United Rail Passenger Alliance

A Plan to Reorganize the National Railroad Passenger Corporation (2002)

December 14th, 2009

INTRODUCTION AND OVERVIEW

The National Railroad Passenger Corporation (“NRPC”) was formed in 1970 to assume from the freight railroad companies responsibility for operating intercity rail passenger services.¹

Since 1970, NRPC has incurred $23 billion in losses, covered by federal and state subsidies. In addition, it has incurred substantial unrealized losses in the form of unrecognized depreciation in certain capital assets. NRPC shows no sign of being able to wean itself from continuing public subsidization in the foreseeable future.²

In 1997, Congress created the Amtrak Reform Council, an independent oversight commission charged to advise Congress whether NRPC was likely to be free of its need for federal “operating subsidies” by the end of FY 2002, and, if not, to recommend a plan to reorganize NRPC, or to liquidate it.

NRPC will require substantial federal subsidy in FY 2003, on the order of three-quarters of a billion dollars³, to survive.⁴ NRPC may be successful by the end of FY 2002 in reclassifying its costs so as to report that all of its federally subsidized costs are “capital” in nature, rather than “operating.” But it will need subsidies totaling three quarters of a billion dollars a year, however labeled, indefinitely into the future.

On the assumption that Congress wished to end its subsidization of NRPC by FY 2002 rather than merely relabel it, this report proposes a reorganization of NRPC that will largely achieve the Congressional goal of ending federal subsidization of intercity rail passenger operations in most markets.⁵ A specific plan is proposed as well as a transitional strategy to achieve it. The theoretical foundation for a genuinely successful rail intercity service is outlined, and examples — including a specific precedent and model for the plan proposed — are given.

The basic concept of this plan is to reorganize the NRPC by dividing it into a half dozen of its major component parts, and to spin off those major elements into autonomous, competitive entities (leaving the Northeast Corridor in the hands of the current NRPC entity and management), on the model of the highly successful 1984 breakup of AT&T Corp. Significant, self-financed growth is forecast for the spun-off entities, especially the component providing a national system of long distance interregional services.
THE STATUS QUO IS A FAILURE
1. Original Goals of NRPC. Congress had two primary goals when it created NRPC in 1970: to relieve the freight railroads (primarily the bankrupt Penn Central) of the economic burden of operating intercity passenger trains;⁶ and to develop a “modern” and useful intercity rail passenger business. NRPC met the first goal when it commenced operations on May 1, 1971, and it has succeeded against all odds in surviving for 30 years. But it has done so only with a skeletal national route system that is economically suboptimal in scale and output. The route system and total output in 1999 were both smaller than they had been in 1990 and 1980. Between 1970 (the year before Amtrak took over from the freight railroads) and 1997, output (revenue passenger miles) of the U.S. airline industry more than quadrupled (from 108.4 billion to 450.8); private passenger car passenger miles rose 37%, from an estimated 1.75 trillion to 2.4 trillion; while intercity passenger rail output fell 16%, from 6.2 billion to 5.2 billion. Amtrak’s highest output, in 1991, was 6.3 billion r.p.m.s. Automobiles account for about half of all trips over 100 miles, with market share dropping rapidly in favor of commercial airlines in trips over 500 miles. Amtrak’s market share in corridors it serves range from about 1% to a high of 12%. Nationally, it is less than 0.5%. This leaves Amtrak with a great deal of untapped upside opportunity.
2. Corporate Structure. NRPC was structured as a “for profit corporation,” chartered under the District of Columbia Business Corporations Act. It is not clear from the legislative history whether the designation of NRPC as a “for profit” corporation actually expressed a Congressional intention that NRPC operate at a profit (either on operations, or overall), or whether Congress’ designation was merely an indication of Congressional intent that NRPC should be structured and function on the model of a private sector business organization. Subsequent Congressional behavior, i.e., consistently providing NRPC with sufficient capital and operating subsidization to survive, if not to stabilize or grow, suggests that the designation of NRPC as a “for profit” may have been meant more to indicate a model for the entity’s organization than a criterion for its performance.NRPC Financial Results. What followed was 25 years of steady financial losses, amounting to more than $23 billion through FY 1999.Management’s primary attention has always been directed towards higher volume (ridership), shorter distance, corridors, especially the Washington, D.C.-New York- Boston Northeast Corridor. Other services, especially interregional long distance services, languished, as they were viewed by management and by the U.S. DOT as politically necessary but very costly afterthoughts. It is now clear, however, that the lion’s share – perhaps as much as 75% — of the total federal subsidies to NRPC since 1971 (capital and operating) have gone to the NEC.⁷ The NEC still consumes more than $500 million a year in federal capital and operating grants. NRPC’s income statements do not reflect depreciation of NEC fixed assets and do not, therefore, reflect its full cost, or the disposition of federal capital grants into the NEC.All national system long distance trains, and some, but not all, NEC trains earn a contribution margin (free cash flow after direct costs, not accounting for fixed charges).Congress’ direction to NRPC to end its use of “operating” subsidies by federal FY 2002 (a goal NRPC had adopted in 1994) does not change this analysis. It is clear from direction that Congress has given to the Amtrak Reform Council (ARC) in the spring of 2000 that Congress means only that NRPC must no longer use federal subsidies for so-called “operating expenses,” but only “capital” costs, after FY 2002. Because all long distance trains, and most NEC trains, already cover 100% of their “above the rail” operating costs from fares, that condition already exists and has for several years. NRPC in all likelihood, therefore, will be in a position next year (i.e., well before the statutory deadline of FYE 2002) to state that it no longer uses federal grants for any part of its “operating” losses, provided (1) Congress agrees not to apply Generally Accepted Accounting Principles, and not to count depreciation as a cost, for purposes of defining “operating costs,” and (2) Congress allows NRPC to mimic many federally-subsidized transit providers by treating large categories of maintenance costs (for both rail equipment and NEC track, structures, stations and electric power systems) as “capital” costs rather than “operating expenses.” Even with these concessions, however, NRPC still will not be weaned from very large annual federal subsidies.NRPC’s survival in its current form will be every bit as dependent in FY2003 (and every year out into the indefinite future) as it has been in recent years upon its annual receipt of some $750 million or more in federal grants. The only difference is that by FY2003 and thereafter those grants will be characterized as “capital” in nature.After 30 years of highly consistent financial results of operations under five different management regimes, all of which pursued the same basic strategy for Amtrak, it is now inescapably clear that Amtrak’s financial results occur because of and not despite the strategies management has pursued. Those strategies are the emphasis on, and allocation of the lion’s share of available capital resources to, short haul corridors, primarily the NEC, and the benign neglect and capital starvation of the national system of high revenue interregional trains. Amtrak has never been short of capital — on average, Congress has consistently given it more than a half billion dollars of capital a year at no cost. Amtrak simply has not invested that capital wisely.
3. Breakeven Scenarios. Because all national system interregional (long distance) trains earn a positive cash flow on operations, but do not generate sufficient operating margins to cover their shares of allocated fixed costs, it has been clear for some time that Amtrak cannot “cut its way to prosperity.” Even NRPC now acknowledges as much. Eliminating any one or more national system long distance trains (short of a total system shutdown) always exacerbates, and does not relieve, NRPC’s annual operating deficit.Because these trains all are net contributors of cash, it follows that if the scale of net cash-producing operations in the national system could be increased to the point where cumulative operating margins from an expanded network were of sufficient magnitude to cover not only direct operating costs but also the fixed and system costs associated with their operation, a true breakeven would be achieved. If the scope of the business opportunity available to Amtrak’s national network of interregional trains is sufficiently large to accommodate still more growth, then aggregate operating margins can be expanded further to the point where they cover not only operating costs and fixed costs, but also depreciation and costs of capital. At that point, the network of interregional long distance trains would be completely self-sustaining, and could operate free of any public subsidization. Amtrak’s trivial current market share of a steadily growing long distance (over 100 mile) travel market shows that significant growth is readily available to it.Unfortunately, that breakeven scenario is not available in many of Amtrak’s regional corridor services. The economic characteristics of most short distance corridors are much more similar to large-scale transit services, where the capital costs necessary to support any reasonable scale of operation are of such magnitude, and the revenues derived from train operations so limited, that “breakeven” in the sense in which that term is used in the business world is not realistically possible.⁸ A good example is Amtrak’s operations in the Northeast Corridor, where transit-like operating characteristics generate relatively large numbers of riders (albeit disproportionately concentrated in the 90-mile New York – Philadelphia subsegment of the entire 457 mile NEC market), relatively high revenues derived from extremely high prices (cents per mile prices for transportation services), moderately high operating costs (some NEC train services, notably the Metroliners, appear to generate a contribution margin, but others, such as the Clockers and the Keystone Services, do not), and extraordinarily high fixed costs.⁹Thus, in these short corridor markets, increases in the scale of operations cannot and will not achieve operational breakeven as measured by generally accepted accounting principles. It is possible in these markets that revenues derived from train operations can cover a carefully and narrowly defined set of operating expenses, but not all of them, nor many categories of capital costs, or depreciation, or costs of capital. In these corridor markets, therefore, political judgments will have to continue to be made concerning cost effectiveness of public investments in proportion to the volume and value of transportation services derived. Even relatively high levels of social utility do not translate into financial “breakeven” by any meaningful definition.
4. Policy Choices Are Available. What is inescapably clear by any analysis is that NRPC will not and cannot wean itself from substantial federal subsidy by FY 2002, or ever, as it is presently constituted and operated. The probability that NRPC will successfully reclassify its cost accounts in such a manner that its variable costs are covered by revenues, while its semi-fixed and fixed costs (including depreciation) are labeled as “capital” and covered by continuing federal subsidy, does not change the fact that NRPC (as currently constituted) will continue to need at a bare minimum one-half to three-quarters of a billion dollars (in FY 2002 dollars) each year, indefinitely into the future. Without that level of continuing federal subsidy, however it is labeled, it is clear by every analysis, including NRPC’s, GAO’s, and others’, that NRPC will promptly exhaust its cash reserves and be forced to shut down in its entirety. Even an NEC-only “Amtrak” would still require more than $500 million a year in federal subsidies (indefinitely) to survive.The status quo therefore will be costly. But good choices are available. Alternatives to the status quo include: an orderly liquidation of NRPC’s entire operation through a planned disposition of key segments of NRPC’s assets and operations to states and regional agencies; total discontinuation of Amtrak’s interregional services in favor of concentration of its financial and managerial resources on short corridor and paratransit operations; or, the plan outlined below, reorganizing NRPC on the model of the highly successful 1984 breakup of AT&T
SUMMARY OF ADVANTAGES AND DISADVANTAGES OF EACH MAJOR ALTERNATIVE
1. The Status Quo.Advantages:The primary advantage of maintaining the status quo is the stability and continuity of service and employment it represents.Other advantages include avoidance of disruptions of labor relations, avoidance of disruption of travel patterns for existing customers, and avoidance of significant and unrecoverable costs associated with liquidation. Another advantage is the avoidance of the uncertainties associated with other options, and avoidance of political discord associated with either severe truncation of NRPC’s operations, or its liquidation. Maintaining the status quo also assures that relations between the federal government and Amtrak’s labor unions will not be disturbed, at the cost of no job growth in the foreseeable future.Disadvantages:The principal disadvantage is the continued need for a minimum of three-quarters of a billion dollars annually of federal subsidy.Another significant disadvantage is that the current structure of NRPC is essentially a monopoly, and shows all of the classic dysfunctionality of a monopolist: high costs, high prices, no growth, extreme resistance to innovation, weak service, and the artificial maintenance of high barriers to entry by competitors.A key disadvantage of the status quo is the manifest inability of the current NRPC to expand significantly the scale of services it provides to the traveling public, or the number of railroad jobs it provides.
2. Liquidation.Advantages:The main advantage of liquidation is the ultimate (although not immediate) cessation of direct federal subsidization. Consideration must be given, however, to the likelihood of states continuing to look to the federal government to subsidize various regional corridor operations, especially in the Northeast.Disadvantages:The main disadvantage is the severe public outcry likely to result over loss of a popular transportation option, with the resultant political frictions occasioned by what will certainly be a fierce battle in Congress between advocates and opponents of federally-sponsored federal rail passenger transportation services. Another disadvantage is the multibillion dollar net cost of shutting down, including labor settlements, litigation, and loss of asset value in fixed rail facilities and equipment.Another disadvantage is that states which have invested heavily in incremental development of rail passenger programs, such as New York, California and Illinois, will be severely disadvantaged and will resist any effort to devolve to them sole responsibility and cost for regional rail passenger networks.Rail labor will certainly strenuously resist liquidation.
3. Shut Down Interregional Services.Advantages:There are no apparent advantages to this option. It is now generally understood that national system, interregional, long distance services produce a positive net cash flow from operations, both individually and as a group. Even the weakest of Amtrak’s long distance trains (the 3-day-a-week Sunset Limited, Los Angeles – New Orleans – Orlando) generates $1.5 million annually in free cash flow. The strongest of these trains, the Empire Builder (Chicago – Seattle/Portland), generates $15 to $20 million annually in free cash flow.Disadvantages:The principal disadvantage of this option is the loss of national network interconnectivity, driving an immediate elimination of all revenue and free cash flow associated with these services, followed by a slow (one to five years) phase-out of associated direct and semi-variable costs as operations are shut down, and assets liquidated. Labor protection costs or settlements and litigation costs will be significant and unrecoverable.Another significant disadvantage is the sharp political friction and strong public outcry certain to result from this plan. Another disadvantage (reflected in the predicted political frictions) will be animosity by states that receive no benefit towards continuing federal subsidization of regional paratransit operations, such as the Northeast Corridor and the Chicago-hub Midwest Corridors. Another significant disadvantage of this option (as well as the liquidation option) is the strong probability that public support will not be forthcoming for the development of emerging regional corridors or high speed rail options, anywhere in the U.S.
4. Other Choices. Some other, less desirable, possibilities exist which we mention in passing. Congress could force the intercity rail passenger business back to the small number of surviving Class 1 freight railroad companies. Each of the major railroads could take on more or less the existing pattern of operations over their own respective lines, resulting in an industry structure comparable to that of the trunk airline industry. Alternatively, the railroads could form a single joint venture to operate the national system, in a manner analogous to their own Trailer Train joint venture among the major railroads for “piggyback” flatcar freight services.Another possibility would be to break up Amtrak into numerous relatively small pieces on the model of the successful breakup of British Rail. This option is discussed in greater depth in Part V below.
5. Break-up NRPC into a Few Large Pieces. This is the preferred and recommended alternative. It is a modified British Rail style breakup, modeled more on the highly successful experience with breaking up American Telephone & Telegraph Co.. In this plan, Congress would reorganize the institutional sponsorship of intercity rail passenger service by breaking up NRPC into a few, relatively large, autonomous pieces. The NEC operation would remain largely as is, under the ownership of the existing NRPC entity, with existing NRPC management in place. Its ACELA high speed program could continue its evolution. Its management would be freed of the distraction of all of Amtrak’s numerous other activities, and could focus all of its attention and resources on the challenge of high speed rail in America’s densest corridor. Its “jurisdiction” or authorized service territory would extend from Maine to Virginia, and as far west as Harrisburg, or possibly Pittsburgh (in Pennsylvania), and Buffalo (in New York). Its subsidy need could be transferred to the Federal Transit Administration budget.Other regional corridor operations would be spun off intact, but separately, to individual states, groups of states, or private operators. For example, the Chicago hub corridors and the emerging Midwest high speed regional rail network would be a single operational entity, modeled after the many successful regional airlines in the U.S. It could be taken over by a multi-state (public sector) compact, or be franchised to a private operator from within, or without, the rail industry. Ownership of its assets could be vested in a multistate compact (such as the existing Midwest Regional Rail Compact), with train operations and retail sales and marketing franchised out to a private sector service company such as Carnival Cruises, the Wisconsin Central Railroad, Virgin Trains, Marriott, UPS, Disney, Greyhound, or United Airlines.Similarly, the southern California hub corridor operations extending from San Diego through Los Angeles to San Luis Obispo, and eastward to Las Vegas, NV and Yuma, AZ would be divested to a California agency, or a single private operator. Likewise, the Cascade Corridor (Vancouver – Seattle – Portland – Eugene) would be put in the hands of a single public or private operator.Finally, all of the interregional, long distance, services would be divested to a single private sector operator. Preserving all of the long distance routes under the jurisdiction of a single operator is absolutely indispensable, because it is unlikely that the national network of services would ever achieve critical density of flow through the network sufficient to sustain it economically and financially if it were to be broken up into economically small units. Franchising out individual routes, each with annual revenues of $18 to $60 million a year, is a recipe for failure, because no one of those operators could sustain itself at that financial scale. The fixed costs necessary to support operation of any one interregional long distance rail passenger service are such that many such services, operated at moderately high densities of flow, are necessary to generate sufficient operating profits to amortize the large fixed and capital costs necessary to sustain such an operation at any scale. This central element of this proposal is more fully developed below.
6. Legislative Needs. In the AT&T or hybrid-U.K.-model breakup, Congress must provide three critical statutory cornerstones:
  1. all operators of all rail passenger services, including regional commuter operators such as Metra in Chicago, SEPTA in Philadelphia, and MetroLink in Los Angeles, as well as the separate, spun-off components of today’s NRPC, must be required by law to collaborate and cooperate in areas of reservations, ticketing, baggage, information availability, and train operations and connections in order to provide seamless rail transportation services to customers (if necessary, a limited exemption from federal antitrust law, and a narrow pre-emption of state competition laws, must be enacted to assure that this required coordination of services occurs);
  2. each of the components of today’s NRPC must be required by law for a designated period of time (perhaps four years) to concentrate exclusively on its core business, and not engage in operations or development activity outside of its assigned field of operation; and
  3. after the four-year head start, each provider of rail passenger service would be free to compete for any intercity rail passenger business. This would be the first manifestation of competition in this industry sector since the late 1960s. There is no reason to believe that competition in this sector will not have the same beneficial effects it has elsewhere in the economy, of stimulating innovation, growth, cost abatement, and improved and expanded services. That has certainly been the experience with passenger services in Great Britain after the British Rail breakup, and in voice and data telecommunications in the U.S. after the AT&T breakup. It cannot happen with today’s NRPC, but it will be inescapable with the “AT&T”-model breakup, just as has occurred with telecommunications services post-AT&T. This is also more fully developed below.
HOW PRIVATE BUSINESS COPES WITH FAILURE
1. Free Markets Involve Failure as Well as Success. The American economy involves open opportunity to create businesses, with the upside potential limited only by anti-trust law, taxes, and ultimate public sector intervention in the rare case when a single business enterprise simply becomes too dominant.The other side of the coin is that businesses are also free to fail. There is no assurance of success in American business. When that happens, our system has several familiar ways of dealing with loss and failure (besides outright bankruptcy, managed in court under the Federal Bankruptcy Code). Analysis of “Amtrak” has never really addressed how commercial or financial failure is dealt with in the private sector, or how ubiquitous this eventuality is in the American economy, or how handily American business deals with it.
  1. The most common method of dealing with failure is for shareholders to replace management. It is a rare day that The Wall Street Journal, for example, does not report on the Board of Directors of a publicly traded company (in effect, a committee representing shareholder interests) replacing the CEO or the entire management team of a company whose financial results do not live up to shareholder expectations. Less frequently, shareholders rise up and replace an entire Board of Directors. The Board of Directors of General Motors Corporation in the mid-1990′s replaced senior management to stem GM’s steady loss of market share and erosion of profitability. This has also been tried with NRPC on several occasions, including as recently as 1997, but to no noticeable effect (because each successive management regime has pursued essentially the same strategy).
  2. In more severe cases when financial results of a part of a business’ operation fail to live up to shareholder expectations, the owners of the business sell the failing business unit or its assets to another business organization that perceives a strategic opportunity, or some other value (which might include scrapping the assets in questions). Often, a business asset “fits” better in one organization than another. When ownership transfers, it is often the case that the fixed assets remain in place, and the workforce continues doing the same things pretty much as before, with some changes in senior management by the new equity owner.Occasionally, this kind of transfer of ownership occurs on a company-wide basis, when one business organization perceives value in another that has underperformed its potential. Especially in times when capital is more freely available, or in times of inflated share values, some companies launch unsolicited or hostile tender offers for others. In these cases, entire business corporations change ownership, followed by varying degrees of reductions in workforce (especially upper- and mid-level management, rather than production level employees), reorganization of corporate structure, or disposition of assets. An example of this type of reaction to failure was the takeover of The Pillsbury Company in the late 1980′s by a British-based global conglomerate, Grand Metropolitan. More recently, as Pillsbury’s results have languished, shareholder pressure is mounting on Pillsbury’s current parent, Diageo PLC, to sell or spin-off its Pillsbury unit. Diageo recently announced an IPO of 20% of its equity in Burger King Corp. A more recent example is the proposed amalgamation of U.S. Airways with United Airlines.
  3. With some frequency, management of a corporation deals with failure inside the organization by divesting assets, either in a sale transaction (when a net gain can be recognized on the divestiture), or in a spin-off to shareholders (to avoid recognizing a loss when business unit cannot be sold for gain). In these cases, the business disposed of is usually an entire organization, or group of organizations, capable of functioning as an autonomous business unit. These organizations are capable of being operated at a profit, but have either no strategic fit, or returns that drag down the overall financial results of the parent organization. Recent examples of this type of corporate response to failure include 3M’s spin off of its imaging businesses as a separate, publicly traded, corporation, Imation, and PepsiCo’s 1997 spin off of its restaurant businesses (Pizza Hut, KFC, and Taco Bell) in a new, publicly traded company called Tricon Global Restaurants. In both cases, the businesses spun-off were viable businesses, but were perceived as a drag on the parent company’s earnings and growth prospects. Just as with PepsiCo and its restaurant business (a $12 billion asset), so NRPC perceives the role and financial results of its long distance services: a drag on the performance and potential of its high speed rail program in the Northeast. The solution is the same in both cases: the undesired assets and organization should be divested to allow management to concentrate, undistracted, on its core competency in what it perceives as its most lucrative and promising area of opportunity. Others can deal with the spun-off business units as their sole focus.
  4. Conglomerate business organizations tend to rise and fall in favor, but are now more out of favor than ever. Management is encouraged to focus on “core competencies” and outsource everything else. Some companies (in electronics, and in manufactured food, for example) are tending to become mere brand managers — holders of intellectual property — who outsource manufacturing, marketing and distribution functions. In the case of NRPC, it is by now abundantly clear that its management cadre is a “jack of many trades, but master of none.” It is perhaps unreasonable to expect one group of managers with backgrounds in public transit systems and municipal government to excel at running not only a large scale paratransit function in the Northeast but also a sophisticated computer reservation system, a contract engineering business, a major railcar maintenance and assembly business, a nationwide transportation service provider, a national package express business, etc. Breaking up NRPC will enable the current Board and management group to focus on high speed rail in the Northeast, while Amtrak’s other functions become the sole focus of other management groups devoted specifically to their growth and success.
2. A Model for Amtrak
  1. The corporate reorganization that may serve as the best model for how to react to 30 years of financial failure by Amtrak is one that involved a regulated monopoly. Amtrak has functioned as a lightly regulated monopoly since its formation in 1970.A combination of federal public policy and the characteristics of voice telecommunications services in the first half of the 20^th Century gave American Telephone and Telegraph Corporation a legal monopoly over long distance voice telecommunication services as well as most, but not all, local telephone services. As both telecommunications technology, and public policy, evolved in the 1960′s and 70′s, the emergence of competitive service providers to AT&T, most notably Sprint and MCI, combined with evolving perceptions of public policy in the federal government, led the Department of Justice in 1974 to initiate an anti-trust lawsuit against AT&T designed to end its monopoly status. After protracted litigation, the government and AT&T settled the case in 1982 with AT&T’s agreement voluntarily to divest (by spinning off) its local and regional telephone operations, retaining only the core long distance portion of its business, which would then be opened to competition by Sprint, MCI and others. In 1984, AT&T spun off the “Baby Bells” to become autonomous regional providers of local and regional telephone service. The Federal Government and AT&T had studied and rejected a plan to break up AT&T into 50 autonomous state by state entities after it was concluded that some of those would be too small financially to raise capital and survive. AT&T’s research arm (Bell Labs) and manufacturing businesses were spun off as an independent entity (Lucent Technologies) in 1995. Federal law was enacted enabling AT&T and the Baby Bells, after a limited period of time, to compete with one another on the basis that the regional Bell operating companies could offer long distance telephone service networks only when they opened their (monopoly) local telephone services to competitive access by AT&T and others.Subsequently, the different Baby Bells performed differently in the marketplace. Since 1984 each has charted a separate course in the newly deregulated marketplace for telecommunication services. Some have been more successful than others, and some consolidation has occurred. But the existence of actual and potential competition has spurred significant innovation, efficiency and both consumer and shareholder value as a direct consequence of breaking up the AT&T monopoly.Since 1984, long distance voice telephone rates have dropped by more than 50%, and call volume has more than doubled.Like AT&T, Amtrak has enjoyed a monopoly in its market niche. Between 1971 and 1997, that monopoly was statutory. Subsequently, the monopoly has been de facto, as both the capital costs necessary to begin a scheduled, daily, intercity rail passenger service, and the economic impact of fundamental principles of network economies of scale and of flow are sufficiently high as to discourage experimentation and entry in this market. Perhaps most importantly, only Amtrak enjoys the indispensable statutory right of access to the track, facilities and networks of the host railroads.Also like AT&T in the 1960s and ’70s, NRPC precisely because of its monopoly status has become inefficient, unresponsive to technological and behavioral changes in its marketplace, and continues to be afflicted by high costs, high staffing levels, and a continuing dependency on public subsidization both for its continued survival, and as the prime determinate of where and how it deploys its available resources to offer rail services. As compared to both trunk and regional airline companies and the Greyhound bus company, Amtrak is by far the least productive in terms of passenger miles per employee and passenger miles per employee-hour.
  2. To be a commercial success, intercity rail passenger service in the United States must be operated as a single network. But that emphatically does not require a single corporate sponsor, any more than telecommunications did in the 1980s or airline service does today. Indeed, an argument can be made that, like telecommunications or air transportation, rail passenger service in this country cannot flourish until it is offered — in a seamless network — by independent, autonomous, competitive providers, and that such a competitive structure cannot and will not emerge spontaneously due to insurmountable barriers to entry.¹⁰Like telecommunications services before the breakup of AT&T, rail passenger services in the United States suffer greatly from this monopoly. The failure of the NRPC business model (reflected in its financial results — measured by generally accepted accounting principles — and its net shrinkage in output over two decades) has been masked, and NRPC has been able to avoid any of the traditional American ways of dealing with business failure, only as a consequence of Congress’ willingness over 30 years to continue its annual subsidization of NRPC. Nothing has changed in the last five years, and nothing will change in the next five years, to alter that central fact. Without its continuing annual federal subsidies (whatever they are labeled) NRPC by its own admission will collapse and be liquidated through a bankruptcy proceeding.¹¹ Reclassification of Amtrak’s costs from “operating” to “capital” accounts in order to achieve a congressional mandate that it free itself of “operating” subsidies does not change either the level or the necessity of federal support on an ongoing basis.Just as the combined market capitalization of AT&T and all of the various entities it spun off today significantly exceeds the market capitalization of AT&T as a regulated monopoly immediately prior to the breakup, it can reasonably be expected that the total value of NRPC will not be adversely impacted, but will benefit significantly, from NRPC being broken up in accordance with the model of AT&T. See Part VI below.
WHY BRITISH RAIL’S PRIVATIZATION IS NOT DIRECTLY APPLICABLE TO AMTRAK.¹²
1. Background. The United Kingdom recently reorganized and privatized its entire rail system. British Rail had been a single entity (a Crown corporation) that was the sole provider of rail passenger and freight services (with trivial exceptions) in the U.K. Some proponents of Amtrak reform have suggested that the U.K. model is something that could be directly applied to the American environment. There are several reasons why the U.K. solution, while working reasonably well in Britain, is not applicable to Amtrak. These include the nature of the systems being reformed, their infrastructure, and their respective market potentials. None of these is sufficiently comparable in the American environment (outside the NEC) for the U.K. experience to be directly translatable into the U.S.
2. The Nature of the Pre-reform Systems. In the United States, with the exception of the NEC, the current system involves operation of a very small number of passenger trains (in both absolute and proportional terms) on the infrastructure of private freight railroads. The main purpose of these railroads is the transport of large volumes of freight over long distances at moderate speeds and minimal cost. This means that the private railways in the U.S. will always attempt to maximize the revenue ton miles of freight that can be moved over the most minimal infrastructure system necessary to sustain the freight service. These economic considerations do not lend themselves to the financing and construction of multi-track, grade separated high speed passenger rail routes. In the U.K., the pre-reform system was a tax supported, nationalized and predominantly passenger-oriented system. It employed taxpayer-provided multiple track main lines devoted predominantly to high speed passenger services over a broad national matrix of routes. Freight service in both absolute and proportional terms was a small fraction of total UK rail service, and a trivial fraction of what it is in the U.S.The challenge for rail passenger service providers in the U.S. therefore is one of track access and incremental improvement in the national rail infrastructure. The problem in the U.K. was not the inability to construct modern grade separated multi-track main lines. The problem predominantly was the unionized work force and its allies in Labor Governments, which lead BR into becoming an overstaffed social organization rather than a for-profit transportation system. What privatization accomplished was to divorce passenger train operations from infrastructure ownership, creating a relationship just like the existing one in the U.S., where Amtrak trains (outside the NEC) operate as tenants of the host freight railroads. In Britain now, private operating companies are tenants of an autonomous, publicly-traded infrastructure company, “Railtrack.”¹³The British Rail breakup was also intended to break the national monopoly; the trade unions are still using the leftist press in both the U.S. and the U.K. to call the privatization a “disaster,” when the privatization in fact has allowed the operation more services at lower cost, with the savings being reinvested in infrastructure in the form of enhanced track and signaling systems, and new rolling stock and station amenities. Post-breakup, the British rail system is carrying more passengers, and producing more total output, than before, and doing so at a taxable profit. It is drawing billions of dollars in new private sector investment in rolling stock and facilities.
3. The Nature of the Networks in the U.S. and U.K. The U.S. rail passenger system consists of several widely separated, discontiguous, regional corridors such as the NEC, the Midwestern Chicago Hub corridors, the two California Corridors and the Pacific Northwest Corridor, loosely connected to one another by a long-distance, interregional network sometimes known as the “national system.” The regional corridors are essentially independent lines or networks that could be easily operated autonomously by independent operators. The NEC (where, like the old British Rail, NRPC both owns the costly infrastructure and operates the trains) most closely resembles either the British East Coast Main Line (London-Edinburgh) or the West Coast Main Line (London-Glasgow). These two main lines have been privatized successfully on the British plan. Only on the NEC would the British model work in the U.S.The two British corridors and the NEC represent simple point-to-point railroads that are essentially fully nationalized and primarily provide passenger transportation. The problem on such high density electrified high speed lines is that while the marginal cost of operating trains is often lower than the revenue generated, the fully allocated costs of the entire operation are much higher than any actual or even potential aggregate revenue stream. This means that the operation cannot be successfully privatized in its entirety, or even freed from substantial, ongoing, public subsidies, because it is not capable under any set of circumstances of earning a profit (measured by real world business accounting standards). Therefore, for this kind of “corridor” passenger operation ever to be successful financially, or weaned from public subsidy, the high overhead costs of owning and operating a multi-track high speed railroad must be segregated from train operations by being removed into a national or regional publicly-subsidized infrastructure authority. In the U.K., this is Railtrack. On the NEC in the U.S., it could be a multi-state compact that would own the infrastructure under some form of “NEC-Railtrack”. Customary transit funding support would be provided by the national government through the FTA. Only under such a model could Amtrak’s ACELA program and related services be privatized successfully on the British Model, or become a “breakeven” operation by any meaningful definition, free of operating subsidy.In the rest of the United States, however, the U.K. model has no direct relevance since we are operating a thin network of passenger trains as incremental users of privately-owned infrastructure pursuant to statutory trackage rights (rights of access). Private freight railroads cannot be “re-privatized.” Because these long distance passenger services already produce positive cash flows from individual train operations but do not yet recover total costs, even operating as tenants of the freight railroads’ infrastructure, their scale of operations must be carefully but systematically expanded to the point where aggregate operating margins do cover total costs (including depreciation and cost of capital). That can – and must – be done, but because the U.S. host railroads’ main lines in many cases are at or very near capacity for freight business, modest incremental expansion of infrastructure – in partnership between the United States and the freight railroad industry – must be provided to allow meaningful growth in passenger operations without undue disruption to freight service. In addition, rents paid to the host railroads for the use of their infrastructure by a passenger operator as the marginal user must be increased to compensatory levels, so that the host railroads themselves perceive their “involuntary tenants,” the passenger trains, as a valued and valuable customer, rather than a constant and costly annoyance.The United States must find a means of providing financial incentives to the private railroads for allowing expanded access by passenger trains. The best way to do this is a statutory mechanism to provide tax credits for the private railways under a statutory formula administered by the U.S. Secretary of Transportation, rather than a national infrastructure authority which would be widely feared as a precursor to a nationalization of the rail freight industry itself. The U.S. already has the equivalent of an infrastructure authority in the form of its private rail system. We need only to establish a mechanism for appropriate federal support for the expansion of the minimalist freight system into a multi-track higher speed national network necessary for the operation of a limited, but integrated, network of passenger and express services. Some incidental benefits from these investments will accrue to the host freight railroads as a result of this partnership, justifying an expectation that the freight railroads will both cooperate with and contribute proportionally to this infrastructure investment program.
4. Benefits of Privatization in the U.K. and Potentially in the U.S. Contrary to many news reports from the U.K., its privatization program is leading to a rebirth of rail passenger transportation. For the first time in decades substantial private sector investment is going into new passenger train fleets, the first of which will be entering service this year (2000). It is true that for the first few years of privatized service, the operators had to make do with old British Rail equipment, while awaiting design and delivery of new trainsets. Nevertheless, the private operators managed to refurbish and modernize the old equipment and make it more presentable and attractive to the consumer. The deplorable condition of many stations covered in a century of smoke, grime and even W.W.II damage has been dramatically changed in just a few short years. The great London terminals have been cleaned and returned to their mid 19th Century Victorian splendor and have acquired modern privately-operated food and shopping courts and even restored station hotels. These above-the-rail investments, the first significant ones in the last 20 years and the largest since the end of W.W.II, are primarily privately financed with Government providing aid in the form of urban renewal grants for station improvements. With the tracks and signals transferred to Railtrack, government now has the same relationship to the railroads in the U.K. as it does for the highways. It is responsible for infrastructure investment in the right of way while others operate various services over them, for a fee. These track improvements will begin to show positive operational results starting early this decade. These improvements combined with the arrival of new train sets will cause further dramatic improvements in the British rail passenger system over the next five years.One drawback of privatization in the U.K. is the large number of competing, autonomous commuter and intercity franchises that serve London. This balkanization of service has resulted in a lack of coordination among competing operators. This is not much of a problem for daily commuters, since they only use one operator. It is, however, a major problem for long distance travelers who change between systems in London. For them, connectivity (of both trains, and schedule and fare information) has been curtailed and has occasioned the largest level of complaint against the privatized system. In the U.S. this should not be a major problem as long as only one operator is chosen to operate each regional hub corridor complex, and the interregional long hauls, since the regional corridors do not connect. The only connection problem in the U.S. will be between the National System operator and the regional operators in major urban areas where both the National System and the regional carrier will overlap and operate. Legislation to mandate coordinated information, fares, and connectivity at interchange locations will need to be part of the authorizing legislation for reorganization of Amtrak in the U.S.In the U.K. the franchises awarded to the private operators are only for five to seven years. Some of these franchises are already being re-negotiated in 2000. One trend is that Virgin, the operator of the West Coast Main Line, and several interregional rural services are petitioning to take over the East Coast Main Line from Virgin’s chief rival, GNER. If successful, Virgin has announced plans to develop the East Coast Main Line in concert with Railtrack into a true high speed line and to introduce TGV style trains between Edinburgh (and northern Scotland) and Kings Cross Station in London and then continuing via the Kings Cross-to-”Chunnel” Access Line to Brussels and on to Cologne in Germany. Similar train sets could operate from Milan to London via the Simplon Tunnel (1912) and the new Loetschberg Base Tunnel (2007).The long term future in the U.K. is for continued heavy private investment in passenger rail and the consolidation of the current large number of operating franchises into a much smaller number. The action of Virgin (also a potential U.S. operator) shows that integrated Rail-Air services (with Virgin Atlantic Airways) are not just a possibility, but a reality in Britain. The fact that Virgin wants to control both the East and West Coast Main Lines and eventually expand into France, Belgium and Germany and later into Switzerland and Italy by taking advantage of publicly subsidized infrastructure, shows that this is the wave of the future in the European Community as well. The fact that Virgin as a rail operator, but still mainly a long haul airline, is looking at the long distance rail market as the prime profit source of growth and earnings in rail transportation is no surprise, since all airlines are well aware of the inherent economies of long distance transportation.Since Virgin has proven that it is possible to be a private and profitable above-the-rail operator, the same concept can be translated to the U.S. Companies like Virgin can earn market-rate returns by investing in rail fleets designed to meet the needs of the American market, provided that just as in Europe other agencies provide the route infrastructure. The divergence between the European Model and the American Model is that in the U.S. the bulk of the rail passenger system is operated as an overlay on private freight railroads. In Europe, the opposite is the case. Our freight railroads, provided that the United States partners with them through a tax credit financing method, can perform the role of the publicly-owned European Infrastructure Authorities. The American Model in fact has many advantages over the European Model since unlike Europe, the U.S. still has a continent-spanning integrated long distance rail passenger network.
THE MARKET POTENTIAL FOR INTERREGIONAL RAIL
1. Networks. It may seem counterintuitive that Amtrak’s long distance interregional trains have the potential to become a self-sustaining business while its high density corridors appear to be incapable of ever operating without public financial support. This is especially so after two generations of received wisdom that holds that passenger rail can only function “effectively” or “efficiently” or “successfully” in higher density, shorter distance corridors. Many find it difficult to accept (despite NRPC’s consistent financial results reflecting its investment emphasis in short, high density corridors) that the exact opposite is the true situation.The explanation for this is relatively simple, however, and has to do with the nonlinear flow dynamics of networks, and the transport leverage of distance.In the 30 years of its existence, Amtrak’s results both in financial terms and in terms of output (measured by revenue passenger miles, rather than mere “ridership,” which only measures transactions) has been remarkably consistent within a narrow range of variation. Over that period, in simplified terms, Amtrak has generated more than half of its ridership but only a third of its output in its high density corridors. Its load factors in high density corridor services mimic those of most transit organizations: only 25 to 35 percent of its available seat miles are occupied by fare-paying passengers (including in the NEC). In long distance markets, load factors range from 50 to 65 percent, but on a long distance train, with its many en-route origin and destination opportunities, a 65 percent load factor is, for all practical purposes, a “sold out” condition. In many years, 40 to 50% of Amtrak’s transportation output has come from its relative handful of long distance trains. Finally, the long distance trains have consistently been the highest revenue producing single trains Amtrak operates. Its highest-grossing single train is the Empire Builder, which traverses the demographic wilderness of North Dakota and Montana (operated between Chicago and Seattle/Portland), but consistently generates 50 to 60 million dollars a year in gross revenues from a single daily roundtrip. By contrast, high density corridors require extremely high frequencies (NEC frequencies are as high as three to four trains per hour in each direction in the New York-Philadelphia segment, and once every two hours in the New York-Boston segment), in order to produce in the aggregate only about half of Amtrak’s total transportation revenues, from extremely high fares.In Amtrak West, the one long distance train, the Coast Starlight (Los Angeles-Seattle) usually generates more annual revenues than all of the “Pacific Surfliner” Corridor trains (San Diego-Los Angeles-Santa Barbara-San Luis Obispo) combined. “Pacific Surfliner” corridor services operate 22 trains (11 round trips) per day, the Coast Starlight just one.The reason for this is simple. Even at relatively low prices (cents per mile fares) average trip lengths on long distance trains are so much greater than on corridor services that a typical trip of a typical western long distance train can generate between $60,000 and $75,000 in revenue. One trip of one corridor train, because trip lengths are so short, does well to produce just five to 10% of that amount of revenue, even at much higher price levels. Average trip lengths on Amtrak’s long distance trains exceed 800 miles; in the NEC, the average trip is a little over 100 miles. The economics of rail passenger service in this area are not different from airlines: A fully-loaded 767 on a transoceanic route is much more profitable than a dozen 737s on 300-mile segments. Northwest Airlines, for example, generates 25% of its sales and 10% of its profits from the small percentage of its customers who fly its transAtlantic routes.
2. Amtrak’s Network. Long distance trains do not cover their fully-allocated costs today only because (1) they do not have sufficient lift capacity (available seat miles) in the network to service latent demand for transportation in the routes currently being operated, and (2) even if they did, the existing network of services is of an insufficient scale to generate “critical mass” of flow density through the network. If Amtrak were to operate sufficient capacity in its long distance services to satisfy all latent demand for its services, and did so over a slightly larger network of interconnected services, the inherent nonlinearity of network flow characteristics would drive traffic and revenue levels quickly far beyond both full operational breakeven and breakeven measured by fully-allocated costs.Amtrak has never achieved critical density of flow through its network — the network flow equivalent of an economy of scale in an industrial production model. But it can easily do so.
3. Matrix Theory. The theoretical utility of a transport network may be expressed mathematically to demonstrate the nonlinearity of flow characteristics through the network with merely additive increases in the scale of the network. Additive increases to the scale of a transport network increase the number of origin and destination pairs sufficiently to produce a near squaring of utility within the network, hence ridership, output (revenue passenger miles) and revenues. Additive increases in operating expenses may be anticipated, with periodic step function increases in capital expenses, but the inherent nonlinearity of flow produces even greater increases in revenue. (see also: MATRIX THEORY for PASSENGER TRAINS)The nonlinear effect of additive increases in network size has been referred to as “matrix theory,” referring to the exponential growth in output resulting from additive increases in the size of the “matrix” of origin-destination pairs within the network.Nonlinear expansions in output from partially additive increases in the size of the matrix assume constant levels of market penetration. This is a critical point, because the following discussion presupposes that Amtrak does not change or improve any of its existing functions (marketing, advertising and sales, operations, etc.), but merely performs more services of exactly the same character and at its current level of performance, but in an enlarged market matrix.Because Amtrak’s national network of interregional long distance trains in almost all markets involves the operation of a single daily frequency (one round trip a day), the nonlinear characteristic of the expansion of the size of the network will require additional frequencies along existing routes simply to service the increase in demand resulting from the expansion of the matrix, but the increases in frequency themselves multiply the utility of the service, driving further increases in demand. Empirical experience in Amtrak’s long-distance markets suggests that increases in frequency within an expanded matrix alone will cause disproportionate, additive increases in outputs, including revenues and net operating margins.Amtrak has suffered since before its birth from a thorough failure to grasp the nonlinearity of network flow dynamics. Early U.S. DOT planning for what became Amtrak involved a largely discontiguous series of end-point city pairs defining discrete routes. Examples included longer routes (e.g., “Chicago-Los Angeles, via Albuquerque”) and shorter routes (e.g., “Chicago-Milwaukee”). No recognition of network flow characteristics was evident. As recently as the mid-1990s, Amtrak’s Board and executives succumbed to a foolish plan by equally uninformed outside consultants to improve Amtrak’s financial results by cutting national system operations. That effort had devastatingly negative consequences because neither management, nor the consultants (nor Amtrak’s Board), understood the nonlinearity of network flow characteristics, and that the nonlinearity works in a downward deconstruction of a network just as strongly as it does in a network expansion. This condition persists today, as even the current management group pursues national system growth through politically-driven expansions of service such as the embarrassing Chicago-Janesville (WI) startup, rather than expanding the scale of its most highly productive services.
4. Empirical Proof of Matrix Theory.
  1. Matrix theory has been field tested in numerous applications, ranging from urban transit services to Amtrak long distance services. The now-familiar “timed transfer” operating practice pioneered in Edmonton, Alberta demonstrated the utility of matrix theory as applied to intraurban transit travel. Airlines have repeatedly demonstrated the enormous potential of matrix theory (and its attendant capital leverage) with their hub operations (e.g., Delta at Atlanta, U.S. Airways at Pittsburgh, and Northwest at Detroit).
  2. The applicability of matrix theory to long distance rail passenger travel was demonstrated forcefully in 1989 with the extension of the Palmetto train from its southern terminus at Savannah, Georgia to Jacksonville.The Palmetto extension is instructive. Matrix theory predicts that when a linear passenger train route is extended by any number of additional stops, the utility of the overall service will expand exponentially, not additively, with the degree or absolute volume of actual expansion in any given situation dependent upon demand generation characteristics such as the size and demographics of the markets served, times of day at which they are served, the character of the service offered, information made available to potential customers, and frequencies with which the service is operated. It also depends heavily upon the availability of additional lift capacity through the peak loading points of the train in question. The projected extension of the Palmetto from Savannah to Jacksonville assumed that almost no one would ride the train locally between Jacksonville and Savannah, but that extension of the train would create significant additional demand for service to and from Jacksonville and points north of Savannah, in North Carolina, Virginia and the NEC. It also forecasted that making available a service between the Northeast and Jacksonville that did not involve an overnight segment would attract passengers off of the then-saturated “Silver” long distance services operated between New York and Florida, thereby freeing up space on the Silver trains for resale to potential long distance customers who at the time were being turned away for want of carrying capacity.Amtrak’s Board of Directors at the urging of the United Rail Passenger Alliance forced the extension of the Palmetto on a reluctant management. Management objected to the additional costs associated with operating the train the additional 140 miles to Jacksonville, and did not recognize the revenue potentials from the extension. Management’s forecast of revenues associated with the extension were based only on management’s perception of the local traffic that would be generated between Jacksonville and Savannah, which was by any reckoning very low.Once the train was actually extended, however, the results were telling. Although the Palmetto ordinarily carried only 40 to 50 passengers into or out of Jacksonville, those passengers tended to travel longer distances than had been forecasted even by the advocates of the extension based on matrix theory. These passengers more than paid for the extension, and represented a significant improvement in the Palmetto’s operating ratio. Ridership and output could have been higher still, because ridership yields at Jacksonville were sharply capped by limited capacity on the Palmetto through its peak loading point in northern Virginia. Empirical experience indicated that high revenue, long distance, traffic between Jacksonville and the Northeast could have been expanded by 50 to 100% had additional lift capacity been provided. A serendipitous additional benefit from the extension was the unforecasted availability of a daily mail contract with the U.S. Postal Service once the train was extended to Jacksonville.The extension of the Palmetto was so successful that a successor train now operates on a daily basis from New York through Jacksonville to southern Florida as a third frequency complementing the Silver Star and Silver Meteor.
  3. Similar results have been obtained in southern California with the extension of San Diegan corridor trains north of Los Angeles. Incredibly, until the mid-1980s, Amtrak only operated trains between San Diego and Los Angeles in corridor service, ignoring the more than 5,000,000 population north of downtown Los Angeles through Santa Barbara. When Amtrak was finally forced over its objection to extend San Diegans north of Los Angeles to Santa Barbara (and eventually to San Luis Obispo), results were equally dramatic. Average trip lengths on the extended trains and the corresponding revenue yields far exceeded management’s expectations.
  4. In 1984, the United Rail Passenger Alliance sponsored a simulation, using matrix theory, of Amtrak’s Southwest Transcontinental Corridor (Chicago-Kansas City-Albuquerque-Los Angeles) by the Surface Transportation Systems Institute (“STSI”). This route is served by a single daily long distance train, the Southwest Chief. It has no rail connections anywhere between its endpoints other than an unpublicized connection at Kansas City to an all-coach local train to St. Louis. STSI compiled actual ridership data for Trains 3 and 4 from the preceding year in order to calibrate a computer model of the route using actual origin-destination data for all en-route stations. Assuming constant levels of market penetration, the STSI computer model was then calibrated and extended to ask what ridership results would obtain if the Southwest Transcontinental Corridor were modified in three respects: (1) a section of the train, i.e., a through sleeper and coach, were to drop from the train at Flagstaff, Arizona for Phoenix and Tucson (providing second-morning arrivals in Arizona’s premier destinations from Chicago and the Upper Midwest); (2) the remaining train were to be split in half at Barstow, with half continuing to Los Angeles as the actual train did, but with the second half proceeding north over Tehachapi Pass to Bakersfield, and then displacing an existing San Joaquin valley train (i.e., only 90 incremental train miles were involved) up the valley through Fresno to Oakland and terminating at San Jose; and (3) on the east end, the train were split in half between Chicago and Kansas City, with half operating over the existing direct route to Kansas City, and half operating between those two points via St. Louis (again, displacing an existing local train).At that time, actual ridership onboard Train No. 4 eastbound out of Flagstaff on average was 212 passengers per day. The STSI model, assuming constant levels of market penetration but with the three incremental changes described, forecast an average daily ridership load onboard eastward out of Flagstaff of approximately 1,260. Because a long distance passenger train even in a peak load environment cannot accommodate 1,260 passengers, it immediately became apparent that multiple frequencies, at least three and probably four, would be necessary to accommodate that volume of traffic. The model did not analyze the further incremental demand generation (i.e., deeper market penetration) resulting from having four daily frequencies available in each direction, rather than merely one.Based on that result, STSI then operated a computer model using the forecasted results of the described incremental changes to the Southwest Transcontinental Corridor, but actual ridership data for the Central Transcontinental Corridor and the Southern Transcontinental Corridor, with the addition of a connecting link between the Southwest Transcontinental Corridor to the Central Transcontinental Corridor from La Junta, Colorado to Denver via Colorado Springs, and a connection to the Southern Transcontinental Corridor, southward from Newton, Kansas through Wichita, Oklahoma City, Fort Worth, Dallas, to Houston. No other changes were modeled in either the Central Transcontinental Corridor or the Southern Transcontinental. Assuming constant levels of market penetration, and no other changes to the pattern of operations, the computer forecast ridership numbers from this small expansion of the national matrix that were so large that URPA made a policy-level decision not to publish the results for fear of public incredulity. URPA continues, however, to have very high confidence in those numbers and in their implication for results to the national system of Amtrak services were an enhanced matrix to be developed.
  5. This is significant for the future of interregional long distance passenger services because more recent URPA computer modeling suggests that true breakeven in the national system, measured by generally accepted accounting principles, will not occur until Amtrak increases its annual output (revenue passenger miles) by a factor of approximately three. The Southwest Transcontinental Corridor model, however, suggests that increases in output on that order of magnitude, and more, are readily achievable without either significant expansion of services into major new routes, or significant change or improvement in the type or quality of service offered to the public.
5. Implications of Matrix Expansion. What are the implications of an expanded national matrix of long distance, interregional passenger services? They are numerous, and significant.Among other things, they suggest that it is easily within the reach of an autonomous operator of interregional long distance services to achieve critical density of flow through the network sufficient (and necessary) to achieve a genuine operational breakeven in the short run, and a full, self-sustaining financial success in the long run. They also suggest that in order to accomplish this critical density of flow, a significant, but carefully staged and phased expansion of the scale of operations will be required, over a period five to 10 years. Amtrak needs to triple its annual output of revenue passenger miles to break even on operations; URPA believes that Amtrak could quintuple its output with only modest effort.United Rail Passenger Alliance forecasts that operational breakeven can be achieved within five years, and full self-sufficiency within 10.The full implications of an expanded and growing national matrix include the following points:
  1. Using matrix theory, the long distance operator (henceforth, “Amtrak”) — meaning a new organization, spun off from the current NRPC, and consisting initially of interregional long distance services — will slowly expand the “matrix” of origin and destination pairs within the national system through selective route extensions, and selective interconnections of existing routes. For example, in a simple route extension, the Central Transcontinental Corridor (currently Chicago-Salt Lake City-Oakland) will be expanded through a linear route extension, by extending Trains 5 and 6 down the California coast through San Jose and Santa Barbara to a new western terminal at Los Angeles. Among other things, this will provide a second daily (overnight) frequency between Los Angeles and the San Francisco Bay area markets, as well as significantly expanding the reach of the Central Transcontinental Corridor market.¹⁴Another example, this time on a regional basis, would be the restructuring of the current pattern of service between New York City and Toronto/Montreal, currently served by separate single trains between each Canadian city and New York. Currently, one daily train operates New York-Toronto, and another New York-Montreal, both via Albany. The northbound trains leave New York an hour apart, but do not interact. One of those two trains will be restructured to originate in Boston, rather than New York, and meet the other train in Albany, allowing cross-platform transfers between the two. By doing this, what are now two entirely discontiguous and unsynergetic services will be restructured in a such a manner as to create a regional “matrix” allowing travel from all points east and south of Albany to all points north and west of Albany, and vice versa, on a daily basis. This step should produce an instantaneous doubling or more of ridership on these two services. The incremental cost of this opportunity is essentially zero. Another example of a readily accessible matrix expansion involving interconnection of existing routes would be the operation of a local service between Cheyenne, Wyoming and LaJunta, Colorado via Denver, Colorado Springs and Pueblo, connecting the Central and the Southwest Transcontinental Corridors and the markets served by each.Both individually and in the aggregate these kinds of expansions of train operations involve relatively slight increases in route miles operated (URPA estimates on the order 5% to 7%). The characteristically nonlinear, exponential expansion in utility of the resulting matrix of services will drive ridership, and more importantly output (measured by revenue passenger miles), exponentially in markets served.
  2. Measurement of performance by output, revenue passenger miles, rather than transactions, ridership, is critical. Performance of any transportation activity that does not involve a single, flat fare (as is common in many urban transit operations) is by unit miles: freight carriers measure output in terms of ton miles of transportation provided; airlines in terms of revenue passenger miles flown.Amtrak is no different. Because fares are distance measured, output also must be distance measured, by revenue passenger miles. Ridership, which simply measures the number of transactions, is a useful measure of output only where the price charged per transaction is the same irrespective of distance. An extreme example illustrates the point: a static equipment display might generate very high “ridership” in the number of persons who view the equipment, but the transportation output is zero. Another illustration is the relative economic value of ten passengers carried 100 miles each on a corridor train, as compared with five passengers carried an average distance of 800 miles each on a long distance train. Even if the corridor fares are set at price levels that are three times higher than the long distance price, the economic value of the five long distance passengers substantially exceeds the economic value of the 10 corridor passengers, while the cost to transport the 10 corridor passengers is at least the same, and can be much higher, than to carry the long distance passengers. This is why the Coast Starlight, Amtrak West’s single long distance train (Los Angeles – Seattle) frequently produces more annual passenger miles and revenue than all of the 22 daily San Diego – Los Angeles – Santa Barbara corridor trains combined, on one quarter the ridership.
  3. Rail employment will increase significantly. For Amtrak to expand its output by a factor of between three and five, the number of train operations will have to triple, at least. This will make Amtrak the only significant source of growth in rail industry employment in the next 20 years if this strategy is pursued, and will mean as many as 10,000 new represented employees in that same period.
  4. Amtrak’s output, measured by revenue passenger miles, will grow rapidly. It will quickly swamp the lift capacity of existing rolling stock.¹⁵ Amtrak’s existing asset base is already stretched beyond reasonable operating and maintenance capabilities to service existing business. To triple or more the scale of train operations and the output of the system will require a substantial increase in the number of rail vehicles employed. For Amtrak to break even will require introduction into the system of between 1,000 and 1,500 new long distance rail passenger cars, together with associated locomotives. The procurement of these rolling stock assets will not require public capital subsidies. These assets, railcars, locomotives, and associated maintenance facilities, can all be self-financed from private sector sources based on their own inherent revenue-producing capability.¹⁶
  5. Computer simulations and empirical experience suggest strongly that available volumes of traffic cannot be handled with existing frequencies. In most long distance markets, a minimum of three or perhaps four daily frequencies will be required to service the demand generated by the expanded matrix. The Atlantic Coast Corridor, which today fields five different daily frequencies, is a model of such a fully-developed corridor, despite its thoroughly dysfunctional route alignment within Florida. That point is significant also because it demonstrates that operation of five daily passenger frequencies over heavily trafficked main lines of host freight railroads does not result in significant impairment of the host railroads’ ability to provide normal freight service to their customers.
  6. Amtrak’s relationship with state and local transportation agencies must be significantly reformed. The type of growth envisioned by the plan cannot occur if Amtrak persists in maintaining a “customer” relationship to state agencies. Rather, Amtrak must take on the role of a joint venture partner with those agencies in providing services to the public which the agencies might choose to sponsor in addition to those being provided by Amtrak, and by the various regional corridor operating entities.In addition, Amtrak should not own and operate station facilities any more than the trunk airlines own and operate airports. Provision of fixed terminal facilities for rail as well as for air and other transportation modalities should be the responsibility of state and municipal agencies. Amtrak (or an independent entrepreneur operating the station under franchise from Amtrak) would become a leasehold tenant of those facilities in the same way that the airlines lease gates (and other facilities) from airport authorities.Smaller community passenger train stations that Amtrak currently controls through ownership or lease from the host railroad can and should be franchised to local entrepreneurs to operate as private businesses, often in conjunction with other businesses, such as a restaurant, florist or car rental office. To the extent that Amtrak’s employees are interested in assuming those entrepreneurial opportunities, Amtrak can easily provide a favorable financing package and training support to enable its current station agents to take on an entrepreneurial role operating the Amtrak station as part of a larger business opportunity in the facility.
  7. If Amtrak carries out the plan as envisioned, it will be at a point after five years where it will no longer need federal subsidies. Some very limited capital programs may be required; this will need to be more fully developed in a comprehensive business plan and capital budget to be developed by the new Amtrak entity in preparation for its spin-off from NRPC. But, because existing long distance services are all generators of positive net cash flows on operations, it is inescapable that a carefully phased expansion of the scale of those operations will eventually drive the aggregate operating margin from those services above the total cost of the operation, and eventually above the real total cost including fixed charges and depreciation.
  8. Amtrak’s relationship with the host freight railroads will also have to change significantly. In most cases, the host railroads regard Amtrak as at best a nuisance, and at worst a costly interference with their ability to provide freight transportation services to their customers.While Amtrak will require statutory trackage rights access to the host railroads’ facilities, the rent paid to the host railroads in exchange for that access must be compensatory to the host railroad of the costs incurred by reason of Amtrak’s use of their facilities, as the incremental user. We propose that increased compensation be provided to host railroads in the form of growth incentives, by which the host railroad will share in the financial rewards associated with expansions in the scale and frequency of passenger services over their lines. This will create, for the first time, an incentive to the freight railroads to welcome increased Amtrak usage of their facilities, and at the same time compensate them appropriately for that usage.In addition, for capital improvements to track, structures and communication and control systems which Amtrak chooses to sponsor, the tax credit mechanism described above is an appropriate way for the host railroad to be compensated for the cost of infrastructure enhancement necessary to support publicly-desirable expansions of intercity passenger service, until that service grows to the point where it can generate even its own capital needs.
  9. Amtrak’s current initiative in expanding mail and express service as an adjunct to its primary passenger carrying mission is beneficial, and should be aggressively expanded, but not at the expense of providing high quality service to passengers. The expanded scale of operation contemplated, over the slightly expanded route matrix, should open up the possibility for a substantial increase in Amtrak’s relationship with the U.S. Postal Service, as well as with package express companies.
  10. If Amtrak’s output can be expanded by a factor of 300 to 500%, it will, for the first time, make a meaningful contribution in the markets it serves towards reducing peak demand for finite roadway and airway facilities. As the incremental cost of providing expanded capacity in Amtrak’s intercity rail network is a trivial fraction of the cost of providing comparable carrying capacity in either roadway or publicly financed airway systems, it follows that the proposed expansion of Amtrak interregional passenger services will avoid (or at least defer for 30 or more years) significant public outlays that otherwise might be necessary in alternative transportation modalities.
  11. By providing an immediate and substantial increase in the visibility, utility and usage of intercity rail passenger services, the expansion of Amtrak’s interregional long distance services necessary to take it to a self-sustaining level of operation will also increase public awareness of rail passenger service as an alternative to highway and airway services, and increase public support for the disproportionately large public sector capital expenditures that will be required to develop higher speed operations in regional corridor networks operated by the independent franchisees of those services.
6. Time lines.
  1. The program described above cannot be implemented “overnight.” By the norms of American business practice, a planning process of 12 to 18 months duration would be required to execute the spin-off of Amtrak from NRPC.The new Amtrak will have to take delivery of hundreds of additional passenger cars and locomotives before it can experience any measurable increase in output and financial performance. Under the best of circumstances, two to three years would be required from the time an equipment order was placed until first deliveries could be expected, even from multiple providers. Locomotives can be delivered under current circumstances within approximately one year of being ordered.Thus, even if equipment orders are placed before and in anticipation of Amtrak being spun off from NRPC, it will be three years at a minimum before any noticeable increase in carrying capacity can be offered to the public. As cars are delivered at a steady pace thereafter, capacity and output can be increased accordingly, first by lengthening existing trains; then by route extensions; then by beginning the process of creating connecting links between existing route systems to expand the national matrix; then by multiplying frequencies. By that point it will become necessary for Amtrak to begin the systematic replacement of its oldest Superliner and other rail car assets. Only after that would Amtrak contemplate the inauguration of entirely new routes or services, which is the most costly, risky and difficult form of expansion to undertake.
  2. Amtrak, as an operator of a national network of long distance passenger services, should concentrate on its core mission, just as the restructured owner of the NEC should be focused on its high speed and corridor functions. We perceive no reason why management of the new Amtrak should have its capital or management attention and resources tied up in collateral functions that can better be performed by other, more capable and better capitalized, organizations. Thus, functions that are not critical to the performance of its core mission should be outsourced immediately to others who are better qualified to perform those functions. For example, the central reservation system, largely a computer database operation, should be outsourced to a firm such as EDS, or SABRE. Equipment maintenance and overhauls should be outsourced to the fleet manufacturer or another specialist in that activity. As NRPC did with the ACELA trainsets, so Amtrak will procure future fleets of rail cars under lifetime maintenance contracts with manufacturers, or others.
  3. Some time must be allowed for the new Amtrak to negotiate suitable collective bargaining agreements with its represented employees. The plan proposed is not likely to be successful if the new Amtrak continues to be afflicted with the mediocre labor-management relations that have characterized NRPC’s relationships with its employees in the last 10 years. For example, there is no reason that the new Amtrak could not and should not establish as a specific goal being listed on the Fortune Magazine list of the 100 best companies to work for in America, within a period of three to four years (the minimum period required to qualify for listing) after being spun off. Amtrak will employ leading-edge collaborative labor-management relations practices gleaned from the most successful unionized businesses in America.
  4. Unlike the current NRPC organization, which appears to be unable to reduce its exempt, “management” staff below 1,400 or more employees, the new Amtrak management structure could be staffed with as few as 150 officers and management employees.NRPC’s 19^th century railroad-model corporate organization structure is also utterly obsolete, and would be replaced by a 21^st century corporate organization structure based on a holistic, dynamic model requiring full interdisciplinary cooperation among all functional elements of the corporation. National-level consulting resources exist to assist in creating such a structure. A model is attached as an Appendix.
  5. The timelines for procuring necessary new rolling stock are outlined above. This plan does not require significant federal capital financing assistance for the acquisition of rolling stock and related maintenance facilities. Those costs can readily be “bootstrapped” through the earnings capability of fully deployed trainsets of this equipment, even with acquisition and full lifetime maintenance costs factored in. The full acquisition, maintenance and financing costs (costs of capital) associated with the acquisition of fleets of new Superliner rail vehicles, including associated “nonrevenue” cars and locomotives, can easily be financed out of the earnings capability of those cars in typical deployment in western interregional long distance services. The fully burdened cost of such cars, ordered and deployed in trainsets, does not exceed 25% of the typical cash earnings capability of those cars, leaving generous cash flows available to finance other aspects of the corporation’s activities. Amtrak’s interest cost on debt will not increase as a result of these equipment orders.Some transitional capital assistance will, of course, be needed, but this plan anticipates that by approximately year five, no further federal subsidies would be required, other than programmatic infrastructure financing support to host railroads provided through a tax credit mechanism.Other capital needs can be satisfied through the proposed joint venture partnerships with state and municipal agencies, and possibly equity positions taken by package express companies, or railcar vendors.The scale of financial assistance to the new Amtrak contemplated by this plan would be at current levels for approximately three years (i.e., about 25% of the current level of federal support for NRPC; the NEC owner would continue to receive the remainder of available federal funding), followed by two years of rapidly declining federal funding support as new fleets of rail cars are brought into service, and no direct federal financial support needed, beginning in year six.
  6. Changes in the current scale and pattern of Amtrak intercity operations would not become visible for the first two to three years after implementation of this strategy. Beginning in about year three, however, significant changes would become apparent, primarily in the volume of intercity rail passenger transportation service provided. Full concept implementation would occur in approximately year nine, when sufficient stocks of rail vehicles had been put into service to create a fully utilized national matrix.
AN EXIT STRATEGY.

The United States had a very favorable overall experience with the rehabilitation of Consolidated Rail Corporation. Following federal consolidation into Conrail of the six railroads involved in the Penn Central bankruptcy, and after those railroads were streamlined and rehabilitated, the United States successfully floated an initial public offering (“IPO”) of Conrail stock. Conrail continued to operate as a highly successful private sector, publicly-traded, rail business corporation for several years until it was acquired in 1999 by CSX and Norfolk Southern.

Similarly, the spun off new Amtrak should be in a financial position by approximately year nine after the spin off for the federal government to be in a position, should it wish to do so, to make an IPO on Amtrak stock as well.

We believe that a significant minority portion of the equity in Amtrak should be reserved for Amtrak’s employees, management and labor alike, as an incentive for enhanced performance during the intervening years after the spin off.
THE PLAN.
1. Spin Off NRPC’s Major Components. NRPC is a failure by any objective business criterion. The financial results it has achieved are the inescapable consequences of the strategies it has pursued. As with any American business that has failed after a long period of time and ample opportunity to prove or disprove its capability to reach a self-sustaining level of operation, NRPC should be broken up in a manner consistent with norms of American business, and with the ongoing public policy objective of providing economically rational intercity rail passenger transportation services.NRPC should be broken up into the following constituent parts, each of which should be spun off as a separate legal entity under autonomous management:
  1. The current NRPC entity will be renamed ACELA Corp., and will be charged with a primary focus on the Northeast Corridor, and a secondary mission to support other emerging high speed rail corridors. It will retain its current Board, management, and assets not spun-off to other entities.
  2. North American Rail Corp. (“Amtrak”) will be created, with a focus on all U.S. interregional long distance rail services, mail and express business, and related rail and highway feeder services (other than those provided by the regional hub corridor operators). Currently, NRPC operates about 30 trains a day that would become the province of the new Amtrak.
  3. The following regional corridor networks each should be set up as a separate, autonomous, business organization: the Chicago hub, and the related Midwest regional high speed rail initiative; the Cascades Corridor, in the Pacific Northwest; the Southern California Corridor operation, which hubs at Los Angeles; the Northern California and San Joaquin Valley operation, based in San Jose; the Piedmont regional operation in the Carolinas; and, allowance for possible future regional corridor entities operating services in Florida, Ohio, Texas, and New Orleans-based Gulf Coast Corridors.
  4. ACELA Corp. would retain substantially all of its existing engineering, infrastructure construction and maintenance, equipment maintenance, power generation, policing and other functions, assets and staff. Similarly, existing NRPC assets that the autonomous operators of the regional corridor services might want to take in the spin off should be allocated to them. The new Amtrak would take only those rolling stock and related assets that were directly related to its core functions, as it would intend to outsource all other peripheral functions.
2. Franchising. The break-up of British Rail was accomplished by franchising operating rights over defined segments of Railtrack-owned infrastructure to bidders who competed to acquire the franchises. A franchise is a license of intellectual property rights. It is a granting of permission to another party to use intangible property of the licensor in the conduct of the licensee’s business or other activities. Thus, the British government authorized Stagecoach, Virgin, and numerous other private sector businesses respectively to operate defined portions of the former British Rail network. Freight operating rights were similarly franchised out to an entity formed by the Wisconsin Central Railroad.Franchising in the break-up of NRPC would have some relevance to the extent that the U.S. Department of Transportation would empower the different operators of the components of NRPC to exercise NRPC’s statutory trackage rights and other privileges under the Rail Passenger Services Act of 1970 as amended.Amtrak would employ franchising itself in the conduct of its long distance train operations by franchising to local entrepreneurs, who might be the existing Amtrak station agents, the right to operate Amtrak ticketing facilities at the local station. Amtrak would also franchise private sector motor vehicle operators to function as feeders to Amtrak long haul routes in markets not reachable by rail in much the same way that the trunk airlines franchise the so-called commuter carriers to feed traffic to them at their hub airports.
3. Structure for North American Rail Corporation.
  1. North American Rail Corporation would be a new, separate corporate entity formed under the Delaware Business Corporation Act, and be spun off from NRPC. The initial “equity” shareholder would be the U.S. Secretary of Transportation.
  2. The effective date for the spin off would be approximately 15 months after Congressional approval of the plan. That period of time is necessary to plan and implement the spin off.
  3. North American Rail Corporation would be managed initially by a Board of Directors consisting of one director appointed from each of the following constituencies: Rail Labor (probably the United Transportation Union); Association of American Railroads (to represent the interests of Amtrak’s host railroads); one representative from each significant equity investor (see below); the Secretary of Transportation; a Governor of a State, appointed by the National Governors Conference; Amtrak’s CEO; and two outside directors who are CEOs of publicly-traded consumer-service oriented businesses not otherwise connected to the rail industry (these individuals would be appointed by management, subject to the approval of the Secretary of Transportation).
  4. Management of the new Amtrak entity during the 15-month planning period would engage expert consultants to advise them in designing a capital structure, capital budgets, and cash flow for the new organization; to define a specific management structure and organization design; and to design and install an entirely new management information system and financial accounting system based entirely on Generally Accepted Accounting Principles. Management, with the advice of its consultants, would select those assets, facility and staff for which it would assume responsibility on the effective date of the spin off.A simplified example of the type of 21^st century organizational design and vision for the new Amtrak is attached as an appendix.
4. Federal Legislation Will Be Required. To execute a spin off of this character, federal legislation will be required:
  1. A universal trackage rights act, affording Amtrak (and the other regional corridor operators) reasonable access to the facilities of the host railroads. A brief summary of such an act is attached as an appendix.
  2. The new Amtrak must transition coverage of its employees to state workers compensation systems.
  3. Some other mechanism must be provided for sufficient and appropriate levels of funding to railroad retirement. The new Amtrak will be fully accountable for the costs of its retirees, but whatever level of subsidization Congress might choose to provide to RRA accounts for other retirees must be channeled through different means than the Amtrak budget.
  4. A simple exemption should be provided to Amtrak from all FTC, federal and state franchise laws, in order to afford it a reasonable opportunity to implement its survival strategy without undue cost.
  5. The new Amtrak should be authorized to issue tax exempt bonds for qualifying transitional capital programs under supervision of the Secretary of Transportation; a tax credit mechanism should be enacted for joint capital investment programs with host railroads in railroad infrastructure of primary benefit to the passenger service; and some reasonable provision should be made to afford Amtrak with some net operating loss carryforward (from NRPC’s books) to cushion it from the full impact of state and federal taxation until such time as it (like Conrail) is capable of supporting that burden.
  6. The transitional statute providing for the spin off of Amtrak from NRPC must mandate cooperation and interlining among various operators of rail passenger services (including ACELA Corp.). That transitional statute should also direct each of the constituent entities to focus exclusively on its respective core mission for a stated period of time (four years) but by law allow each of those organizations, after expiration of the transitional period, to compete for whatever aspect of intercity rail passenger service it believes it can provide profitably. Thus, if, for example, a Midwestern state wished to implement a high speed rail development program, Amtrak, the affected regional corridor operator, and ACELA Corp. each would be free to compete for that business, with ACELA offering its vision of high speed rail, and Amtrak and the corridor company offering their respective separate visions. Similarly, if ACELA Corp. believed that it could successfully operate a rail passenger service from its core area in the Northeast to Florida, it would be free to offer such a service in competition with Amtrak, subject to negotiating appropriate agreements with the host freight railroads.
5. Strategic Partnerships. The new Amtrak would have to forge strategic partnerships using the best practices of American business in the 21^st century.These partnerships would include fundamentally redefined relationships with employees represented through collective bargaining agreements, substantially more remunerative and cooperative relationships negotiated with host railroads, and long term contractual relationships with providers of outsourced services, such as computer reservation services and equipment maintenance.Amtrak must immediately repair and restore its relationship with private sector travel agencies and tour operators. Significant opportunities exist, which NRPC has never exploited (and in some cases, actively repudiated), to act cooperatively with travel agents, tour providers, operators of cruise ships, tourist destination locations, and operators of private rail vehicles, all to drive demand for intercity rail passenger transportation services.In anticipation of the prospective benefits of an IPO, the new Amtrak should actively solicit equity investments from parties with structural interests in the existence and success of Amtrak. These would include equipment suppliers, major express shippers, contract rail labor, and possibly even the host railroads. For example, it is not unreasonable to expect that a company such as United Parcel Service might be interested in negotiating with Amtrak to become an equity investor in Amtrak in exchange for the benefit of having access to Amtrak’s statutory trackage rights and its eventual IPO. If appropriate strategic partnership relationships are worked out with the host railroads, all interested parties could enjoy the benefits of incremental business generated from such multi-party relationships. Similar investment scenarios can be developed with equipment suppliers who would have a strategic interest in the long-term survival and growth of Amtrak, in light of its need for many hundreds if not thousands of new rail cars and related equipment.
6. Exit Strategy.
  1. The ultimate goal of the spin off of Amtrak from NRPC is a Conrail – model IPO at approximately year 9 or 10, with piggyback rights for other equity investors.No other plan affords the federal government the combined benefit of enjoying a substantial increase in the scale and reach of intercity rail passenger service, combined with an early ramping down of federal financial subsidies associated with such an operation, together with an ultimate cut-off date for all such federal involvement.
  2. The new Amtrak, if structured on the plan described in this report, would be in a position to make an absolute commitment to the federal government as part of the statute directing the spin off from NRPC that beginning with year six following the spin off, it would neither seek nor receive any federal subsidization (other than participation in other programs generally available to others in the economy, such as research and development programs, grade crossing elimination programs, safety innovation, etc.). If, after following implementation of the plan described above, the enterprise eventually fails, it should be liquidated.

Footnotes.

NRPC was formed pursuant to the Rail Passenger Service Act of 1970.
In its performance report to Congress (in FY 2000) requesting more than $900 million in federal subsidy in FY 2001, NRPC reported that without these funds, and authority to expend them on substantial costs associated with equipment maintenance and maintenance of way, NRPC would not “. . . make it, on a cash basis, through FY 2001.” In June, 2000, the U.S. GAO identified more than $9 billion in unfunded capital needs for Amtrak through 2015, predominantly in the Northeast Corridor (NEC) between Washington, D.C., New York, and Boston.
Plus substantial subsidy from several states.
Equivalent levels of subsidy will continue to be required each year into the indefinite future. The GAO recently identified unfunded needs for more than nine billion dollars of additional capital subsidy be incurred over the next 15 years.
Certain high density, shorter distance corridor operations, like most urban transit services, are by their nature incapable of operating without substantial ongoing public financial support.
In 1970, the Penn Central operated about half of all then-surviving intercity passenger trains in the U.S., most of which operated on the NEC between Boston, New York and Washington, D.C. Penn Central was hopelessly bankrupt.The federal government feared a general breakdown of the rail freight industry, the annual returns on investment of which had been negative for a decade. Amtrak therefore also played a significant role in meeting an unstated goal of the Rail Passenger Services Act of 1970, which was to quarantine the bankruptcy of the Penn Central, and the five other northeastern railroads which became involved in the Penn Central bankruptcy, and prevent that bankruptcy from cascading out into the rail freight industry elsewhere in the country. The government’s plan, which was highly successful, was to relieve the railroads of their passenger services to enable them to be reorganized, reformed and revitalized. This plan was highly successful in the case of Penn Central and Conrail, and culminated with the Staggers Act, in 1980, which revitalized the industry by economically deregulating it.
NRPC’s reported loss and federal subsidy more than doubled overnight in 1975 when it assumed ownership (from Penn Central, at the direction of the U .S. Railway Administration) of most of the Northeast Corridor railroad property. The USRA orchestrated the transfer of ownership of the NEC from Penn Central to NRPC to move its intractable losses and billions of dollars in deferred maintenance off PC’s books and onto Amtrak’s, as a first step to rehabilitate, financially, what became Conrail. USRA’s assumption then was that NRPC would always continue to be subsidized, a view that was corroborated by Congress’ unequivocal acceptance of NRPC’s doubled subsidy need in subsequent years. NRPC’s ownership of the NEC is, however, 100% mortgaged to the United States.
Short distance corridors must offer high frequencies, automobile-competitive speeds, and low fares in order to draw sufficient ridership to be worth conducting the operation in the first place. High frequencies and even modest speeds (90 mph) require large amounts of capital. Very high ridership is necessary at market-constrained prices to cover operating costs, but rarely if ever reaches levels sufficient to recover capital costs (measured by GAAP depreciation charges). Short distance corridors, therefore, are structurally diseconomic even at relatively high levels of ridership and social utility.
Even in the NEC, and after nearly $20 billion in “investment” of federal funds, Amtrak’s market share is only approximately 12% and shrinking and there is no convincing evidence of modal cross-elasticity of demand between rail and air transportation services. More than $9 billion in unfunded capital needs still exist in the NEC just to maintain it at its current level of utility.
Barriers to entry consist primarily of huge capital costs and, more importantly, the intrinsic economies of scale associated with characteristics of flow through large polynodal networks.
Railroad bankruptcies under U.S. law are handled under Chapter 11 of the Federal Bankruptcy Code, even in cases of liquidation.
By Dr. Adrian Herzog, Vice President – Research, United Rail Passenger Alliance, Inc.
Railtrack itself is a privately owned, publicly traded entity. It is a regulated monopoly answerable to an officer of the national government. The relationship is very loosely analogous to the relationship between the U.S. Postal Service and the U.S. Postal Rate Commission.
It will also allow consolidation of all California Superliner maintenance at Los Angeles. The avoided maintenance cost savings alone are enough to pay the direct operational costs of the extension.
Load factors on western long distance trains are already at or near their theoretical upper limits in many segments in many months of the year.
On the other hand, introduction of public capital to finance the acquisition of these cars, by reducing the cost of capital and the acquisition financing cost, would accelerate the point at which Amtrak would become fully self-sustaining financially.

A Plan to Reorganize the National Railroad Passenger Corporation (2002)

INTRODUCTION AND OVERVIEW

THE STATUS QUO IS A FAILURE

SUMMARY OF ADVANTAGES AND DISADVANTAGES OF EACH MAJOR ALTERNATIVE

HOW PRIVATE BUSINESS COPES WITH FAILURE

WHY BRITISH RAIL’S PRIVATIZATION IS NOT DIRECTLY APPLICABLE TO AMTRAK.¹²

THE MARKET POTENTIAL FOR INTERREGIONAL RAIL

AN EXIT STRATEGY.

THE PLAN.

Footnotes.

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United Rail Passenger Alliance

A Plan to Reorganize the National Railroad Passenger Corporation (2002)

INTRODUCTION AND OVERVIEW

THE STATUS QUO IS A FAILURE

SUMMARY OF ADVANTAGES AND DISADVANTAGES OF EACH MAJOR ALTERNATIVE

HOW PRIVATE BUSINESS COPES WITH FAILURE

WHY BRITISH RAIL’S PRIVATIZATION IS NOT DIRECTLY APPLICABLE TO AMTRAK.12

THE MARKET POTENTIAL FOR INTERREGIONAL RAIL

AN EXIT STRATEGY.

THE PLAN.

Footnotes.

Pages

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Archives

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Discussion Groups

Rail Travel

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WHY BRITISH RAIL’S PRIVATIZATION IS NOT DIRECTLY APPLICABLE TO AMTRAK.¹²