This Week at Amtrak 2006-01-26
Volume 3 Number 5
Re-Thinking America’s Rail Passenger Service
by Andrew C. Selden
Amtrak is at another of its many cross-roads: financially hopeless, working with an interim “acting” CEO, strapped to irreconcilable strategies (to provide abundant social services in its corridor markets, yet expected to produce tolerable financial results of operations overall, with an underdeveloped interregional business that it doesn’t understand or appreciate and supports halfheartedly for the wrong reasons). Many of its management systems are ineffectual or unreliable, according to the October 2005 GAO analysis.
Amtrak can - and must - do better in all of its activities.
It is very easy to sit in the back benches and criticize Amtrak’s manifest shortcomings, or to drift in from somewhere in outer space and demand that Amtrak re-create the rail passenger network of 1920, or even 1960. But, to offer an implementable program of commercially, economically and politically viable reforms in the environment of today is a bit more daunting. No one who has deeply studied Amtrak doubts that a huge latent demand exists for a properly positioned intercity rail transportation service. How to service that demand, effectively, efficiently and productively, is the principal challenge to Amtrak’s next CEO. What follows is my vision for how to realize Amtrak’s potential, with structural and operational reform, real growth in service and economic results, and real growth in productive employment.
Reform must occur in four principal areas for Amtrak to succeed in both economic and political terms:
- Management systems: Amtrak desperately needs an all-new management information system, and reformed internal accounting, strategic planning and budgeting procedures; and greater transparency to its various stakeholders.
- Capital allocation: A greater share of available capital resources must be redirected to allocations that produce the greatest rate of return on invested capital measured, at the margin, by ticket revenue and transportation output. Too much capital today is invested in applications with the lowest (and sometime negative) rates of return on investment.
- Train operations: Amtrak must better align both services and capacity to actual customer demand; updating its unfulfilled 45-year-old business model to 21st Century actual market conditions and travel demand is a must.
- Strategic partnerships: Amtrak must focus on creating, reinvigorating, or reinstating good working relationships with critical resources: the host railroads, American Society of Travel Agents, states and communities served, cruise ship and destination operators, AARP, employees, and Amtrak’s investment banker, Congress.
Congress has made clear that it is willing to invest more than a billion dollars a year into intercity rail passenger services. How would I use that money to get better results than Amtrak has accomplished over the last 15 years?
First, I would invest - and it will cost as much as $40 to $50 million over three years - in a totally new management information system. Amtrak’s Route Profitability System is worse than useless. Another $50 million will have to be invested over about a three-year period to correct the many serious management system deficiencies identified in the October 2005 GAO Report.
I support the Board’s initiative to investigate the benefits and drawbacks to spinning off the fixed assets of the NEC to a neutral third-party owner. Amtrak operated fine before it owned the NEC and, like most passenger trains in Europe, and all of its trains elsewhere in the U.S., will operate fine if even this 400 miles of railroad is owned by a neutral third party. And, ownership of the NEC fixed assets is both a huge distraction and a financial albatross to Amtrak without obvious benefit. To fail at the very least to study divestiture would be highly irresponsible. Studying something does not predetermine outcomes.
As a prelude to any further significant capital spending, on any route or activity, Amtrak should conduct the independent, unbiased, expert study called a comprehensive consumer segmentation study, designed to elicit (a) what intercity rail passenger transportation services (including routes, kinds and levels of service, and collateral services) customers are interested in purchasing, and at what prices; and, (b) who those customers (persons likely to purchase rail transportation services) are and through what advertising and promotional channels they can be reached efficiently. Then, Amtrak needs to experiment aggressively to test the research conclusions to ascertain the actual strength and scope of potential demand for its services in various market segments.
As part of this experiment, one short distance corridor, competing operating rights over the Northeast Corridor, and one long-distance market should be franchised out to a third-party operator (such as Virgin Trains, Carnival, Marriott, Disney, the host railroad, or Herzog or Bombardier) to determine what operating efficiencies, and demand elasticity, can be realized through genuinely fresh, innovative, entrepreneurial stewardship of a defined market segment.
Amtrak also has a huge opportunity to enhance its operations and financial results by going through a “back-to-basics” program, to make sure that its stations are clean and inviting, its passenger cars are restored to roadworthy condition, that windows and restrooms are clean (and stay clean en route), its employees are trained and supported to deliver enthusiastic “come back” service, and programs are in place to deal with operational breakdowns.
Then, I would use significant operational reform (designed to drive up load factor without sacrificing output; i.e. match capacity to demand) and extraneous, non-operating asset sales not related to core infrastructure in the Northeast Corridor to raise $150 to $200 million a year in avoided costs and sale proceeds. With that, plus about a hundred million from the Congressional subsidy we could fund the remaining capital subsidy needs of the NEC at a steady rate of about $250 to $300 million a year. If and when actual demand requires more infrastructure or more intense use of infrastructure, more capital can be sought from Congress, or private sector sources. The absurdly low load factors in the NEC can also be addressed by modest and inexpensive enhancements to the network of services offered in the northeast. These include management initiatives such as single-ticket, cross-platform services between Newark and Wall Street on PATH; creating a stop somewhere in Queens, New York, or even running through trains onto Long Island; running more trains on the inland route to Boston; extending some NEC trains to Charlottesville, Virginia and Albany, New York; and adding service in the Lehigh Valley.
The rest of the available discretionary capital from Congress can be used to focus on rail passenger markets with real growth potential. With the information and capital resources described above, I would undertake an urgent rehabilitation of all rescuable Superliner and Viewliner rail cars. Amtrak is turning away tens, if not hundreds, of millions of dollars a year in incremental revenue for want of roadworthy carrying capacity. Even if no changes were to be made in Amtrak’s routes or services, huge and heretofore untapped latent demand exists for current services, which Amtrak can reach with renewed focus on growth in its core business.
I would put out an immediate solicitation of two proposals from the worldwide rail vehicle industry:
- First, for supply of up to a hundred new Viewliner sleepers in “bed and breakfast” configuration (sacrificing one standard bedroom/roomette for a small galley facility; all of these cars will be used in one-night markets in the East, Northeast and Atlantic Coast Corridor), and about a hundred new long distance single-level coaches and associated lounge-type food service cars, to be delivered, starting in two to three years, over a four-year period.
- Second, I would negotiate for an open-ended Superliner production line designed to deliver cars, beginning in two to three years, at a rate of about one a week, which we could accelerate later, to begin with sleeping cars to expand capacity on existing trains. In total, the capacity and network expansion throughout the national system would require a fleet of as many as 1,500 new Superliner rail cars.
Available capital remaining should then be allocated into national system infrastructure investments, which I would leverage through tax credit-financed joint ventures with host railroads, and with state partners, to fix terminals and junctions, to create route intraconnectivity, and to make minor route adjustments and extensions. I would ask states to invest only in capital projects, not subsidizing train operations (except in cases of services operated at the request of a state).
Many of Amtrak’s smaller community stations are not in good condition, and are regarded more as “cost problems” than as “revenue opportunities.” Rather than un-staff or even close these stations, Amtrak should experiment with a franchise program that would place these facilities, and the Amtrak agency business opportunity they house, into the hands of motivated local entrepreneur owner/operators. A financing program would be part of the franchise to assure that existing employees have the first opportunity to own these businesses. In most cases, the Amtrak agency business would be combined with one or more other businesses or tenants to create a commercially-viable business proposition. In many other cases, partnering station rehabilitation with the municipality, as has occurred at Oceanside, California and Del Rio, Texas, provides a model.
Network density (derived from capacity growth and network intraconnectivity) inevitably creates flow density through the network, and traffic will grow rapidly … even at constant levels of market penetration on existing and newly interconnected routes. Growing train lengths will absorb all available rehabilitated and new cars in the first few years, and demand will drive additional frequencies on existing routes next. Then, and only then, and this is probably five to ten years out, we would look to add carefully selected routes, such as Washington, D.C. to Atlanta to Jacksonville to Orlando to Miami; Atlanta to Dallas; Dallas to Denver; or restoring the Desert Wind between Los Angeles, Las Vegas, Salt Lake City and Chicago.
Other low cost, easy, near-term network enhancements, the real low-hanging fruit, would include such things as making the Sunset Limited a daily train; creating a regional hub at Albany linking Boston and New York to Montreal and Toronto; extending the Silver Star to Montreal (Nearly 10 million Canadian visitors go to Florida every year; Amtrak’s current share of that market is zero.); extending the California Zephyr to run down the coast line overnight to Los Angeles, partly to provide a second through frequency on that route, but mainly to consolidate western Superliner maintenance at Los Angeles. I’d fix the terminal trackage at such locations as San Antonio, Minneapolis-St. Paul, Phoenix and Portland.
With this kind of vision, and an investment strategy focused on real business results and real growth, in as little as five years Amtrak can be at a genuine operational breakeven in its national system precisely because, for the first time in its history, it would be operating a large, robust, and growing national network of intercity passenger services.
Other service initiatives would include realigning food service operations better to match the needs of passengers in various markets. All day or even 24-hour operation of full-service dining cars is smart business on long distance trains where customers are in Amtrak’s care for one to three days at a time, and demand a quality dining experience as a component of their rail travel. Operational reform and slight repositioning of these services can bring long-distance dining car services to break-even in short order. Snack and beverage service is more than adequate on most corridor trains, where typical trips rarely exceed two hours. On any corridor or regional train whose route is long enough for average trips to exceed three to four hours, a full “casual dining” food service must be offered and actively promoted.
In the area of strategic partnerships, Amtrak is missing out on huge opportunities by not reinvigorating relationships with other groups and organizations with which it shares economic goals. One example is retail travel agents, whose support could be highly valuable in corridor markets (where load factors are so low now that plenty of salable inventory goes wasted every day) and in off-season long distance markets where some excess capacity exists seasonally. The rewards of an alliance with AARP would include both new sales to AARP’s members (who are more flexible to take high-value experience trips on long distance trains in non-peak periods), and having a powerful political ally. Amtrak serves many cruise ship ports of call, from Los Angeles to Vancouver, New Orleans to Ft. Lauderdale, even Memphis, for Mississippi River paddlewheel steamboats. Why Amtrak doesn’t aggressively pursue interline and packaged travel with cruise companies (and other major destinations, such as Disney resorts; Branson, Missouri; the National Parks; and even the Mall of America in Minnesota) is a complete mystery.
Much can be done to evolve Amtrak’s often contentious relations with its represented employees, into a more collaborative, productive, mutually respectful and pleasant working relationship. Growth in the national network necessarily entails growth in the number and quality of jobs and opportunities for career advancement for line employees.