How to Operate Passenger Trains at a Profit October 12th, 2013
By Noel T. Braymer
It is no secret that the key to being profitable is to bring in more money than you spend. To run a profitable passenger railroad the keys are maximizing productivity and increasing revenue with increased ridership. Here are basic steps that other successful transportation services use to do more than just cover their costs.
The key to income for all passengers services (trains,planes, taxis, ships and buses) are passenger miles. The miles passengers travel reflects income since passengers are charged by the mile. Even if a train carries many people for a short distance, it isn’t earning money when the train has empty seats. The best way to generate passenger miles is with extended routes. In transportation the long hauls are always the biggest money makers.
Airlines today when they offer corridor service usually do so to connect with major hub airports. On a recent flight from San Diego to San Francisco the man sitting next to me was on his way to Korea making connections at San Francisco. Many other passengers on this flight no doubt were also making connections. This made it possible for me to get a cheaper ticket for this flight.
On transportation services empty seats don’t generate income. In the aftermath of airline deregulation and competition in the late 1970′s airlines in order to survive discovered hub and spoke service and yield management. Hub airports allowed the airlines to serve the greatest number of markets using the least number of planes and employees. With hub and spoke service airlines increased their productivity. Flight times today are slower than they were 50 years ago. But more people today fly greater distances than 50 years ago and adjusted for inflation fares are generally lower. The key to doing this is having connections so every flight has service to the greatest number of markets and the planes were flying with few or no empty seats.
Hub and spoke service to many markets helps to fill planes. To insure the planes fly full most of the time yield management was developed. An example of this is seen on the many commercials for Online Travel Agencies advertising they have lowest prices for flights, hotels and car rentals. But it is really the airlines, hotels and car rental agencies offering the discounted fares.
Demand for travel can vary from month to month or even by hour to hour. Yield management offers different prices depending on demand at the time for a fight, a hotel room or location for a car rental. A person who books early or takes a seat near the back of the plane will pay less than someone who books at the last minute or wants to sit up front. The point is to keep planes, hotels and rental cars earning income. Even if the price is highly discounted when demand is low it will still be more money than nothing. A person who must travel on a certain day or time of the day will pay more. People who can travel on slow travel days or times of day can enjoy major discounts. The point is to not let planes, hotels or rental cars be left unused.
Today most passenger rail services and intercity bus services in developed countries use yield management and reserve seating to maximized income. Today both Greyhound and Megabus (both are own by different Scottish companies) sell their bus tickets online and use yield management. This is a major reason intercity bus ridership has grown lately after years of decline. America is unusual because yield management is ignored by rail passenger operators here.
Passenger trains by themselves don’t lose money. Most trains cover their direct costs. The problem is there are not enough trains and passengers on the trains to cover the entire overhead expense of the service. To cover overhead trains should be kept in service generating the maximum passenger miles with the highest possible occupancy. Commuter trains historically are the hardest trains to run at a profit. Commuter trains are often crowded during rush hour. But they carry low fare passengers at short distances and commuter trains are often left idle much of the day and weekends.
Local rail service should be seen as a regional service not just for commuters. Regional services runs 7 days a week and all day and into the night. Regional service serves many more markets than commuter trains, not just major jobs centers. They can do this by extending and or combing their routes into longer routes. They also have better connections serving airports, other trains at hub stations and interline tickets with bus service. Such connections makes it easier to travel without a car and for people to travel to more places by air, rail, road or even over water. Take the Pacific Surfliners as an example of the value of extending train routes.These trains run from San Diego to Los Angeles. Those trains that are extended also to Santa Barbara and even San Luis Obispo carry the most passengers and generate the most revenue of the Surfliners.
Any major capital intensive industry keep expensive assets in use generating income as much as possible. Factories run 24 hours a day rather than run 3 factories each 8 hours a day. Airlines keep their planes in the air as much as possible and on the ground only as needed for maintenance and servicing. So it should be for rail passenger service. Too often with the idea of saving money passenger train equipment is left idle when demand is slow or to save money equipment repair is delayed. This is false economy. No successful business leaves expensive equipment sitting idle when it can be put to work making money.
Most intercity rail passenger service including High Speed Rail makes an operating profit. Most passenger railroads around the world today are run on a for profit basis. This includes operating rural and commuter passenger services under contract with a subsidy from the government. But intercity rail service doesn’t need a subsidy in most of the world. A major difference is most countries run more trains and carry many more passengers per train than this country. To operate trains at a profit here we need to expand service to cover overhead, not eliminate trains to “save” money.
What needs to be pointed out is making an operating profit for passenger service is not the same as paying all capital costs. But let’s face the fact that few transportation services cover their capital costs. Airlines don’t own the airports, trucking companies don’t own the highways and shipping companies don’t own the harbors. In this context most commercial transportation is dependent on the government and the taxpayers to some degree. The benefit for the taxpayers is good transportation is central to a healthy going economy.The same should be true of rail passenger service.
Today in most of the world rail service operators don’t own the railroad. In Europe today the only place where the government owned railroads are owned by the rail service providers is Ireland. Generally a government agency or non-profit company operates the railroad. But for-profit companies operate the trains. National railroads in Europe which now are for-profit companies are increasingly looking to expand both passenger and freight service to other counties in Europe.
Facilitating increased track utilization is in the interest of the railroad owners.The non-profit companies or government agencies in Europe which own the railroads are expected to cover most of their costs from user fees. The Chunnel between England and France was built with private financing and is paying its loans from fees charged to the trains that use the Chunnel. The Chunnel has High Speed Passenger Trains, auto/truck ferry trains and freight trains. The double tracked Chunnel is capable of operating in each direction 20 trains an hour which is a train every 3 minutes in each direction.
Owning the Chunnel has not been very profitable. A few times the Chunnel has come close to defaulting on its debt. It has been able to reorganize its debts to avoid default. One problem the Chunnel has is that it only runs now at about half of its capacity. One thing the people who manage the Chunnel want is to run more trains through it. Towards this end the Chunnel is looking for more operators to use the Chunnel to expand passenger and freight rail service from all of Britain to more of Europe. To better pay for the cost of owning their railroads the other European Countries are planning to bring in more service and competition with rail operators from other European Counties.