NARP Whitepaper on Long Distance Service

[PRR 60]

...It is just the usual convenient let us count all the revenues and hide away all the costs using seemingly plausible sounding arguments, and then...... Wow! This is so profitable!

And, that's how they come up with Amtrak revenue covering 88% of all direct operating costs.

 

[jis]

I suppose what is good for the goose is good for the gander eh?

But isn't the major issue there more on the revenue side than on the cost side? I thought the big beef there was that GAAP requires that the state subsidies be accounted for as revenue for services provided, thus infalting the percentage some.

On the cost side the perennial issue always is what is operations cost (expense) vs, what is capital cost, and whether part of capital should be counted as operations cost or not. This is an area where there appears to be at least twice as many opinions as there are people involved in the discussion, and it is not new to Amtrak. I remember this was a hotly debated subject in the pre-divestiture AT&T because the cost plus returns agreement with the government treated pure operational expenses and capitalizable expenses differently in determining what amount of profit AT&T was allowed to make on what base amount.

 

[Paulus]

The Don Phillips commentary is basically just repeating the claims of Andrew Seldon (the only named source), with specific complaints that long distance trains costs triple when they enter the NEC, a statement that aggregate NEC costs spiked after Acela was introduced and "nothing else happened in those years to explain it" and repeating the old hoary chestnut that no high speed rail service in the world earns a profit (he claims that two Japanese HSR lines might but that they're too commingled with non-rail income; this is nonsense, the JRs separate out transportation/railway income and expenses from commercial revenue, just as Amtrak does). There's also a claim that Amtrak has not, according to GAAP, made a return on $3 billion in sunk capital costs for Acela (and what of the sunk capital costs for the LD trains I wonder?). Page 21 says $$2,624.5 was invested, though inflation and rounding would bring that up (and much of this work is of benefit to other Amtrak routes anyhow).

 

[jis]

Don Phillip parroting Selden does not enhance Don's credibility, and actually adversely affects it IMHO. Afterall AFAICT Selden has never let a pesky fact or two stand in the way of his diatribes. I did not expect Don to pick that up uncritically. But c'est la vie.

The fundamental question about return is though, what should be counted as part of the return. By that measure what has LD returned? What have highways returned? It is mostly a rediculous vacuous statement which just sounds very learned a nd sage, unless much more meat is put on the bones of the point being made. I am quite sure Amtrak will never see a penny of return on any sunk cost on LD trains either. Afterall none of the private railroads did. That is why they got out of it. And still LD fares are way below what is arguably the real cost of operating them, and possibly somewhat below what the market will bear today. You cannot get return on capital by not even covering or barely covering incremental cost of operation.

 

[Nathanael]

Accounting is more an art than a science.

As I've said before, you want to use different sorts of accounting to answer different questions. The accounting you use to answer the question "How much cash would it save if we stopped running this train" is not the same accounting you use to answer the question "How much added cash would it require to run this train twice as often". Neither is the same accounting as the one you use to answer the question "When do we need to replace obsolete equipment and what rate of cash flow do we need in order to do so". Yet another accounting is used to answer the question "If we order this new equipment now, will it reduce our average cash burn rate over the next 10 years".

Assuming honest accounting, the answer you get is determined largely by what question you are asking. The question of whether LD trains are "profitable" or "how much money they cost" isn't actually meaningful, because it's not asked with sufficient specificity. The same is true of the question as to whether NEC trains are "profitable" or "how much money they cost".

 

[Anderson]

Well, and with "cost" and "benefit", there's very rarely a serious examination of follow-through business. As a good example of this, the Sunset East, North Coast Hiawatha, and Pioneer reports didn't examine the impact of adding those trains on the rest of the LD network. For example, the NCH would probably synch nicely with the Empire Builder CHI-MSP, and with good timing you could add to the already robust business on that line. Likewise, it's not like all of those passengers simply pop into existence at Jacksonville or Chicago or Portland, and even modest additions to traffic on connecting routes (2-3%) help with both load factors and can drive buckets up just a bit more.

 

[Paulus]

Interesting perspective on Claytor's management which I've not seen before (everything I've seen before has been "He made so much money for Amtrak with more LD trains!") The Delaware Valley Rail Passenger Special Issue: The Future of Amtrak May 1995

Wasn't it just a couple of years ago when Graham Claytor said that Amtrak was going to be able to operate without a Federal subsidy by the year 2000? Now Tom Downs says Amtrak faces imminent bankruptcy if service is not cut immediately. Did Amtrak's financial situation deteriorate so quickly?
No. Amtrak's basic financial situation didn't change much at all. What did change was management's response to the chronic problem of disinvestment in infrastructure and equipment. In the Claytor administration, Amtrak played along with the government's wishes to have a nationwide passenger train service without paying for it. Maintenance was deferred, and most importantly, Amtrak used up its working capital to pay for everyday bills.

When Tom Downs took office in late 1993, he determined Amtrak couldn't go on like this, as the working capital would be totally depleted by this year. He saw immediate reductions in spending as the only way out, but with government regulations making some moves impossible, he chose to cut service.

The cuts are especially painful because every cut in service means a cut in fare revenue, which can lead to a downward spiral towards a total end of Amtrak. Much of the controversy over the present cuts (see cover stories) is the result of how those cuts were made. Down's goal was to make the fewest cuts possible while still balancing the budget. That required an accounting of what each train costs to run and what it brings in as revenue. Downs commissioned a study by a consulting firm to give him that data.

But people who have studied this issue know that deciding which trains are the best financial performers depends greatly on how you allocate the costs and the revenues. Do you use the 'short-term operating costs,' which are the immediate savings from shutting down a train? Do you use the 'fully-allocated costs,' which include administrative and capital costs? Or do you use another formula? Amtrak brought much of the immediate controversy upon itself by keeping the accounting questions private. So everyone who lost trains felt that the process was rigged against them, and any work Downs did to make this an objective process was wasted.

It gives me the impression that the heydey of the Amtrak long distance train was illusory in nature.