Why Amtrak Loses Money - For the Layman

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A friend asked me why Amtrak loses money the other day, and rather than repeat just what I could remember, I wished there were an online document that explained it in layman's terms. Is there? His take was that Amtrak should be charging enough money to cover everything. So I would need a document that would show what happens if Amtrak raises its prices that high.

jb
 
There are two reasons.

(1) The competition -- roads -- is very heavily subsidized by the taxpayer. Roads are paid for out of property taxes and income taxes and sales taxes. Railroads, by contrast, have to pay for the tracks. This is why ticket prices have to be lower than the "full cost coverage" price -- because they have to compete with driving, and the car drivers on the neighboring highway are being subsidized to the tune of over 50% of the costs of driving. (Last estimate I read was $14 billion per year, *14 times* what Amtrak gets, and the analyst specified that they weren't including local property tax funding in that.) Note that Amtrak does a lot better financially where the competing roads are *toll roads*.

(2) Lack of economies of scale. In railroading, most of the cost is in fixed costs: the reservations system, maintaining the track and signals, keeping the stations open, etc. The variable costs of running an extra train on the same route are quite low. In order to recover the fixed costs, you have to have high volume: run a lot of busy trains across those lines. Unfortunately, for stupid historical and contractual reasons involving hostility to passenger service by the "freight railroads" and control of the lines by said "freight railroads", on most lines Amtrak is only running one train a day each way. Which is not enough. The NEC, controlled directly by Amtrak, runs lots of trains per day (*and* the competing roads are toll roads) so it does better financially than the other lines.

Raising ticket prices typically reduces volume, so it's often counterproductive. The *variable* cost of adding an extra passenger is very low. Almost all the trains cover their *variable* costs, and amply so -- what they're not covering is the *fixed* costs. So what Amtrak needs is to be running more trains with more cars.

That's the short layman's explanation.
 
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The way I would view it is to look at the September 2016 Monthly Performance Report, page APP-1. This is stated as the Final Audited results for FY2016 and gets you to the $230.2MM adjusted operating loss that I believe Amtrak uses for the 94% figure for % of operating costs. I'm off by a few basis points when I try to recreate the %, but that looks like it.

Note that Amtrak is using total revenues, but subtracting out non cash expenses, primarily depreciation, to get to the adjusted operating loss. If we're trying to make Amtrak cover everything without a subsidy, I would at least assume that capital expenditures at least match depreciation and ignore the non cash subtraction (Cash out the door does count for this exercise). The 2016 cash flow statement (from the 2016 Amtrak financial statements) indeed suggests that capital expenditures are considerably in excess of depreciation for the last couple of years. So assume $4,261.3MM as the target to be met by increasing ticket prices. (I'm ignoring non operating expense as not a major item.)

Now let's try to raise ticket prices to meet the $4,261.3MM. The problem is that pure ticket revenue is only $2,136.3MM. The rest of total revenues of $3,240.6MM is made up of F&B, state supported and "other" revenues, most of which would be challenging to substantially raise prices on. Ticket revenues are only two thirds of total revenues.

So let's try raising ticket revenues only. $2136.1MM/$4,261.3MM=50%. That means we need to double ticket prices to break even assuming totally inelastic demand-that is everybody continues buying tickets at the same rate. In the real world Amtrak traffic would fall off a cliff.

And you'd really need another $500MM or so to pay for capital expenditures that Amtrak apparently needs to put into the NEC each year. So you'd need to more than double ticket prices to get there. Just not feasible in the foreseeable future. So yes, Amtrak needs subsidies-and big ones.

This may not be in layman's terms, but is the best way I can think of to quickly explain why Amtrak can't just jack up ticket prices and make everything all right. IMHO.
 
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To follow up on what Carolina said -- if drivers all had to pay tolls on every road to cover the full cost of road use, then Amtrak *could* double ticket prices, and it would still be cheaper than driving. But as long as the roads are subsidized....
 
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Amtrak came into existence because the railroads then carrying passengers were rapidly going broke.

Why?

Because the Feds were busily building the Interstate Highway System and airports to help the growing airline industry to grow.

Amtrak was formed with the expectation that Amtrak would only exist for a couple to a few years.

Fortune magazine exposed the intentional, manufactured mismanagement in 1974.[/font]

Louis W. Menk, then chairman of the Burlington Northern Railroad went so far as to publicly complain that the story was undermining the scheme to dismantle Amtrak.

So as neroden points out even today highways and the airline industry get way bigger subsidies from the Feds to keep the highways and air transportation system running.

Gasoline taxes paid at the pump were supposed to pay for the highways but in actuality fall way short and they have to dip deeply into a General fund to keep the highways in the somewhat sad shape they are in today.

A former Amtrak CEO (Alexander Kummant maybe) explained it all to Congress I think some years back, but that was before I became interested in Amtrak and riding Amtrak trains.

Someone else would have to link to that speech.

At any rate, for an example even back when railroads made money hauling passengers the dining cars never made money and were a 'loss leader' used to attract riders.
 
A friend asked me why Amtrak loses money the other day, and rather than repeat just what I could remember, I wished there were an online document that explained it in layman's terms. Is there? His take was that Amtrak should be charging enough money to cover everything. So I would need a document that would show what happens if Amtrak raises its prices that high.

jb
A document? The title "Economics for Dummies" comes to mind. A few paragraphs on "Competition" should cover it.

Amtrak's many competitors include the airlines; Bolt, Megabus, Greyhound, and other bus services; and most of all, private automobiles. (All use taxpayer-subsidized facilities to do business.) Not to overlook the option to stay at home for free, housebound for lack of other opportunities.

Our textbook should explain that (barring illegal price-fixing) the presence of even one more competitor will hold down prices in the marketplace. Of course, all the competitors have different features, pro and con. Private cars require private drivers, while buses, planes, and best of all trains allow riders to use their time otherwise. Planes are usually faster (not always on shorter center-city-to-center-city routes). Trains offer more space with no middle seats and the right to move around on board. But in the end, each consumer weighs the relative service levels and different prices -- and usually the low-price option wins. So if Amtrak raises prices too much, riders take a competing plane or bus, drive or stay home.

btw, a flip side of competition is that Amtrak helps to hold down competitors' prices, even with only one train a day. Sounds improbable, and too good to be true. But Virginians posted on this board that after the new Lynchburger train entered service, airfares decreased. Nationwide, the effect is faint, but "Economics for Dummies" should tell you that with the airline industry dominated (combined 80% market share, iirc) by just four big players, if the Amtrak LD trains are killed off, average air fares WILL go up.

Still, another useful document to introduce is the Monthly Performance Report.

https://www.amtrak.com/ccurl/188/327/Amtrak-Monthly-Performance-Report-September-2016-Final-Audited,0.pdf

In the past full year, FY 2016, on the NEC Acela and Regional ridership had weak gains or even declines, but revenues were up. That comes from raising prices; no other way to explain it. I don't see any places where Amtrak is obviously under-pricing what the market will bear. Instead, it has been aggressively pushing fare increase wherever it can, despite low gas prices aiding its biggest competitors.

I've tried to answer politely the "Why not raise ticket prices?" silliness. Perhaps others will answer the larger question of why all forms of passenger transportation lose money.
 
Perhaps others will answer the larger question of why all forms of passenger transportation lose money.
Basically, because we've decided to subsidize passenger transportation out of taxes, so that *more economic activity* happens. By making travel cheaper, we improve everyone's lives and boost the economy.

We could have a situation with unsubsidized airlines and unsubsidized airports (practically nobody would be able to afford to fly), every road an unsubsidized toll road (driving would drop in half or more), and unsubsidized railroads... and a lot of business just wouldn't happen. People wouldn't travel. Travel causes a lot of consumer spending (restaurants, hotels, etc). It allows people to look further afield for jobs while still being able to visit their families. It causes business deals to happen. So most countries have decided that it's a good thing to promote passenger transportation.

If you don't subsidize it, you end up with a nation of people who stay in their home towns, live next door to work, and rarely leave. Seriously. There's a reason no developed country thinks this is a good idea.

The US, however, is unique in throwing infinite piles of cash at roads and airplanes while claiming that trains should for some reason be profitable. :eyeroll:

I should note, *again*, that on an "above the rail" basis, nearly every Amtrak train is profitable. What makes it a "loss" is maintenance of tracks (maintenance of roads comes mostly from property tax), security (police on the roads are paid for by property taxes), central reservations and dispatching (air traffic control was paid for for decades out of income tax), station overhead (almost all airports are funded out of property taxes and sales taxes), etc.
 
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So, to bring it down to the most basic, "Amtrak loses money because it's being charged tolls sufficient to pay the full costs of the roads it runs on". If your car were charged tolls sufficient to pay the full costs of the roads you run your car on run on, it would blow a huge hole in your budget..
 
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Labor costs are one of the big reasons. No knock on what crews are paid, but consider that the EB involves a 2000 mile trip. The train/engine crew of at least 4 changes multiple times across the country. The on board crew has at least 4 sleeper attendants, 4 or 5 in the diner, and a couple coach attendants for the 2 day trip. An airline flight has a crew of five or six and takes maybe 5 hours. The economics don't favor the train.
 
Actually, the labor costs on board have very little to do with it. Common misconception. Maybe they are higher than they should be, but in fact, you're wrong, the economics actually *do* favor the train even *with* the labor costs. It's the fixed costs which cause the losses, not the variable costs.
 
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Actually, the labor costs on board have very little to do with it. Common misconception. Maybe they are higher than they should be, but in fact, you're wrong, the economics actually *do* favor the train even *with* the labor costs. It's the fixed costs which cause the losses, not the variable costs.
Could you expound, please? It's not immediately seen why labor costs have little to do with it.

Seems that Palmland may be overlooking that the Empire Builder and the others typically carry more passengers than a single plane, so labor *per passenger* might work for the trains. Or are you saying that the on-board labor costs do favor planes, but so what. The fixed costs that disfavor trains are so high that nevermind the relatively trivial labor costs.
 
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Make it simple. Tell your friend that most transportation methods will never be able to charge the TRUE costs of the operation without driving people away. The railroad is no different.
 
We could have a situation with unsubsidized airlines and unsubsidized airports (practically nobody would be able to afford to fly) [...]
This is my favorite response to the financial whines about NPRC/Amtrak, since airlines are often compared (unfairly) to rail travel. One of the top two whines is that "flying is much cheaper"; yet very few air travelers pay what it actually costs to fly between airports and fewer still pay what it would cost if the airline they are flying on had to pay for all of the costs associated with their usage of the air transport system. Heck, some airports don't even charge landing fees because they want to encourage and/or maintain commercial air service to their locality.

The price sensistivity is so bad that recent surveys have shown that there are still a fair number of people who will fly with an airline that supports dragging passengers off their aircraft, as long as the price is right.
 
Could you expound, please? It's not immediately seen why labor costs have little to do with it.

Seems that Palmland may be overlooking that the Empire Builder and the others typically carry more passengers than a single plane, so labor *per passenger* might work for the trains. Or are you saying that the on-board labor costs do favor planes, but so what. The fixed costs that disfavor trains are so high that nevermind the relatively trivial labor costs.
I meant the second one -- though the first one is also true. But also, in terms of variable costs, what the planes save over the trains in labor they lose in fuel costs.
The fixed costs are the dominant issue here. Airlines do not typically pay full freight for access to airports: the cities hosting the airports frequently more-or-less bribe the airlines to serve them. Even when cities build stations for Amtrak, they usually charge Amtrak to be in the station (though Amtrak has started taking a very hard-nosed position on these deals recently).
 
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Actually, the labor costs on board have very little to do with it. Common misconception. Maybe they are higher than they should be, but in fact, you're wrong, the economics actually *do* favor the train even *with* the labor costs. It's the fixed costs which cause the losses, not the variable costs.
Could you expound, please? It's not immediately seen why labor costs have little to do with it.

Seems that Palmland may be overlooking that the Empire Builder and the others typically carry more passengers than a single plane, so labor *per passenger* might work for the trains. Or are you saying that the on-board labor costs do favor planes, but so what. The fixed costs that disfavor trains are so high that nevermind the relatively trivial labor costs.

Let's call the infrastructure a "toll road" since Amtrak pays fees for its use as long as you run the train. That cost will remain.

If you use the current operating crew and OBS profile, the costs of their salaries will be covered by handful of passengers traveling in sleepers for the entire distance. If you wiped out the OBS crew, it drops even further. However, once you reach the threshold, you can add more cars and keep the same number of staff if you desired. Whether you have a 10 car or 20 car train, the operating crew will still cost the same. You will likely add more OBS, but you will more than make up the costs.

The on train crew is not the problem. It is the costs of the equipment, infrastructure, dispatching, inspections, training blah blah blah.
 
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Could you expound, please? It's not immediately seen why labor costs have little to do with it.

Seems that Palmland may be overlooking that the Empire Builder and the others typically carry more passengers than a single plane, so labor *per passenger* might work for the trains. Or are you saying that the on-board labor costs do favor planes, but so what. The fixed costs that disfavor trains are so high that nevermind the relatively trivial labor costs.
I meant the second one -- though the first one is also true. But also, in terms of variable costs, what the planes save over the trains in labor they lose in fuel costs.
The fixed costs are the dominant issue here. Airlines do not typically pay full freight for access to airports: the cities hosting the airports frequently more-or-less bribe the airlines to serve them. Even when cities build stations for Amtrak, they usually charge Amtrak to be in the station (though Amtrak has started taking a very hard-nosed position on these deals recently).
Airports make money in different ways though. Various airport concessions can make a lot depending on the location. The rent for airline lounges can be pretty hefty. However, I'm guessing that small regional airports don't necessarily bring in that much.

I'm not sure that many stations serving Amtrak do that well with concessions. Maybe NYP, but that's a completely different setup than most train stations.
 
Too bad Amtrak doesn't provide the detailed data to know what we're talking about. Bottom line is the EB lost $57 million last year regardless of it being labor, equipment, rr payments, etc. How do we fix that, or should we? Is Amtrak really just a public service and should be recognized as such? Those living in remote towns in ND or MT would probably say yes. Those in the population centers would say heck no. Fortunately our government gives the states with small populations a voice that might not be heard if it was strictly based on a state's population. But I digress.
 
Labor costs are one of the big reasons. No knock on what crews are paid, but consider that the EB involves a 2000 mile trip. The train/engine crew of at least 4 changes multiple times across the country. The on board crew has at least 4 sleeper attendants, 4 or 5 in the diner, and a couple coach attendants for the 2 day trip. An airline flight has a crew of five or six and takes maybe 5 hours. The economics don't favor the train.
The pilots and the cabin staff work longer than the time it takes for the flight.

The pilots more so than the cabin staff.

Airports that serve commercial air traffic don't come anywhere near paying for themselves, though it should be noted that commercial airliners pay landing and gate fees.

Yes. Amtrak is a public service, like highways/airports are, and should be recognized as such.
 
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To put everything on common footing, the fixed cost, or a very very substantial part of it should be viewed as public service and funded as such, with perhaps a small component compensated by tolls based on usage. The variable cost should be viewed as the thing that needs to be covered by service fee (ticket etc. ). That is why it is important to separate those two out, for rail as the "top of the rail" account and the infrastructure account. But each time one tries to do so on the NEC everyone confuses the issue in different ways depending on ones political agenda.
 
Too bad Amtrak doesn't provide the detailed data to know what we're talking about. Bottom line is the EB lost $57 million last year regardless of it being labor, equipment, rr payments, etc.
I consider that a fake number. It's based on some sort of arbitrary allocation of fixed costs to trains.

The actual bottom line is Amtrak's "comprehensive loss" for 2016, which is $1,093,501,000. This includes capital expenditures, depreciation, fixed costs, changes in pension valuation, the lot. Attempting to allocate this to trains is purely arbitrary. Capricious, even.

I would like to know the actual *avoidable costs* of each train, and Amtrak is required by PRIIA to provide those to the FRA on two bases: (1) costs which end within one year of discontinuance, and (2) costs which end within five years of discontinuance. Amtrak has failed to provide either set of information. Ever. It's been 10 years.

I am pretty certain that nearly all the trains are profitable on a one-year avoidable costs basis and that most of them are profitable on a five-year avoidable costs basis.

As for the "bottom line":

Notice that in 2015, new federal paid-in capital was 1.46 billion, and net loss that year (does not include pension valuation adjustments) was 1.23 billion. In 2016, new federal paid-in capital was 1.53 billion, and net loss that year was 1.08 billion. Amtrak is actually catching up. At this rate Amtrak will be showing a profit in five years. If funding stays steady, they'll be able to catch up on about half a billion in deferred maintenance issues per year...

Or you might want to look at it on a cash flow basis. Amtrak's cash used in operating activities was $92 million in 2016. Total! That even includes those fixed costs which are considered operating costs (like the reservations system and station staffing, which costs way more than that).

Of course, Amtrak had to spend a *lot* on "purchases and refurbishments of property and equipment". $1.4 *billion* dollars. Because railroads are capital-intensive and Amtrak inherited worn-out infrastructure which often dated from the 19th century.

To a first approximation, *all* of Amtak's federal subsidy is the equivalent of federal road construction money.
 
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You want more LD passenger rail??? You'll need to move out of the US, where airports, freight rail, and roads for semis and cars are King. And that will never change, in your lifetime.
 
The simple answer is that all highways ,roads, airports, and public transportation LOSE money. So do the National Parks, city parks,the armed forces, the ports, bus terminals, the police, firefighters and all public service institutions. Government is there to serve the people and our tax dollars funds it. As for Amtrak it is a vital transportation link to 100's of cities and towns across the USA and a necessary part of our economy. .
 
You want more LD passenger rail??? You'll need to move out of the US, where airports, freight rail, and roads for semis and cars are King. And that will never change, in your lifetime.
Stranger things have changed in this country in my lifetime so far. It is quite possible.
 
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