When push comes to shove, what Amtrak will axe

Posted by Fred Frailey
on Saturday, October 29, 2011

Cardinal in Charlottesville VAJoe Boardman, the president of Amtrak, penned a note to employees the other day that offers clues to what the company would do if Congress cuts its operating grant. He notes first that the best guess is that the Senate will appropriate $1.48 billion in operating and capital grants, which is far short of the $2.2 billion the company had sought. That amount included $600 million for operations, $1.3 billion for capital needs and $200 million for debt service.  A House committee has approved far less in operating subsidies — a mere $227 million, while also cutting capital grants — but the full House has not acted. Once both chambers of Congress have passed appropriations, a joint House-Senate conference committee will reconcile the two measures. What Boardman said this week is, expect to get by on less.

Auto Train in VirginiaBoardman then says: “We have a great future and we cannot abandon our investments or our plans. We don’t have that luxury, and our customers expect us to get better while some of our detractors expect us to fold our tent. We will not do that. We need to create an organization and a culture that can manage the ambiguity that comes from the annually changing government support. . . . We will continue to make the investments that will yield a more efficient and reliable Amtrak.”

He goes on to say that Amtrak will use the strategic plan released earlier this month strengthen its bottom line (to read that plan, go here and click on "Fiscal Year 2011-2015 Strategic Plan"). If you put what Boardman says in his letter to employees together with facts contained in that plan, it becomes clear that Amtrak’s 15 long-distance routes are sitting ducks.

How can I draw that conclusion? First, I have it on good authority that Boardman, in discussions with his top aides, defines Amtrak’s priorities toward train service as Northeast Corridor first, state-supported short-distance trains second, and long-distance trains a distant third. Were I in his shoes, I’d do the same thing. There was also a defining moment in a Senate hearing this year, when asked by Susan Collins, R-Maine, why Amtrak's deficit for 2011 was rising despite increased ridership, that Boardman blurted in response, "It's the long-distance trains!"

Next, his letter says Amtrak will not abandon its investments or its goals. These investments are primarily in the Northeast Corridor and secondarily in short-distance services. Outside of stations and facilities, the long-distance trains have not required sizable capital infusions for several decades.

Now, assume that Amtrak must make do in fiscal 2012, which began this October 1, on, say, $200 million less in operating subsidies. Where will it come from? Not from the Northeast Corridor! The strategic plan notes that the NEC has a operating ratio of 88, meaning that for every $1 in operating revenues, there is just 88 cents of operating costs. No way will Amtrak cut off this arm, which on the face of it isn’t even bleeding.

Nor would a lower subsidy be felt much by the short-distance services. Their operating ratio, according to the strategic plan, is 130, meaning that for every $1 of revenue come $1.30 in costs. But Congress requires that starting 24 months hence states must cover any operating loss. So soon enough the short-distance trains will be at breakeven on Amtrak's budget.

That leaves the long-distance trains, with an operating ratio of 209 ($2.09 in costs for every $1 in revenue). Like it or not, these trains have the least collective ridership and the worst financial profile. Together, their fully allocated losses in fiscal 2010 came to $307 million. The losses of short-distance trains amounted to one-third of that, and the NEC made an operating profit of $70 million.

To my way of thinking, a meaningful cut in the operating subsidy can be achieved easily only one way, by making sizable reductions in the number of long-distance trains. Which trains are most vulnerable? One way of looking at it is to identify those with the worst ratio of cost recovery. The five biggest losers—that is, the trains with the highest operating ratio—are, in order, Sunset Limited, Cardinal, Silver Star, Crescent, and Southwest Chief. (The Cardinal is in the upper photo, loading passengers in Charlottesville, Va.) At the other extreme, the five long-distance trains with the best cost recovery are (again, in order) are Auto Train, Empire Builder, Palmetto, Capitol Limited, and Silver Meteor. (That's the Auto Train in the lower photo, in central Virginia.)

Of course, it isn’t all that simple. When Boardman takes that axe to a flock of long-distance trains, he will discover that they enjoy the support of many powerful senators and governors. Take away “their” trains, and there may go support for the Northeast Corridor. In addition, train-off campaigns will hit Amtrak’s unions in the solar plexus, and Boardman has consistently gone out of his way to coddle Amtrak’s unions.

His other alternative is to cut costs in ways that avoid removing trains. Amtrak has 17 vice presidents or equivalents, and each of them has staffs. A rational organization chart would include VPs for operations, marketing/on-board services, law, human resources, planning, and public affairs. So taking a whack at management positions is a no-brainer. Boardman could also cut Amtrak’s $115 million advertising and sales budget by $40 million or more, at least in the short term; it would still equal about what was spent on these functions in 2006. But neither of these alternatives save the company $200 million. So we go back to the long-distance trains.

Before the shouting starts, I realize the conundrum of Amtrak finances: The long-distance trains run up huge operating losses but require little capital; the NEC trains essentially break even on operating costs but require huge capital infusions. Put another way, the operating losses of long- and short-distance trains about equal the capital requirements of the Northeast Corridor. But as I understand it, the capital budget is less threatened than the operating budget at the hands of Congress this year.

That’s my reading of things. Okay, shoot the messenger. — Fred W. Frailey

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