Fred Frailey Blog

Is the Northeast Corridor really profitable?

  • Comments 9

A recent Washington Post story quotes Amtrak president Joe Boardman as saying the Northeast Corridor, between Boston and Washington, is making its owner money. In fact, Boardman goes on to say, the Acela Express service enjoys a profit margin of 40 percent. You’ll find that story here (the statement is made on page 3).
 
The story ended up on Trainorders.com this week and provoked a firestorm of responses. But all they did was generate a lot of smoke. Nobody sought to check the underlying facts, available to anyone who looks on Amtrak’s website. To see for yourself, go here and call up the “Monthly Performance Report” for September 2010, which has audited financial results for each Amtrak route for fiscal 2010, which ended last Sept. 30.
 
So is Boardman right? Go to page APP-19. It shows Acela Express revenues of $450 million and after all direct and indirect expenses, a profit of $105 million, for a profit margin of 23 percent. Other NEC trains show a loss of $43 million on revenues of $470 million. Well, 23 percent is not the same as 40 percent. But as Boardman says, taken together, the NEC trains covered all their direct and indirect costs, with $61 million left over.
 
The results are better if you call up the March 2011 “Monthly Performance Report,” covering the first seven months of fiscal 2011. The Acela Express enjoys a profit margin of 31 percent, the rest of the NEC breaks even (almost), and the corridor as a whole is $71 million to the good. So while Amtrak’s boss exaggerates the Acela’s profit margin a tad, he’s correct in the larger sense. Give Joe a passing grade of B.
 
But in that Washington Post story, Boardman qualifies his statement in one important respect. To cover the Northeast Corridor’s capital costs, Amtrak still needs a government subsidy, he says. That is correct. How much are capital costs, on average? For the answer to that, go back to that same link and refer to page 4 of the 2009 report titled, “Northeast Corridor State of Good Repair Spend Plan.” There, it estimates the NEC’s annual, normalized capital needs the next 15 years as $368 million for infrastructure and equipment. Last fiscal year’s NEC operating profit of $61 million covers only one-sixth of that capital need.
 
Then the thought occurs to me: Has the NEC in recent times ever covered both its total operating and capital costs from revenues? Amtrak.com today cannot provide the answer. But the Wayback Machine, an internet archive at www.wayback.org, takes you to Amtrak.com as it existed at various points in time years ago. And in the monthly report covering fiscal 2008, which ended just as the economy topped out prior to the Great Recession, I make a remarkable discovery.
 
That year, the Acela Express cleared all its costs with $220 million to spare, and the other NEC trains cleared their costs as well, with $149 million left over. That adds to $369 million, or a million bucks more than the corridor’s normal capital needs. That’s an important fact and worth remembering. In a sparkling business environment, the Northeast Corridor is capable of making a profit, any way you want to state it. Maybe that will be one year in five or 10, but it’s possible. Take heart, folks. — Fred W. Frailey

|
  • While Amtrak's annual reports are audited, the Monthly Performance Reports are unaudited.  One would have to spend weeks in examination of Amtrak's acccounting system before having much confidence in the numbers presented for individual routes.  There was a report a couple of years ago from a state official (Illinois?) who was attewmpting to verify Amtrak's costs in order to negotiate the state subsidy that the cost data was unreliable.  

  • When he was under pressure from the Bush Administration and the Amtrak Board to sell off the Northeast Corridor, Dave Gunn addressed the issue of the NEC making a "profit" while all the other trains required a operating grant, at the time, to the tune of about $350 million.  He noted that for the most part, the long distant and regional services off the NEC had no requirement for capital expenditures for infrastructure, where as the Amtrak owned NEC needed much more than that operating grant in capital expenditures to bring the infrastructure up to and maintain a "state of good repair".  So, while it is great that the Acela service is making an operating profit, my answer to your title for the blog is probably not.

    This blog and the other recent posts on the subject of Amtrak revenue/loss has really gotten into the area of cost accounting. It is one thing to keep good records of all the revenue and expenses for a period, usually a year, follow GAAP (Generally Accepted Accounting Principals) to correctly define expenses as current-things such as train crews costs, fuel, corporate staff wages, food and beverages- or capital-expenses for things that last for a period longer than a year-track, signals, cars, locomotives, buildings and machinery.  Then, after following more GAAP rules, a determination is made as to what percentage of the capital expenditures are to be allocated to the current years expense.  From that effort, it is then possible to produce an income statement reflecting to business's total financial performance for the year.

    For a complex, far flung organization such as Amtrak, collecting the data, checking the integrity, and compiling to produce annual financial reports is a monumental task.  Going the next step to allocate the financial information to define the profit/loss of segments of the business adds a a huge jump in record keeping, as it now becomes necessary to assign each expense transaction to an appropriate segment.  That's not to difficult when reporting the purchase of the catch of the day for the Empire Builder, but how about the process of assigning the cost of a replacement section of catenary on the NEC.  How much of that expense is allocated to Acela, vs., Northeast Regional, vs. the Cardinal or Cresent, vs. MARC's Penn Line service using motors?

    It is not difficult to understand that the result of a cost accounting effort would be the subject of some controversy.  I pose this.  How should the salary and expenses of the Amtrak president be allocated to each segment or train?  Base it on train revenue, expense, train miles, passenger miles, or should he be required to keep a log of time used to address issues of various segments?  What do you think would most accurately reflect the "real" cost.

    On the other hand, we could debate angels on the head of a pin.

  • It's not just the expenses.  

    If a passenger buys a ticket from New York City to Orlando he/she will travel over the NEC for part of the trip.  So how much of the ticket revenue goes to the NEC?

    Depending on how the revenue is arbitrarily allocated any desired financial result can be produced.  It won't really mean anything, but it will be a number that people can argue about.

  • I think the answer is that the NEC comes close enough to "making money" that there is little debate about it's usefulness or Federal funding for capital.

    In fact, the current debate isn't whether there should be an NEC, but how, when and who improves it.

    If the rest of Amtrak did as well as the NEC, Amtrak would not be a political football.

    (...and I would agree that "real allocated costs" is an oxymoron.)

  • Well considering that the Freight RR's give Amtraks Trains outside the NEC low Priority over the Freight RR's own trains, It's understandable that those areas outside the NEC where Amtrak doesn't own Its own rails is a drag on Amtrak as a whole, HSR was for a good while opposed by the airlines and by some of the Freight RR's too, Not to mention Big Oil and a host of other entrenched industries(Special Interest Groups), Amtrak outside of the NEC is a client and hasn't ever really gotten a fair chance or funding to be something to be proud of, Just something for some to ridicule cause they see Passenger Rail to be old fashioned and Obsolete and not cutting edge, Yet more and more people flock to rail worldwide.

  • I just read else where that Amtrak can't be delayed by the Freight RR's, Still Amtrak does need to own more of It's own track outside of the NEC, Like in the Midwest, the Southeast, the Northwest and in California Amtrak should Cooperate with the California voter approved CHSRA. Of course Congress needs to address long term capital improvement needs of Passenger Rail of all types, Instead of trying to kill Passenger Rail to please their Rich Oily Masters... The Interstate Freeway Network is big enough and costly enough to build/expand as prices for land isn't cheap anymore and for Military purposes, Not too relevant anymore with planes like the C130 Hercules and the C5 Galaxy around to transport the military quickly from place to place. Of course there is nothing Free about Freeways, As everytime one fills up, One pays for It and Freeways have never been expected to make a profit, Just to break even, maybe, Yet Passenger Rail is told that It can't have money to expand or repair what It has, And that If It wants to expand It must get the money from scarce profits of places like the NEC(North East Corridor) and that the NEC is a special case, Which Big Oil does not want replicated anywhere(Like LOSSAN[LOS Angeles - SAN Diego] the 2nd biggest corridor in the US I've read), As that would happen if service were fast enough, Cost Big Oil profits from Airplanes not being able to compete with Fast Passenger Rail(HSR), Of course Big Oil gets a Federal Subsidy and yet makes Billions in Profits...

    So Passenger Rail of all types needs a subsidy for Construction to give Americans a choice and not just a risky Monopoly that puts all American Citizens in Danger worldwide, In CA HSR is going to use largely Renewable power and lots of that is being built already and 33% of electrical power in CA must by law now be from renewable energy sources, Like Wind and Solar.

    CA has a Toll road down in Orange County, SR73 I think, That is privately funded and built that is losing money currently, So what did they do to get to 100% of expected revenues during the Great Recession? The Toll road stupidly increased the Toll to $5.00 each way and so discouraged even more traffic and therefore collected less tolls than they did before, Instead Tolls should have been lowered and a PR campaign mounted to attract drivers, but this was not done, So the Toll road is still bleeding red ink, Yet the Far Right will not mention this as It's an almost forgotten thing that private projects for the railroads did go bankrupt in the 19th Century and that the Interstates, State and most Local Roads are today mostly Federally funded, Want a Bridge/Underpass to replace an at Grade Crossing over/under some Railroad tracks or Need some roads repaved? Apply for a Grant If You don't have enough tax revenue. Most of It will be a Federal Grant, then there are usually State and/or Local matching funds, even the proposed expansion of parts of the Tehachapi Rail Line in CA near SR58 is only going to be half paid for by the BNSF Railroad, the rest comes from CA Bond money(Prop 1b).

    Don't get Me wrong I like Trains, Not just Freight, But Passenger too and I always have, Automobiles weren't invented here anymore than the Clock was, Autos are a European invention just like Trains and Airplanes are, Oh and Clocks? China invented that, What did America invent? AC/DC electricity(Tesla for AC and Edison for DC), Electric Lights, the Electric Chair, Television, Telephone, Telegraph, Electronic Computers, I could go on, But why? The list isn't endless, But It is a decent amount I suspect, Oh and Airplanes were merely improved by the Wright Brothers. Rockets and Gunpowder are Chinese inventions, It's just that some say Passenger Trains are Un-American and Socialistic(Gee, Now where did that come from?)... And Passenger Trains are as American as Automobiles and Airplanes are, No more no less, It's just a smoke screen to give some like KOCH Industries more and more power and yep more money for their effort to turn back the clock to the bad 'ol' days of the late 19th Century in America, When Robber Barons almost Ruled the USA from the closed doors of a Board room.

  • There are a few good posters on Trainorders that are familiar with freight railroad accounting...but I don't think there are many familiar with government accounting, which I am sure can vary as much as who is putting together the reports!

  • Uh, Zoom314, the Wright brothers did not just improve on the airplane, they basically invented it.  Up to that point, all human flight was in unpowered gliders or lighter-than-air vessels (hydrogen balloons were used by Union forces for aerial observation during the Civil War).  The Wrights claimed the prize for the first powered flight on December 17th, 1903 on a desolate stretch of sand near Kittyhawk, North Carolina.  If you've never been there, it's worth the trip, much the same as going to Promontory, Utah.  In the genes of every plane flying are traces of a Wright Flyer.  In the sound of every train passing in this country are the taps of a hammer on a golden spike.  Look and listen for them the next time you're out.

Is the Northeast Corridor really profitable?