Valentine 1 Introduction Amtrak, the largest passenger railroad company in the United States, has been funded primarily through government subsidies since its inception. Despite various initiatives and “reforms” from incoming presidents, the company has never been able to turn a profit without the help of the federal government. At this point in the history of the United States it is imperative for the country to find way to reduce the national deficit, and substantive change at Amtrak to turn a profit will save the government over $1 billion in annual subsidies. “Amtrak has a debt of more than $3.5 billion and its operating loss for 2005 topped $550 million”(De La Cruz 2006). Amtrak loses $22 as each of the 25 million riders annually takes a ride on the train. This trend of consistent loses is draining valuable funds that could be used towards government essentials like healthcare and social security. David Gunn, the former president of Amtrak, differs from acting president David Hughes in regards to the future for Amtrak. Many government officials believe that the White House aims to dismantle Amtrak by selling pieces of the rail system and its standing capital to private companies and investment firms. Gunn believes that he was fired because he blocked the Bush Administration’s proposal to end service on Amtrak and worries that Hughes will succumb to pressure from Capital Hill. Hughes contends that the future for Amtrak looks bright with initiatives “to revamp some long-distance routes, streamline its finances and boost customer service while looking at several costcutting initiatives such as revamping its food and beverage service”(De La Cruz 2006). While the optimism is uplifting, there are evident flaws in the current and future plans at Amtrak that must be evaluated and revised. A company with a debt load of more than Valentine 2 $3.5 billion dollars and negative cash flow cannot validate its existence without undergoing drastic changes to make the company more economically viable. The Amtrak Board of Directors and management are fighting to preserve a mode of transportation that is relatively antiqued, especially for long-distance transport. The airlines in the U.S. have been engaging in price wars and cost-cutting battles since the introduction of low-cost carriers in most of the primary and secondary markets in the country. Currently, Amtrak is losing approximately $25 for each passenger on long distance train rides. Amtrak cannot compete with low cost carriers and the major airlines in the long distance market; this unprofitable service must be eliminated. There are select profitable routes such as the cascades that should remain in service. In the short distance market bus lines like Greyhound and Bonanza Bus have put pressure on Amtrak. In order to lure riders from the bus lines for short distance routes, Amtrak must upgrade the interior of its passenger cars and improve customer service. The bus lines cannot provide this level of support and Amtrak could capture the middle and high-class segments of the short distance market. Lastly, Amtrak’s future depends on direct funding from the appropriations committees of Congress. Instead of a constant annual stream of payments ranging from $1-$2 billion there should be one-time appropriation of $10-$15 billion to allow the company to upgrade their infrastructure and replace old trains. The current system of funding is only sufficient to allow the infrastructure to attain the lowest possible operational quality to remain operable. Currently Amtrak is a burden to the country and its board of governors. Drastic changes must be made in the short and long term to release the company from their current situation. In the following paper many different aspects of Amtrak’s business operation is discussed, with particular focus on Valentine 3 future plans. Directly after each section there is an evaluation of their strategy and in some cases new solutions are entertained. Long Distance Rail Service The rail service provided by Amtrak spans the length of the United States, with service to cities as far west as San Francisco and as far to the east as Portland, Maine. The long distance rail business has the largest per rider loss in Amtrak’s portfolio of business operations. Source: Amtrak 2006 Strategic plan - http://Amtrak.com In their 2007 Legislative Grant Request, Amtrak projected operating revenues of $407 million and federal support of $438.2 million for long distance service. Even with the government support the company is projected to record a loss of $27 million. Former Amtrak President David Gunn acknowledged that, “passenger rail service in the U.S. will continue to need at least capital subsidies…especially if you are going to have longdistance rail, you have to have a deficit”(Morton 2006). David Laney, the chairman of Amtrak, recently spoke in a Congress hearing where he outlined a program for sustained Valentine 4 growth and loss reduction at Amtrak. He contends that the company will soon engage in a comprehensive study of the performance of their long distance trains and, if needed, reconfigurations will be executed. Throughout the testimony, it is striking that there is no reference to removing some of the worst performing lines, only reconfiguration. The Empire Builder, one of Amtrak’s signature long distance trains, will bring in $382 million of revenue in 2006 but lose $493 million in costs. (Machalabra 2006). There is no justification for the government subsidizing each passenger $125 to take a ride on The Empire Builder. With no improvements in margins for these long distance trains as gas and labor costs rise, these lines must be sold to private companies and eliminated from the network. Long Distance Rail Evaluation and Recommendations Sound economics dictates that quantity of production must achieve the minimum efficient scale. The intercity, commuter, and northeast corridor rail lines have lower average costs than the long distance rail service. Increased ridership reduces these costs, but rider growth only appears to be prevalent for a couple long distance rail lines like Cascades. Source: Washington State Department of Transportation - http://www.wsdot.wa.gov/rail/cascades/ridership.cfm Valentine 5 Long distance rail is a great service in this country, but allocating exorbitant amounts of taxpayer money to fund poorly run railroad is not an efficient use of resources. Joseph Vranich, a member of the 1999 Amtrak Reform Council, noted that “last year, passenger loss on the Orlando-to-Los Angeles Sunset Limited worked out to $486…It would be cheaper just to buy those passengers airplane tickets”(Goff 2005). The $456.2 million dollars allocated solely for the purpose of operating the long distance rail line must be cut. The Northeast Corridor section of rail attracts over sixty percent of the total number of riders while running on three percent of the total track owned by Amtrak. This shows that too much funding is spent runnig unprofitable lines that should but cut. The first step towards a profitable future for Amtrak is selling off the worst performing rail lines in the country. The process is made extremely difficult because Congress, a group of legislators worried about constituent retaliation, may use their power to restrict any innovative changes Amtrak is likely to make. Political Hurdles Since Amtrak’s inception, there has been no firm indication from Congress or Amtrak as to the type of company Amtrak should become. Is Amtrak a public service? Should the company be privatized? At the moment, Amtrak is a private company with internally elected management, yet the government controls its existence and many of its operations. Congress has attempted to create a committee to make recommendations and oversee the development of profitable initiatives. The Amtrak Reform Council of 2000 dissolved in November 2001 because they acknowledged that Amtrak would not be a profitable entity by December 2002, the deadline set by Congress. (Morton 2006) Valentine 6 There have been bitter debates in Congress over the annual allocation of resources for operating the railroad. In 2005, President Bush moved to eliminate all funding for the railroad, spelling out the potential demise of Amtrak and sale of the various pieces of standing capital. Former President David Gunn admitted that it is difficult to convince politicians to continue investment in the rail system in the United States. “Take Chicago and Milwaukee, they are 100 miles apart and would be an ideal high speed rail corridor. But there are 30 flights a day from Chicago to Milwaukee. What a waste of 100 slots”(Morton 2006). Gunn was able to identify many intercity routes that could be profitable with high-speed lines, but Congress would not allocate additional funding because travel needs were already met with air travel from O’Hare Airport. Each year, despite contentious debate in Congress, Amtrak is given meager amounts of funding to continue operations. Without adequate support for maintenance and repairs of capital it is likely that Amtrak will never reach profitability. In 2005, Congress continued to put pressure on this restrained monopoly by increasing restrictions on prices and capital improvements. In the bill that passed Congress, the transportation secretary gained the right “to raise the price Amtrak charges commuter railroad, like New Jersey Transit, for the use of the Northeast Corridor tracks, which Amtrak owns. And it seeks to limit Amtrak’s ability to discount ticket and reduce the airline-style pricing that the railroad has been using”(Wald 2005). The $1.31 billion appropriation to Amtrak for the 2006 fiscal is only enough to fix critically damaged capital and run the company without making substantive improvements. Valentine 7 Political Evaluation and Recommendations Two detrimental factors are at work in the current system of funding Amtrak. First, Congress expects long-term growth and profitability, yet their actions restrain Amtrak’s ability to fulfill congressional expectations. By limiting Amtrak’s power to price their own tickets, the government is impeding future growth plans. Secondly, Amtrak has few incentives to reduce costs and lay off thousands of workers because they assume that they will continue to be funded by the federal government years into the future as they have in the past. Source: Iowa Department of Transportation http://www.dot.state.ia.us/railplan/section2.htm An agreement must be made that allows for one lump sum subsidy of $10 billion so that Amtrak has the resources they need to upgrade their deteriorating infrastructure, eliminate all costly long distance lines, and build potentially lucrative high speed rails between highly populated cities in the south, west, and midwest. Effective immediately, Amtrak must become a public company, with senior management responding to shareholders rather than the ambiguous guidance of the federal government. The current $1.598 billion Grant Legislative Request from Amtrak is one-sixth of the total appropriations planned in this proposed $10 billion subsidy. The past thirty years have shown substantial increases in funding for Amtrak, and this plan eliminates all Valentine 8 subsidies beyond a one-year commitment. If the railroad company does not improve its balance sheet with the last amount of additional funding, the railroad will slide into bankruptcy and dissolution. The long-term plan for Amtrak must be moving towards the creation of a publicly traded company. Its current status as neither a public service nor private company allows Amtrak to muddle their finances. They report to Congress the overall amounts of spending by each division, but are under no pressure to divulge where the spending is happening. Lobbying Congress and making bad decisions are influence costs that can be eliminated with transparency and a streamlined operation. Amtrak must work with Congress to clarify its state as a private company and be provided with enough upfront funding to thrive rather than just survive. Capital Improvements The current state of the Amtrak rail infrastructure is poor. The Northeast Corridor, home to 66% of total ridership traffic on Amtrak rails, has been so neglected that it would take approximately $2 billion to repair the damages caused from normal deterioration. The Bush Administration would like to see the Northeast Corridor spun off as a subsidiary or sold to a private firm, but the high costs of track and rail ties present a situation that cannot be remedied without support from the government. (Amtrak’s Future 2005) Current financial constraints impair the company’s ability to overhaul their passenger cars, replace antiquated wooden ties on tracks, and replace old power systems. Dedicated increases in funding will be the only way for Amtrak to achieve growth and profitability. Annual subsidy of just over $1 billion each year is not enough for the company to move towards success. Valentine 9 Source: Amtrak Grant Legislative FY07 Request The main source of revenue for Amtrak is the passenger related, and customers will not choose to ride Amtrak if the amenities are superior with other modes of transportation or there are no high-speed Amtrak routes to intended destinations. Amtrak must commit itself to opening more city-to-city avenues of high-speed travel, and extensive improvements in the high-speed network are needed. The current stock of passenger cars ranges from 5 to 50 years old. Maintenance that was requested in the late 1990s and early 2000s has been deferred due to meager funding and allocation of capital for railcar upkeep. (Laney 2006) Also, the new Acela trains made by Bombardier were sidelined for approximately five months because repairs were necessary on the braking systems. Other corridors are in development including Harrisburg to Philadelphia and Los Angeles to Seattle. Channels like these are sole proven revenue and profit generators for Amtrak, and this model can be duplicated in other cities across the United States with proper support and funding. Valentine 10 Capital Evaluation and Recommendations The state of Amtrak’s infrastructure is weak. The Department of Transportation’s inspector general noted that, “some of Amtrak’s assets, thing like overhead power lines and switches, went into service at the turn of the 20th century. Continued deferral brings Amtrak closer to a major point of failure in the system”(Goff 2005). Improving the passenger trains and rail system are long-term projects that need a steady flow of funding. Unfortunately, the current system of requesting annual funding from Congress severely limits the amount of long-term spending possible. It is difficult to project the amount of money that should be spent on capital improvements when the actual subsidy dollar amount cannot be counted upon year-over-year. A $10 billion onetime subsidy would provide sufficient funds to put Amtrak on a course for consistent and timely upgrades to its infrastructure. Customer Service In an effort to post significant rider growth for the 2006 fiscal year, Amtrak has engaged in a number of initiatives to improve the customer’s overall experience. Improvements in the food services are essential to build a strong base of riders, especially as competing airlines further reduce the quality and availability of food service to their clients. The agency costs to the food service are enormous. “The railroad says it lost $120 million on [food service] last year – and cut loses on 15 cross-country routes”(Chebium 2006). Amtrak’s recent changes in food service include using disposable utensils and plates, which reduced the number of food service workers per car from five to three. This segment of Amtrak’s business has historically been laden with Valentine 11 agency costs. Meals are now packaged with regard to ease of manufacture and saving space aboard the train. Secondly, Amtrak is retrofitting its entire staff and interior cabin space to focus on customer satisfaction. Historically, Amtrak has had “some notorious customer service problems, ranging from dirty cars to unhelpful and rude employees”(Machalaba 2006). The train company has begun to provide unique incentives to attract a middle and upper class group of travelers willing to pay for first class. On one trip, customers enjoyed a wine tasting party, meals cooked with recipes taken from the years when train travel first began, and a cookie on the night table before bed. As more amenities are offered, customers will begin to get fed up with the declining quality of service at most of the major airlines in major cities and turn to Amtrak for their transportation services. (Machalaba 2006) Customer Service Evaluation and Recommendations Steps taken to improve customer service will be a key factor driving the success of the new Amtrak presence. I agree with acting president Hughes that customer service increases new ridership and decreases in the customer attrition rate. The management should be applauded for their recent initiatives to build the Amtrak brand and increase consumer loyalty with upgraded trains and friendlier service. The company appears to be moving in the right direction with customer service, but it is essential to be costconscious. The $22 per passenger loss stated above is a strong reminder that the system must get more efficient, not more costly to run. Valentine 12 Staff and Wage Issues Labor costs have been a source of major contention for Amtrak and its employees. The railroad union has not been under contract for seven years. Also, wages are up for its 20,000 employees. The total amount of money paid out in salaries makes up 50% of the total operating costs for Amtrak. This compares with 37% labor costs as a percentage of operating costs in the airline industry. (Goff 2005) In the railroad industry, expansions in size increase marginal wage costs. This diseconomy of scale is part of the reason why poorly performing railroad operations in the Midwest should be discontinued. Most railroad employees are paid through mechanisms present during the stream engine era, and new processes mandate new salary and labor cost structures. Wage negotiations with unions are extremely complex and rarely without major conflicts and concessions. Management at Amtrak must work towards negotiating a new contract with its workers and change the retirement benefit cost structure. Many corporations are changing pension packages to offer more flexible options to workers. Amtrak must move towards a long-term contract with its workers to increase worker satisfaction and productivity. Alternatives Across the world, many countries have opted to privatize their rail system by splitting up the miles of track and capital and bidding them out to companies. “In Britain, the country was sliced up into 26 different train routes that were put out to bid. In Japan, a big chunk of the rail system was privatized, and is now making a profit. Canada simply reduced its railroad’s annual subsidy”(De La Cruz 2006). While these solutions were effective for other countries, it is not the ideal scenario for the United States. Amtrak is Valentine 13 operating with significant influence and agency costs that drag down the profitability of the company. The long-term goal is to have a self-sustaining railroad that has a strong niche in the transportation industry. Putting the miles of track and numbers of train stations up for bid would be economically efficient but there is a risk of creating ten or more losing railroad companies in the process. Others believe that decreasing or eliminating the subsidy to Amtrak would spur its revival and lead to cost-cutting measures to save the business. However, the $3.5 billion in current debt, the poor quality of its tracks and trains, and the large deficit encountered from labor salaries and pension packages would put Amtrak out of commission. Conclusion Amtrak can be saved from its perpetual downswing in business. With a large one-time appropriation to create a new accounting system, $4 billion to upgrade capital ($2 billion for the northeast corridor), pay off long-term debt ($3.5 billion), and restructure the labor contract this railroad company can be profitable. Critics calling for the disbanding of Amtrak’s passenger railway systems in the United States are ignoring the economic and social value inherent in railroad transportation. The political system stands in the way of creating substantive change for Amtrak. Consistently balking at removing funding for Amtrak yet failing to meet the yearly budget request, Congress has the power to bring Amtrak out of their deficit and puts the pressure solely on Amtrak for their misfortune and struggles. If Congress refuses to release the restraints on Amtrak and continues the trend of annual subsidies, it would be more advantageous to break the company up into sections and put them up for sale. Amtrak has been an albatross for Valentine 14 decades, and the board of governors and Congress must work together to achieve success. The future of rail travel in the United States is at stake. Valentine 15 Works Cited Amtrak. ReBuilding America's Passenger Rail System: FY07 Grant and Legislative Request. <www.amtrak.com>. "Amtrak's Future." Washington Post 12/3/05 <http://www.washingtonpost.com/wpdyn/content/article/2005/12/02/AR2005120201703.html>. Chebium, Raju. "Amtrak Trains Will Keep Running -- but Still Uphill." Gannett News Services De La Cruz, Donna. "Amtrak's Future as it Marks 35 Years on the Rails." Associated Press Worldstream 4/30/2006 <http://www.wstm.com/Global/story.asp?S=4836367&nav=2aKD>. Goff, John. "Is this any Way to Run A Railroad?" CFO Magazine 11/2005 <http://www.cfo.com/article.cfm/5077873/c_5101083?f=insidecfo>. Laney, David M. Fiscal 2007 Appropriations: Transportation, Trasury, HUD. Trans. U.S. Senate. Ed. Senate Appropriations. <http://web.lexisnexis.com/universe/document?_m=8138aa4eaa8a58602dcfa3b793c28da1&_docnum =1&wchp=dGLzVlz-zSkVA&_md5=f932f7d0a58f604f3cd7251cb8cfc6e5>. Machalaba, Daniel. "Amtrak Improves Service on Long-Haul Trains." Associated Press Financial Wire 3/17/06 <http://web.lexisnexis.com/universe/document?_m=5c925af3cfe1de0d1136f16dd4242f48&_docnum =1&wchp=dGLzVlz-zSkVA&_md5=74dc64c47beaad14577bd016146fddb3>. Morton, Peter. "Amtrak Runs into Funds Furor." National Post's Financial Post 2/6/06 <http://web.lexisnexis.com/universe/document?_m=01cf7816eeaedebae9110fa9e723e034&_docnum =1&wchp=dGLzVlz-zSkVA&_md5=1f3bbabc0899f6ab25416ee9b61b0863>. Wald, Matthew. "Budget Gives Amtrak Carrots, but Wields Sticks as Well." The New York Times 11/26/05 , sec. The Late Edition - Final: <http://select.nytimes.com/gst/abstract.html?res=F20B14FB3C550C758EDDA8099 4DD404482>.