Passenger Trains Make Money March 15th, 2013
Report by Noel T. Braymer
To often we hear in this county about how passenger trains lose money. The fact is many passengers trains cover their costs for trains crews, fuel and direct operations of the trains. It is the passenger railroads that are losing money. To draw an analogy compare a passenger railroad to a shopping center, an old, run down shopping center with many empty stores. This shopping center is losing money. But the stores that are still open in this shopping center are making money. In this analogy the stores are the passenger trains.
When people say that we should get rid of the passenger trains that lose money, this would be the same as evicting some of the few rent paying profitable stores in this shopping center. This shopping center could raise its rents to make money from the last few stores it has. But this would likely shut down these remaining stores because they are not making enough money at this shopping center to afford a rent hike. Or these stores could move out of this old shopping center because they can get a better deal at another shopping center. The obvious solution if this failing shopping center wants to make money is to attract more stores to bring in enough rent to pay the shopping center’s overhead.
So what are the best ways to have more money making trains? Commuter rail service is generally a very expensive operation.The commuter train operator often owns the railroad they run on which is expensive overhead. Commuter trains often carry large numbers of people but only during the rush hours. For most of the day very expensive equipment sits idle. Transportation experts like cab drivers know that they don’t make money sitting idle. Cab drivers favorite fares are trips to the airport. Cab drivers get paid by the mile and the airport is generally the longest trip they can make. Just as important to cabbies is they can usually pick up a fare at the airport and are making money going back into town. The best time to add more service on commuter trains is between rush hours and on the weekends when equipment is idle. There is a great deal of travel during non-rush hour times which commuter trains are missing.
Another problem with commuter trains is even when they carry lots of passengers they don’t bring in much money because the fares are low and the distances traveled short. It helps to extend the route of the trains to increase passenger miles which is what cabbies do when they go to the airport. We will see some of this by 2014 on the Coaster and Metrolink between Los Angeles and San Diego. There is a great deal of travel between San Diego and Orange County which current rail service doesn’t serve. To change this Metrolink will be extending some trains from Los Angeles that end at Oceanside to San Diego and some Coaster trains will be extended to Fullerton. In the case of Metrolink not only could they run more trains in the off hours, but they could run service through Los Angeles and serve longer and new markets. Like say Palmdale to Anaheim or Chatsworth to San Bernardino and all the towns in-between for example. Since Los Angeles Union Station is a natural hub more trains can also be scheduled to make it easier for passengers to transfer between trains. These changes may not make all commuter railroads profitable but will increase ridership, fairbox recovery and increase its value to the community.
So can I prove that Amtrak has profitable trains? Going back to 1979 there were political demands that Amtrak save money and eliminate the trains that were losing the most money. Amtrak charges its trains what are called avoidable costs which implies that if a train were eliminated Amtrak would save money by avoiding these avoidable costs. In the fall of 1979 Amtrak eliminated 5 long distance trains. As a result Amtrak’s losses increased 150 million dollars from 1978 to 1981 after the October 1979 service cutbacks: Amtrak didn’t save money it lost more money cutting these trains.
Shortly after this happened Dr. Ronald C. Sheck an Associate Professor of Geography and Planning at New Mexico State University Las Cruces, New Mexico in 1982 wrote a reports called Amtrak 90:A Route to Success. What Dr. Scheck found was” In FY 1980 Amtrak incurred total expenses of $1.1 billion, yet the actual cost of direct operating expenses (moving the trains over the tracks-labor, fuel, expendables, etc.) was only $272 million, or about 25 percent of the total. Indirect expenses (stations, yards, shops, maintenance of locomotives, cars, and the small amount of track owned by the corporation) totaled $644 million, or 56 percent of expenses. Revenues generated from ticket sales, food and beverage sales, and the movement of mail and express in the year ending September 30, 1980, totaled just over $410 million. On a direct-cost basis Amtrak’s trains earned more than the cost to operate them by some $127 million.(emphasis added) The high infrastructure costs are clearly a major problem and reflect serious diseconomies of scale.”
What Dr. Sheck found was that Amtrak had very high overhead costs. While Amtrak’s trains earned $127 million dollars, overhead’s costs of $644 million dollars caused Amtrak to lose $417 million. Dr Sheck’s solutions to this problem was simple, run more trains than can earn more money than their direct costs. Amtrak was like an old run down shopping center with lots of surplus capacity and not enough income. Adding trains wouldn’t just increase ridership but would if enough trains were run would cover Amtrak’s overhead costs and even produce a PROFIT.
How could this be done? Back in the fall of 1976 California was the first state to give money to Amtrak to improve and add rail service for local trains. The trains California first subsidized were the San Diegans which then ran only between Los Angeles and San Diego. In fiscal year 1975-76 Amtrak ran 3 round trips a day between Los Angeles and San Diego that carried 376,900 passengers. The next year California through Caltrans helped pay for a fourth train, extra advertising and Amtrak introduced new cars and locomotives on these trains. In 1976-77 these four San Diegans carried 608,000 passenger and according to Amtrak recovered 36% of direct costs.
By 1988 after years of court battles against the Southern Pacific railroad paid in part by the State, Amtrak was allowed to extend one San Diegan train north of Los Angeles to Santa Barbara.This same fiscal year the State supported a fourth train in this corridor which brought up to 8 trains between Los Angeles and San Diego. Amtrak on its own had earlier added a 7th train. This same fiscal year 1987-88 the State paid Amtrak a little more than the year before, just over a million dollars while Amtrak reported the direct cost recovery that year at almost 105%.
For the next 6 years until fiscal year 1992-93 the San Diegans continued to recover 99% or better of its direct costs according to Amtrak. During this same time the subsidy needs of Amtrak from the Federal Government continued to decline. This happened as rail service was expanding on Amtrak and new equipment was bought to handle growing ridership . When then Amtrak President Claytor retired in 1993 Amtrak’s cost recovery had improved to almost 80% of costs up from 42% in 1980. As he retired he predicted that by 2000 Amtrak would recover 100% of costs if his policies were continued.
After 1993 Amtrak had new management. Most of the resources of the company went into the ACELA project which was for building faster rail service between Boston, New York and Washington. Track work, additional electrification and all new equipment for this project was very expensive and for much of it Amtrak borrowed money which increased their costs expecting the ACELA trains would be very profitable. After 1994 Amtrak was having cash problems and looked for ways to save money. They cut 2 long distance trains as well as other service cut-backs to save money. By 2002 Amtrak almost shut down because of cash shortages and needed a bail out from the government to keep running.
Let’s go back to Amtrak’s charges to the San Diegans/Surfliners. On a direct cost basis the San Diegans were for clearly doing well for several years between 1987 and 1993. Then things started to change. Amtrak found new costs to charge the State for what are now the Pacific Surfliners and the 2 other California supported trains. The cost of running the San Diegans trains according to Amtrak in 1992-93 was $13,254,709. By 1997-98 the cost of running the trains was now $44,769,723. In 2011-12 fiscal year Amtrak said the Surfliners now cost $74,494,532 and lost $31,610,112.
Lets go back to 1979. Amtrak claimed that cutting 5 trains would save money due to their avoidable costs. Instead of saving money Amtrak lost over a $100 million dollars more. The reason for this was Amtrak’s high fixed overhead costs which Amtrak’s accounting often claims as an avoidable cost. Amtrak charges their fixed costs to their trains in an arbitrary way. No consideration is made of how increased revenues from expanding service will cover more of Amtrak’s overhead or how eliminating service will reduce income to cover overhead. The avoidable costs charged by Amtrak to a train always go up if service expands, even when there is little increase in fixed costs such as running more miles with existing equipment on an existing route.
This makes most service improvements look very expensive and makes it hard to get profitable service improvements at Amtrak. Amtrak tries to save money by running trains with fewer cars on their long distance trains than they did in some cases before 1993. This despite the fact the long distance trains are often sold out and have the fewest empty seats of Amtrak trains. Adding one or two cars would greatly increase the revenue from these trains. Because avoidable costs are in part allocated by route miles, long distance trains are hit with the highest avoidable costs which is why Amtrak claim they lose $500 million a year on the long distance trains. But the reality shown by what happened in 1979-80 when trains are cut is that these fixed cost would remain if you eliminated these trains but the revenue would disappear. Then Amtrak would be forced to apply these fixed costs to fewer trains.
Recently the Brooking Institute a Washington based Think Tank with cooperation from Amtrak released a study that claimed that Amtrak’s most profitable trains were its short distance trains while the long distance trains were the most unprofitable. If this is true this would be unique since all other transportation services make most of their money with long distance service and finds running short distance service hard to make money.
Beside taxi drivers who dislike short trips the freight railroads handle mostly interstate freight and much of it is international container traffic. The railroads have abandoned most of their short haul branch line services. What is left is contracted out to small operators with much less overhead than the Class 1 railroads for connecting service to interstate travel. The airlines are much the same way with many short distance flights with their name flown by contractors with much lower costs and the airlines main interest in this traffic is for transfers to their long distance flights not for short trips. Southwest Airlines known for flying shuttle services is expanding with national and even international service. The first year Southwest flew with just local fights in Texas it lost money. Instead of trying to save money with cut-backs it kept its employees and the same number of flights but with faster plane turn arounds on the ground reduced it overhead by getting rid of 1 of the 4 planes it had. The next year Southwest was profitable
So how can Amtrak make money on short distance trains when it claims it lost over $31 million last year just on the Surfliners; certainly one of Amtrak’s most productive short distance trains? Perhaps Amtrak doesn’t make money with short distance trains from passenger revenue but from the subsidy paid for by the states to run them? Amtrak has been losing contracts to private operators for running commuter trains in many places because Amtrak’s operating costs are higher than the competition. This is because these other services don’t have the high overhead costs of Amtrak.
There is political pressure to have all Amtrak trains run by private operators.This is behind the Federal Law forcing Amtrak to charge States 100% of the avoidable costs of state subsidized trains. The downside of this could make it difficult to have connecting ticketing and train schedules for passenger to transfer between services. Also without the economy of scale of a single service it will be harder for a passenger railroad to generate enough revenue to cover all its cost’s. Contacting short distance to private operators will save the states money compared to the current system with Amtrak but it will not lead to self-supporting passenger train service. Contracting service also will do nothing to pay for Amtrak’s overhead which will still remain.
What government is good at as seen in the past is building and paying for transportation infrastructure. In California, State and local governments have spent billions of dollars improving railroads and building new rail transit which connect to Transportation Centers also built by government which are also train stations. There is a great deal of government infrastructure for rail service which Amtrak uses in California it doesn’t have to pay the majority of the costs. This is unlike parts of the East Coast and Midwest where Amtrak owns tracks and stations which accounts for much of Amtrak’s overhead.
The difference between railroads and most other forms of transportation is railroads owns the railroads and all of its fixed costs. But airlines don’t own airports, shipping companies don’t own harbors and trucking companies don’t own freeways. To put passenger rail service on a level playing field with other transportation services government spending should be going mostly towards improving rail infrastructure not subsidizing operations. Intercity rail passenger service in much of the world runs at a profit. Not just the direct costs but all costs and most countries have much denser passenger service than the skeletal service we have now in most of this country. What rail service in many countries is subsidized is commuter service, rural services and in some cases freight. Many counties are too small for profitable rail freight service. A good rail passenger service is an efficient service and will be well patronized and require little or no subsidy. To make this happen we need more rail infrastructure spending.