairs specialist for the ARC, says that Amtrak in its strategic business plan (fiscal 1999 to 2004) expected Acela to “generate $300 million in revenue, contribute $180 million to Amtrak’s bottom line and bring in 2 million additional passengers (i.e., 2 million people would decide not to fly or to drive on the Northeast Corridor between New York City and Boston but take Acela). In the first year of operation (Dec. 2000-Dec. 2001) Amtrak attracted 240,000 new passengers but not all the trainsets are in operation yet.” She adds that while Acela’s revenues and ridership are increasing, these are not at the level that Amtrak’s plan had estimated.

Allen isn’t averse to the idea of separating operations and infrastructure, and wants to see some fresh ideas thrown into the mix. “Freight railroads in the U.S. don’t really have excess capacity. If you want high speed trains, who’s going to build the tracks? ARC says let’s get the states and regions involved. There are entrepreneurs who claim they can do great things. I’d like to see them strut their stuff.”

But Mates cautions that it is important to move one step at a time and take the situation in context. “European cities have more compact land areas, and different population density,” he notes. “The area they’re serving is very different. You can’t really compare the two. If a train’s going faster than 110 miles an hour, you have to eliminate grade crossings, and there are lots of these in the Midwest. If you’re stopping all the time you can’t accelerate and decelerate the way you need to. We need to fix what we have first before making that leap.”

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