Pro’s and Con’s of Replacing Amtrak   February 8th, 2013

Analysis by Noel T. Braymer

With changes coming this October to the billing for State supported trains run by Amtrak, California and the other States supporting Amtrak Trains are getting sticker shock. Congress which is forcing Amtrak to raise its prices is also considering allowing private companies to take over some of these Amtrak trains. This would be similar to many commuter trains run by a private company under contract to a government agency.

What are the Pro’s of replacing Amtrak with a private company? The private company will have lower operating costs to run trains than Amtrak. The States would pay less to have short distance trains than it costs with Amtrak under the new mandated billing. The money saved would cut the criticism of subsidizing these services and may free up money for capital projects to improve local rail service.

So what are the Con’s to replacing Amtrak? Amtrak has the legal right to run on all major railroads in this country. States using private operators would have to negotiate a new contract with the railroads that now have Amtrak service. Amtrak already has liability insurance to run on these railroads. The railroads will want any operator to assume liability before using their tracks. The railroads will also be interested in the new operator paying more to run trains using their tracks than what Amtrak pays.

Another big issue is equipment. Most States use Amtrak cars and locomotives for their State supported trains. Some States like Washington, Oregon, California and North Carolina own equipment. California owns all the equipment for the Capitol Corridor and San Joaquin Trains. But most of the equipment for the Pacific Surfliners is owned by Amtrak. Will Amtrak be willing to sell or lease their equipment to the States for use by private operators if Amtrak loses the contract to run these train? If so will the States have the money to buy or lease the equipment? So where will the equipment be serviced if the States get the equipment to keep running their trains? It takes time and money to build new facilities and the deadline is this October. Would Amtrak be forced to continue servicing their old equipment after selling or leasing it?

These are some of the issues the States need answers too now. It can take years to set up a new rail operation and the States are working on their budgets now for next fiscal year. The possibility that Congress will make changes in the law in the future to make things less expensive doesn’t balance a State’s budget this year.

So will Amtrak be better off without these short-haul trains which “lose” so much money? No. Amtrak doesn’t have a problem running too many money losing trains. Instead it needs to run more trains to bring in enough money to cover its overhead. These short-haul trains don’t make money or even cover their operating expenses in many cases. But Amtrak comes out ahead from running these train now with the money the States pay Amtrak.

Amtrak needs to overhaul its accounting system because it  hides problems and opportunities. The reason the States pay as much as they do to Amtrak are because of “Avoidable Costs” for these trains. Congress has ordered Amtrak to charge the States 100% of a train’s Avoidable Costs starting this October. The term avoidable implies that if these trains are eliminated Amtrak would save money. But when Amtrak has eliminated trains in the past based on their Avoidable Costs it has always resulted in increased losses due to reduced revenue and little reduction in costs. Avoidable Cost accounting at Amtrak hides much of its fixed overhead costs by charging them to trains instead of identifying them.

Avoidable Cost accounting at Amtrak hides opportunities by hiding progress made by improving rail service. When Amtrak started running 3 round trip trains between Los Angeles and San Diego in the early 1970′s the trains didn’t cover even 40% their operating costs. With service improvements and added service managed for the State by Caltrans these trains by 1988 were recovering just over 100% of operating costs. Strictly speaking this is not a profit because this doesn’t cover all costs including overhead needed for these trains but it was still a major achievement. By 1995 Amtrak starting adding some Avoidable Costs to the bill for these trains. By 1997 these trains were recovering less than 40% of costs under this new billing and the State was paying up to 20 million dollars a year to Amtrak to run these trains. Between 1987 and 1991 California’s cost per year for these trains to Amtrak was usually around 1 million dollars and often less.

So what are these Avoidable Costs? No one really knows, because they reflects costs for all of Amtrak that are arbitrarily assigned to different trains. When service improvements are proposed no consideration is made from increasing revenues paying down Avoidable Costs. The result is increasing service looks like it will increase losses not reduce them. Amtrak’s high fixed overhead costs often have little to do with these local short distance trains.

Where is much of this fixed overhead? Amtrak’s management is centralized in the East. Amtrak owns several major train stations mostly on the East Coast as well as Chicago. Stations are very expensive to own unless there is commercial development to help pay for them. Also between 1995 until 2002 Amtrak spent a great deal of money and went heavily into debt to start-up the Acela Trains back east which is still being paid off. It was because of this debt that Amtrak almost ran out of cash in 2002. Amtrak owns most of the railroad between Washington and Boston with some tracks in Michigan.

In comparison Amtrak doesn’t own tracks or stations in California. The tracks Amtrak shares with commuter trains are owned by the counties in Southern California and mostly managed by the Commuter Train operators. On the East Coast Amtrak owns the railroad and is responsible for operating and maintaining the tracks it shares with many commuter trains. Most stations in California are locally owned and many cities have or are spending money to improve and expand their stations because busy train stations boost local economic growth. In addition California is now paying 100 million dollars to Amtrak to help pay for the State’s 3 corridor trains and that figure will go up in October. If the East Coast was more like California, Amtrak would save a great deal of money.

A big problem having private operators running trains is how will passengers connect with other trains? If you want an economical rail passenger service you need connections to other trains to increase ridership which should have joint ticketing. For that to happen train schedules have to be coordinated between different trains. Just in California there is much to be done to coordinate service between the Surfliners, Metrolink and Coaster as well as between the Surfliners, San Joaquins and Capitol Corridor Trains. Imagine the problems with 3 different operators and local authorities in charge of each train if they aren’t working together. Imagine the problems with trains all over the country run on the State Level not connecting with the Long Distance Trains or even Trains with neighboring States.

Using private operators to run passenger trains can save money for many States. But private operators will not cut the high fixed overhead costs that Amtrak has. These costs  for Amtrak will be elinimated by giving local government ownership of the railroad and stations owned by Amtrak. But there will still be the problems of paying for these costs which will still need government to pay for. This still brings up the question which part of the government; local, State or Federal will pay and where will the tax money come from? Paying for many of these costs will be solved by rationally expanding passenger rail service with better connections and service between more cities. Increased commercial development at the stations will increase revenues and cut overhead. But such a rational and economical approach we have yet to see in Washington either from Congress or Amtrak.

This entry was posted on Friday, February 8th, 2013 at 1:57 PM and is filed under Editorials, Reports.