Editorials

How Profitable is the NEC?

Report by Noel T. Braymer

According to Amtrak’s 2011 Fiscal Year their NEC Passenger Trains grossed just over 1 billion dollars. Revenue that year was roughly split evenly between the Acela Trains and the conventional Northeast Regional Trains. In 2011 according to Amtrak the Acelas covered their fully allocated costs and had an operating profit of $165 million dollars. The Northeast Regional service exceeded their allocated costs by an additional 15 million dollars. That compares to a reported 18 million dollar operating loss back in Fiscal 2003 for Amtrak’s NEC Trains. This was reported in Fred W. Frailey’s column in the November 2012 issue of Trains Magazine.

However when we look at Amtrak’s 2011 Capital Budget for the NEC, it was $575 million dollars versus the $180 million in “Operating Profits”. In the words of Amtrak Vice-President Stephen Gardner on the NEC …”infrastructure costs are growing exponentially”.

This in a nutshell is the problem of trying to make money running a railroad. Most transportation services depend to a large degree on the government to provide infrastructure. Airports, roads, harbors, and waterways are generally built and maintained at government expense. This difference is at the root of the argument when comparing rail versus other modes when talking about subsidies for transportation. How do American Railroads make money with their own infrastructure? It helps after over 150 years they own it free and clear. Also over the last 30 plus years with deregulation the railroads can charge enough to cover capital costs. American freight rail service is on a continental scale which creates the significant train miles needed to produce profits. Plus since deregulation the railroads have eliminated miles of poorly performing secondary lines and have invested money to add capacity on busy mainlines.

So how does this compare with railroads in other countries? In the past railroads in most countries were owned by the government. These railroads usually didn’t make money but didn’t lose much either. Generally services that need government subsidies are commuter trains and service on rural branch lines. In the last 20 years or so this has changed in much of the world with either rail service being turned over to private companies or the government owned railroads being reorganized for-profit. At much the same time many countries have separated ownership of the infrastructure of the railroads from that of the operators.

What is the advantage for the rail service operator in not owning the railroad? Saving money! The operator only has to pay the cost it incurs, not the whole cost which can include excess capacity. The form of infrastructure ownership varies from country to country. In some cases it is owned by the government which can use tax money to maintain the railroad. Often it is a non-profit organization which is funded by users to maintain the railroad. It isn’t easy breaking even let alone making money owning infrastructure. We have small scale examples of this in California. Los Angeles County created the Alameda Corridor: 20 miles of grade separated railroad from the harbors to the major rail freight yards near downtown LA. This allows greater rail freight traffic for the harbors while eliminating dozens of grade crossing that would have blocked traffic with additional trains. Even though the government owns the Alameda Corridor the railroads are still paying for much of the cost of construction and operation from what they are charged to use it. There have been times when the debt had to be renegotiated when revenue fell short but the project is still a going if not highly profitable concern. Another example in California of operators not owning the railroads goes back to the 1990’s. Back then the Southern Pacific and Santa Fe were more than happy to sell branch lines for Caltrain, Metrolink and Coaster. The railroads were happy to sell these branch lines to get the cash and to get the costs and legal liabilities of owning these rail lines off their backs. The freight railroads pay rent to use their old rail lines but this is much less than what they paid to own them. These rail lines now are often owned by the counties they are in and we see county, state and Federal funding going towards improvements.

It would be in Amtrak’s best interest if it didn’t own the NEC if it wants to be profitable. It isn’t that hard to operate rail passenger service at a profit, but it is hard to pay for the infrastructure. NEC or any rail line can break even or maybe even make a small profit on infrastructure.To do that the fees charged have to be able to cover capital costs and the railroad needs to have plenty of traffic. An independent NEC infrastructure operator to break even would want to charge fees high enough to cover capital costs while increasing traffic to raise revenue. That would include increasing freight traffic. As it is Amtrak is a minority user of the NEC with about 150 weekday trains while the commuter trains number around 1500. As owner Amtrak is responsible for the majority of the costs of the NEC. Going back to the 2011 Amtrak capital budget of ¬†$575 million dollars, the total fees paid for by the other users of the NEC totaled $164 Million for operating and capital cost according to Fred W. Frailey in the July 2012 issue of Trains. While Amtrak trains produce more train miles per train than commuter trains, the heavy commuter traffic in major cities is where most of the NEC infrastructure costs are. And this doesn’t include the cost of future proposed improvements on the NEC which Amtrak is looking at construction costs as high as $151 Billion dollars for 200 plus miles per hour speeds.

By law as of 2015 the other users of the NEC are suppose to pay “their fair share” for capital projects. This brings up the can of worms of what is their fair share? Everything is based on Amtrak’s allocated costs. According to Amtrak’s allocated costs it is losing $530 million on the Long Distance Trains this year. How can Amtrak lose so much money on Long Distance Trains? The Long Distance Trains use very little of Amtrak’s overhead. Most of the infrastructure used by the Long Distance Trains is that of the major freight operators. As it is Amtrak gets a major discount to use the freight railroads tracks which is a sore point with them. Amtrak’s losses on the Long Distance Trains is a result of Amtrak’s allocated costs assigned to them. The Long Distance Trains are charged a proportion of Amtrak’s total overhead costs on a train-mile basis. As a result the Long Distance Trains get charged a great deal of the cost of Amtrak’s overhead since they travel many miles. In other words according to Amtrak’s allocated cost a train cost nothing if it isn’t moving. Is this a realistic way to measure costs at Amtrak? When put to the test in the past when Amtrak has eliminated Long Distance Trains to “save money” the result was Amtrak lost more money. Revenues went down as Long Distance service was cut but little money was saved. During the Amtrak Presidency of W. Graham Claytor of the 80’s and early 90’s, Long Distance service was improved and expanded which increased revenues and reduced deficits. Amtrak could easily increase its revenue with little increase of overhead by buying more Long Distance equipment and adding it to existing trains which are now often full instead of regularly turning away passengers as it does now. Minor improvements with better connections and sections to serve new markets would greatly improve revenues. Amtrak will never be profitable as long as Amtrak owns the NEC and doesn’t expand service on the National System where it doesn’t have to pay for the full cost of the infrastructure.

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