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The subject of Open Access rears its ugly head
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<p>Falcon48</p> <p>I appreciate your response. It is well thought out.</p> <p>I agreed that fully allocated cost and avoidable cost are different cost accounting concepts. Allocating shared costs, i.e. management, common overheads, is tricky. And discontinuing a line of business would not eliminate all the shared costs, as you point out, although it could eliminate some of them, i.e. elimination of a passenger reservation system would reduce the amount of CPU capability a railroad's IT group required to hoist the passenger reservation system. The remainder, of course, would be reallocated to the existing business lines.</p> <p>My perspective is that the railroads by the late 1950s or early 1960s could not cover the variable costs associated with most if not all of their passenger trains. They were eating into the seed corn. I don't have the numbers; I'll bet that they would be hard to get, especially now, but a friend of our family, who was a VP for the Pennsylvania Railroad, told us some horror stories about the money that the PRR was losing on its passenger trains, especially after 1958.</p> <p>I worked in accounting, finance, and audit for several Fortune 500 companies for more than 40 years. We had some lines of business that did not earn their fully allocated costs, but as a rule we did not keep them very long, especially if they were not part of our core competencies and business lines. In fact, on several occasions, we spun off lines of business that were marginally profitable on a fully allocated cost basis to obtain the resources to diversify into more profitable lines. I realize that a railroad, which has some of the attributes of a public utility, may not have been as free to drop marginal lines of business, i.e. passenger traiins, as the companies that I worked for, but in the long run a truly successful business covers its fully allocated costs on all of its lines of business or drops them.</p> <p>There is another cost associated with lines of business that don't cover their fully allocated costs, even if they cover their variable costs and contribute something to the fixed costs. Management focus! If management has to spend a lot of time worrying about marginal lines of business, it can lose the focus on the lines that are really important. I believe this is the reason that IBM got out of the PC business. </p> <p>I favor competitive markets. If the politicians would agree to drop the long distance trains, and allow competition in the high density corridors, there may be some operators, perhaps a railroad or two, that could cover the variable costs and make a decent dent in the fixed costs. The pricing structure would have to change. And so too would the management and labor compensation packages. Amtrak appears to behave like a government bureaucracy. Where is the competitive incentive to do things better, faster, cheaper, with the operative word being better? </p> <p>In any case, at the end of the day, creating Amtrak was a huge mistake. To date it has incurred losses of more than $27 billion, with an opportunity cost approaching $80 billion.</p>
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