THis was the headline in TRAINSNewswire of this date:
"Private bidders hint at interest in running Amtrak routes"
Where would this proposal lead, if one of the bidders was a railroad, like, say, BNSF? Who better to understand how to make money on the rails, and who better to know how to work with the freight railroads?
Thanks to Chris / CopCarSS for my avatar.
samfp1943 I think that just about anyone will agree that the only way it is going to happen is for the Federal Regulators to mandate access for operators other than a railroad entity to have the ability to run passenger trains in this country(?). Anyone care to jump in and add their thoughts as to private contractors wanting to run trains on AMTRAK's routes and authorities? Would those contractors be able to get a modicum of cooperation from the 'hosting' roads? Is this issue dead legislatively, and practically?
I don’t think there will be any problem with the freight railroads consenting. I assume that the government could mandate that the freight railroads grant access to the private operators. But is it a forgone conclusion that private contractors could make enough profit on these trains to justify the investment of running them? Perhaps the answer is yes, but I doubt it. That is where the practical limitation come into play.
So, here is the question I have: Will the government subsidize the private operators as an inducement for them to take over the operations? I’ll bet they will.
Only in the large markets. Veolia (breaking up, about to exit the bus transit business) and Herzog are opportunists....if the subsidy from gov't goes away or the liability issue gets dicey, they bail too.
Edit: Don't try to merge FRA and FTA. Separate and distinctively different. Freight railroads have little to do with FTA. (Most transit agencies chafe at the thought of dealing with FRA/ common carrier rules...separates bus people from real railroaders pretty quick.)
Bucyrus samfp1943: I think that just about anyone will agree that the only way it is going to happen is for the Federal Regulators to mandate access for operators other than a railroad entity to have the ability to run passenger trains in this country(?). Anyone care to jump in and add their thoughts as to private contractors wanting to run trains on AMTRAK's routes and authorities? Would those contractors be able to get a modicum of cooperation from the 'hosting' roads? Is this issue dead legislatively, and practically? I don’t think there will be any problem with the freight railroads consenting. I assume that the government could mandate that the freight railroads grant access to the private operators. But is it a forgone conclusion that private contractors could make enough profit on these trains to justify the investment of running them? Perhaps the answer is yes, but I doubt it. That is where the practical limitation come into play. So, here is the question I have: Will the government subsidize the private operators as an inducement for them to take over the operations? I’ll bet they will.
samfp1943: I think that just about anyone will agree that the only way it is going to happen is for the Federal Regulators to mandate access for operators other than a railroad entity to have the ability to run passenger trains in this country(?). Anyone care to jump in and add their thoughts as to private contractors wanting to run trains on AMTRAK's routes and authorities? Would those contractors be able to get a modicum of cooperation from the 'hosting' roads? Is this issue dead legislatively, and practically?
Sure. Lowest subsidy wins the bid. All we are talking about here is contract operators - much like the commuter agencies. They would still have to be technically Amtrak trains as they are the only ones with the rights to operate. It is not a slam-dunk that the frt RRs would negotiate a new deal with a different operator. In fact, it is very unlikely that the frt RRs would consent to anybody else.
There are several parts of this that could be tricky. First is how detailed are the service requirements? Is it just the route? The route plus station stops? Complete schedule? Food service and sleeping accomodations? For example, could the contractor decide to split the Crescent at Atlanta and run two day trains? Could they decide to add or delete stops along the route? Would they have to provide a dining car or could they provide meals at seats from a cart?
The second part is how would the labor agreements be handled? This has already been a big problem with the VRE contract going to a private operator from Amtrak. Could seniority hold for employees as the contract operator changed? What would happen to Amtrak employees who the contractor didn't hire?
Another would be the equipment arrangement. Would the contractor lease the equipment long term or short? Could they "order up" extra coaches for busy days for example? Would they purchase or take a long term lease on the pieces they wanted? Would they have to contract out the servicing to Amtrak or would they get their own space at Sunnyside? Or, would they have to find their own space?
It could go like some of the Regional train operators in Germany. They bring their own equipment and employees, but operate as part of the integrated network.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
Through lega contrivance freight railroads were bailed out and away from the pasenger business with the National Passenger Railroad legislation which created Amtrak. There was a formula and format to relieve freight railfoads to rid themselves of the burden of passenger trains and part of that was that they had to accept Amtrak trains if they were already running passenger trains (simplified explanation) othewise they were off the hook. Will or can any legislation be passed today that would force a freight railroad to cooperate and run passenger trains? And, with the understanding and knowledge that passenger services will have to receive some form of government help (call it "subsidy"), why bother handing it off to outsiders when the same money will have to be used? And since there isn't a people moving business that doesn't receive subsidies or than hasn't had frequen bankruptcies, what is to be gained by privatizing Amtrak or any of its lines or services? We are lacking a realistic approach to our transportation system, its infrastructures, its orgainizations, its people, its equipment, its routes, its applications, its financing. Piecemealing and selective supports and assignments are not going to solve any of our problems.
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I misunderstood the article to mean that Amtrak would be replaced by private operators for some routes. That interpretation would seem to correlate with the idea that the freight railroads might object or that this would amount to open access.
However, I do not see what either one of those issues have to do with the story if the story is only about Amtrak hiring a subcontractor to operate their trains.
I am sure you are not the only one who thinks they misunderstood anything, only you may realize it when others don't. Government speak is that way. And I am sure that a lot of the rhetoric is just that, rhetoric which shoots from one's political hip and not from any sense of moving people or sense of railroading. Are the handing off the service or selling the property? Or both? If both, as one package or seperately. The can of worms has so many choices and chances that more confusion and colusion is sure to occur.
henry6 And, with the understanding and knowledge that passenger services will have to receive some form of government help (call it "subsidy"), why bother handing it off to outsiders when the same money will have to be used?
And, with the understanding and knowledge that passenger services will have to receive some form of government help (call it "subsidy"), why bother handing it off to outsiders when the same money will have to be used?
Because it might be less money. Quite a bit less money. There is lots of evidence that Amtrak is not an efficient service provider. Boardman has at least acknowledged this, but making the big corporate culture ocean liner change course is not so simple. Amtrak has 40 year of doing things "this way". "That way" won't come easy.
Bucyrus I misunderstood the article to mean that Amtrak would be replaced by private operators for some routes. That interpretation would seem to correlate with the idea that the freight railroads might object or that this would amount to open access. However, I do not see what either one of those issues have to do with the story if the story is only about Amtrak hiring a subcontractor to operate their trains.
It's a bit more than a subcontractor. More like what the German's have done with some of their regional service. It would operate seamlessly as if it was part of the Amtrak network, using Amtrak's operating authority on the host roads, but the whole operation of the train, would be under the control of a the contractor. The exact structure of this hasn't made it to the negotiation stage.
Note that Amtrak has lost the last couple of commuter rail contracts, even the Caltrain one they badly wanted to keep? Ever wonder why?
As i understand this program, the bid to "take over" an Amtrak route has to be on behalf of the railroad that owns the infrastructure Amtrak uses for the route. There can be others involved in a bid (like a contract operator), but the host railroad is an indispensible party. So, the Feds can't "mandate" that the host railroads accept a private operator. Also, this program applies to a maximum of only two routes. For further info, see the implementing regulations FRA recently published:
http://www.gpo.gov/fdsys/pkg/FR-2011-12-14/pdf/2011-31990.pdf
The more I think about this I think it is just the Highway and Oil lobby with support from others opposed to rail passenger service stirring things up so that nothing happens. The only real places Amtrak can be up for grabs is where they own and operate the tracks; and that is a small portion of the total rail milage and a small part of the total Amtrak routes. The deal with the freight roads was that they would be relieved of the passengeer trains and their attending deficits by "joining" and working with Amtrak. I would think any change in that agreement, where Amtrak doesn't own the tracks, has to be agreed to by the participating freight companies. I also believe Amtrak's legeslation has been changed so that they don't have to be the operator of any given rail passenger service, that others can make agreements wiht indifivual railrroads and routes; nobody has stepped forward to offer new routes or take over Amtrak routes. Another problem would be working with commuter agencies who use Amtrak trackage, either totally owned or operated. So what it is is really rhetoric to keep people talking but not taking action of any kind.
I think that somebody needs to write another article explaining the meaning of the article linked to the first post. One thing I would like to know is this: Why is it significant that no freight railroad commented on the proposal?
Falcon48 is correct. To apply one must be a rail carrier that owns infrastructure that ATK uses. The applying RR does not have to own all the infrastructure used to support a route, but has to be in the route.
As to why no rail carrier applictions so far, I think that is the wrong question. The question should be what is in the deal for the underlying rail carrier? The only answer I can see is more overhead to deal with the bureacrats, more bad publicity when something happens, and more liability. If I were a rail carrier President or VP, I would say and do absolutely nothing.
Mac McCulloch
I think the question of why no (freight) railroad has inquired or commented is a good question and the answer is quite clear. One, they believe they were relieved of passenger trains by the legistlation that created Amtrak...doens't matter that 40 some odd years have passed, that things might be different now, it is just that they feel they are clear of the passenger train question. Second, even if they might be interested, they don't want to scare away investors who are taught to believe there is no income in passenger trains. Three, it certainly doesn't stand up agains any political associations they may have at the moment, especially those who might be in power (qualification: either Dem or Rep, local, state, or US government; each mile of track is different). Four, they are not equipped in their operating and marketing departments to deal with passenger trains and passengers, so who there is even thinking about it? Five, passenger trains and infrastructure would take a big investment, money freight rails don't believe or actually don't have, so why sticking one's neck out?
Falcon48 Bucyrus: samfp1943: I think that just about anyone will agree that the only way it is going to happen is for the Federal Regulators to mandate access for operators other than a railroad entity to have the ability to run passenger trains in this country(?). Anyone care to jump in and add their thoughts as to private contractors wanting to run trains on AMTRAK's routes and authorities? Would those contractors be able to get a modicum of cooperation from the 'hosting' roads? Is this issue dead legislatively, and practically? I don’t think there will be any problem with the freight railroads consenting. I assume that the government could mandate that the freight railroads grant access to the private operators. But is it a forgone conclusion that private contractors could make enough profit on these trains to justify the investment of running them? Perhaps the answer is yes, but I doubt it. That is where the practical limitation come into play. So, here is the question I have: Will the government subsidize the private operators as an inducement for them to take over the operations? I’ll bet they will. As i understand this program, the bid to "take over" an Amtrak route has to be on behalf of the railroad that owns the infrastructure Amtrak uses for the route. There can be others involved in a bid (like a contract operator), but the host railroad is an indispensible party. So, the Feds can't "mandate" that the host railroads accept a private operator. Also, this program applies to a maximum of only two routes. For further info, see the implementing regulations FRA recently published: http://www.gpo.gov/fdsys/pkg/FR-2011-12-14/pdf/2011-31990.pdf
Bucyrus: samfp1943: I think that just about anyone will agree that the only way it is going to happen is for the Federal Regulators to mandate access for operators other than a railroad entity to have the ability to run passenger trains in this country(?). Anyone care to jump in and add their thoughts as to private contractors wanting to run trains on AMTRAK's routes and authorities? Would those contractors be able to get a modicum of cooperation from the 'hosting' roads? Is this issue dead legislatively, and practically? I don’t think there will be any problem with the freight railroads consenting. I assume that the government could mandate that the freight railroads grant access to the private operators. But is it a forgone conclusion that private contractors could make enough profit on these trains to justify the investment of running them? Perhaps the answer is yes, but I doubt it. That is where the practical limitation come into play. So, here is the question I have: Will the government subsidize the private operators as an inducement for them to take over the operations? I’ll bet they will.
Aha! This is how the FRA is getting around the "who has rights to operate the train" issue that arose when PRIIA of 2008 required a privatization trial.
So, if Herzog wants to bid on the operation of the Crescent, the bid has to actually come from Norfolk Southern. (and maybe NS and CSX since CSX owns a small hunk of the route from Alexandria to DC.)
This will land with a "thud" at the frt RRs. It would be a huge headache with no tangible benefit. Amtrak is "the devil they know"
[quote user="PNWRMNM"]
"...Falcon48 is correct. To apply one must be a rail carrier that owns infrastructure that ATK uses. The applying RR does not have to own all the infrastructure used to support a route, but has to be in the route.
As to why no rail carrier applictions so far, I think that is the wrong question. The question should be what is in the deal for the underlying rail carrier? The only answer I can see is more overhead to deal with the bureacrats, more bad publicity when something happens, and more liability. If I were a rail carrier President or VP, I would say and do absolutely nothing about this tarbaby..."
[/quote]
To continue on with this ( sorry been away for a few days)
Further from the original posting from TRAINSNewswire:
FTA:"...FRA’s notice of proposed rulemaking, released yesterday, didn’t offer hints as to which routes the companies are interested in operating.The rulemaking was supposed to be finalized by Oct. 16, 2009, one year after the legislation was enacted, but the FRA did not issue a request for comments until Sept. 7, 2011, with responses due by Nov. 7. Significantly, no freight railroad submitted written comments, even though they would be the conduit through which any privatized route must originate, presumably in conjunction with a third party operator.
To Mac's point, I think he is probably spot on as to adding more regulatory bureaucracy and an environment of governmental unfunded mandates, which would create more headaches than solutions for the hosting railroad...FTA:"...Once the final rule is effective on Feb. 12, 2012, prospective bidders may apply to operate up to two Amtrak routes, with preference given to Amtrak’s “worst performing” trains, based on their operating and financial performance.."
This paragraph above is surely the '"Tarbaby in the briar patch" to quote Mac. The route available to be subcontracted out being the worst of the current AMTRAK routes would be the killer of the deal.
'Worst performers' would cover a myriad of operating issues to be resolved before the 'Contractor' took over the passenger operation from AMTRAK and to be settled with the hosting railroads. The operational environment between an AMTRAK Contractor and a host railroad would be something akin to the Hatfield-McCoy feud at best.
My guess, would be as has been suggested above, by other posters. The resolution would almost inevitably be some form of Federal Government intervention (Mandates?). Would the Federal Government have to subsidize the AMTRAK operation? Almost certainly.
The whole exercise of the Federal Government bringing in contractors to operate already problematic passenger trains is fiscally insane .
To take an already bad situation by bringing in another party to the scrap is likely only to create a 'pinata' for the other two parties to thump on. Does not seem to make much sense. The only way this would seem to make sense is to understand who in Congress is pushing this exercise. We already are aware that Fla Congressman Mica is not a fan of AMTRAK and where he stands in this would answer a lot of questions. My thoughts.
Did the legislation that led to the creation Amtrak relieve the carriers of their money losing passenger trains? Or was it an emotional government response to those few Americans, including who actually rode the trains? By the time the railroads threw in the towel on passenger trains Americans had made it crystal clear that they preferred the car and the airplane for most of their trips.
Had the feds not taken over the operation of intercity passenger trains, a plausible scenario finds the carriers would have sought relief in the courts and prevailed. Government cannot, at least in this country, expropriate property and wealth without due process, which is what they would have been doing if they had forced the railroads to continue running passenger trains that threatened the financial viability of some if not most of the carriers.
Thanks to the Staggers legislation, as well as greatly improved management and employee teams, America's railroads are doing very well. In 2010 their average return on equity was 12.3 per cent. Actually, if the returns for BNSF and KCS are backed out of the picture, the results would have been even better, i.e. north of 15 per cent, which clearly beats the Fortune 500 average. The returns for the BNSF were depressed because of the costs associated with its absorption by Mr. Buffett, whilst the KCS does not have the earning power of its bigger and better positioned brothers.
Given the excellent performance of the freight carriers, why in the world would they want to take on a passenger franchise, which does not cover its fully allocated expenses anywhere?
Mail contracts (which were being withdrawn or not renewed) and charters kept passenger trains running, even at a loss. Charters reminded railroads they were to operate for the convenience and necessity of the public, not their shareholders. Thus, passenger service was provided at a loss covered by freight profits until the highway system allowed trucks to overtake rail rates. Amtrak was invented to relieve the rairoads of their passenger train operation burden with a given formula that all roads agreed to. Loopholes were that if you didn't have a passenger train on your railroad, you didn't have to play; and if you did have a passenger train and didn't want to turn it over, you had to continue to operate it.
Why passenger trains were and are expensive to operate fills volumes and many blogs. Moving people is a labor intense and equipment intense proposition whether rail, road or air....look at how many transcontinental bus companies exist today and how many airlines have merged or gone bankrupt. And how many freight railroads are in the passenger train business. Many things economic, political, environmental, labor, and fiscal played a part in ending passenger services on individual railroads and the formation of Amtrak at that time.
"Sam1" said (bold inserts are mine):
... Government cannot, at least in this country, expropriate property and wealth without due process, which is what they would have been doing if they had forced the railroads to continue running passenger trains that threatened the financial viability of some if not most of the carriers. ...
This may be technically true, but it is not exactly "what they would have been doing if they had forced the railroads to continue running passenger trains". They would have been regulating in the (perceived) public interest. Whether it is labor laws, safety regulation, pollution control, or requiring that a common carrier provide, as part of its overall franchise, some service which - though perhaps unprofitable - serves a public interest -- each of these is an example of regulation which cuts into a company's profits for the public good. Let us remember that there is no constitutional right to operate a railroad. It is a common carrier government-granted & regulated franchise, subject to operating in the public interest.
... Given the excellent performance of the freight carriers, why in the world would they want to take on a passenger franchise, which does not cover its fully allocated expenses anywhere?
Are we so sure this is such a bad idea? Putting aside for a moment the question of just exactly how much was being lost on passenger operations 40-50-60 years ago (and the documented actions of certain carriers, such as the Southern Pacific, to deliberatey drive passengers away and cause that "loss" to increase), isn't it possible that enough has changed in the last 40-50-60 years to make profitable passenger service a possibility?
Rail technology is more efficient, aviation is more expense and less "glamorous", ground transportation is more congested, and trains have become -- again -- the exciting "new" thing. There are places where operators apparently make money operating passenger trains, such as Virgin in the UK (oh yeah, they have "open access"!).
And, we should perhaps avoid the "fully allocated" issue -- a good accountant can make any operation look profitable or not, depending on which of numerous legitimate allocation formulae are used. Besides, the much-vaunted airlines lose money all the time, and still they carry passengers. People invest in airlines, which make money, lose money, go belly-up, and investors lose all -- and it starts again.
Maybe it is time to give US commercial passenger rail another chance.
I don't think that the bottom line of passenger train operation has changed that much since 1971. The question is still over how much of a loss are you willing to tolerate. It would be interesting to see how much the various British passenger operators bring to the bottom line, also comparing their accounting standards and practices with ours.
I have a question for sam1: if government has no reason to be in a commercial enterprise, how come that great socialist enterprise known as the Tennessee Valley Authority has not been privatized?
Again time rears its ugly head. Most of the comments here are based on today, today's laws, today's railroading, today's regulations, today's business. United States Post Office services and operations, the Interstate Commerce Commission, SEC rules and regulations, merged railroads, union and non union rules changes, operating procedures (rules and regulations; operating and business); the total Federal highway system (as opposed to CCC roads of the 30's), all are so different than they were in 1971 and with that you cannot judge the Amtrak creation by today's standards, philosophies, and practices nor can you decide today's Amtrak and passenger rail needs and decisions by 1971 standards, etc. Freight railroads back then would never think of asking government's hand in making route changes and improvements as NS did along the Rt81 Corridor about 10 years ago; and governments would not have thought to reach out a hand to help a freight railroad in the same manner.
Sam1 Given the excellent performance of the freight carriers, why in the world would they want to take on a passenger franchise, which does not cover its fully allocated expenses anywhere?
That's a good question, but that's not what's really going on here.
There are some in government who think that Amtrak is inefficient and think that private enterprise could be more efficient. (We've hashed this one out time and again )
They think their case would be made if it could be proven in a trial. They pushed through legislation to that effect with the PRIIA of 2008.
There was one major stumbling block. By law, only Amtrak can run passenger trains on the member roads. Amtrak made this known and the frt RRs all unanimously agreed.
This rule making is the solution to that problem. The freight railroad would be allowed to petition the FRA to "take back" and operate "their" Amtrak trains.
But, cleverly, the rule allows the RR to contract out the operation. The host RR could be the operator in name only.
So, the reality is that bids to operate the designated Amtrak routes will come from outfits like Veolia and Herzog but would have to be funneled through the host freight RR.
Some of the language in the rule makes it sound like the FRA expects the bids to be "negative", that is "how much will the FRA have to pay me to run their train for the trial period."
henry6 Again time rears its ugly head. Most of the comments here are based on today, today's laws, today's railroading, today's regulations, today's business. ...
Again time rears its ugly head. Most of the comments here are based on today, today's laws, today's railroading, today's regulations, today's business. ...
Actually, Henry it feels like most of the comments are eiither focused on what is (which doesn't take into account that things can be changed), or on what was (without regard to the fact that so much has changed in technology, economics, demographics, etc., etc.).
To paraphrase a favorite quote*: We cannot solve today's problems by thinking the same way we were thinking - yesterday and today - when we created the problems. Let's take the best of yesterday's thinking (and there certainly was some good thinking going on in the "good ol' days"), and the best of what we have available to us today, and create something new and better than what we have today - or ever before!
* “The world we have created today, as a result of our thinking thus far, has problems which cannot be solved by thinking the way we thought when we created them.” -- Albert Einstein
Sam1 Did the legislation that led to the creation Amtrak relieve the carriers of their money losing passenger trains? Or was it an emotional government response to those few Americans, including who actually rode the trains? By the time the railroads threw in the towel on passenger trains Americans had made it crystal clear that they preferred the car and the airplane for most of their trips. Had the feds not taken over the operation of intercity passenger trains, a plausible scenario finds the carriers would have sought relief in the courts and prevailed. Government cannot, at least in this country, expropriate property and wealth without due process, which is what they would have been doing if they had forced the railroads to continue running passenger trains that threatened the financial viability of some if not most of the carriers. Thanks to the Staggers legislation, as well as greatly improved management and employee teams, America's railroads are doing very well. In 2010 their average return on equity was 12.3 per cent. Actually, if the returns for BNSF and KCS are backed out of the picture, the results would have been even better, i.e. north of 15 per cent, which clearly beats the Fortune 500 average. The returns for the BNSF were depressed because of the costs associated with its absorption by Mr. Buffett, whilst the KCS does not have the earning power of its bigger and better positioned brothers. Given the excellent performance of the freight carriers, why in the world would they want to take on a passenger franchise, which does not cover its fully allocated expenses anywhere?
Let me try to answer your questions:
(1) Yes, the original Amtrak legislation relieved railroads of their regulatory obligations to run their own intercity passenger trains (although lots of passenger trains had already been discontinued under the then-existing regulatory process). The catch was that a railroad had to "pay", in some form or fashion to get this relief. I'm not sure of all of the details, but I believe the "payment" was 1 year's passenger losses which could be paid in cash or in other assets (i.e., passenger equipment that Amtrak wanted). While most railroads then providing intercity service "joined" Amtrak, there were a few notable exceptions. The Rock Island didn't, because they couldn't come up with the "buy in". DRGW and SOU initially didn't because they didn't want to lost control over their scheduling, and thereby risk greater interference with their other operations.
(2) With respect to your "expropriation" comment, there is a huge body of judicial case law on "regulatory takings" which defies a simple explanation. Suffice it to say that an enterprise which isn't making money as a whole usually can't be forced to provide money losing goods or services through the regulatory process. This principle is not always easy to apply, since whether an enterprise is actually "losing money" as a whole or on a particular line of business isn't as black and white as you might think. But it's most easy to apply to bankrupt companies, since there is no question of whether the enterprise as a whole is making money if it has been adjudged a bankrupt. That leads to the immediate reason for the creation of Amtrak - the Penn Central bankruptcy. The bankrupt Penn Central threatened to discontinue all intercity services west of Buffalo and Harrisburg, which would have been instant (as opposed to lingering) death of what remained of an intercity passenger network. Regulatory agencies could not have constitutionally prevented this (unless they compensated Penn Central for the losses it incurred in providing the service).The solution was a government sponsored takeover.
(3) The question of whether a particular line of business "covers" its costs is also not as easy to apply as you might think, particularly when the line of business has "joint" or "common" costs with other lines of business that the enterprise intends to keep offering (like railroading). The question of "what something costs" in this circumstance is heavily dependent on the answer to another question - "why are you asking?". If the question is "relative profitability", fully allocated cost is an appropriate measure.
But fully allocated cost is not an appropriate measure if the reason you are asking is that you want to know whether to discontinue a line of business. To understand why, you have to understand the difference between "fully allocated cost" and "avoidable cost". "Fully allocated cost" takes all of the railroad's joint and common costs and allocates them to particular services based on some measure of output - ton miles, train miles or whatever (that's why it's called "fully allocated"). In other words, some portion of the salary of the railroad's president will be allocated to each service the railroad provides based on whatever measure of output is chosen. "Avoidable cost" on the other hand is a measure of what the railroad will actually "save" if a particular line of business (here, passenger service) is discontinued. No portion of the president's salary is likely to be saved, therefore it is not an avoidable cost. If the "avoidable cost" saved by a discontinuance will be greater than the revenue lost, then the operation should be discontinued as an economic matter. Avoidable cost" by the way, is not necessarily less than "fully allocated cost" (although it often is). It depends on the particular situation.
On the other hand, the fact that a particular service doesn't cover "fully allocated costs" doesn't necessarily mean it's unprofitable and should be discontinued. If the revenues from the service exceed avoidable costs and are making at least SOME contribution to the railroad's joint and common costs, a railroad may be worse off if it discontinues the service (or might not be, if the resources being consumed by the service can be used for more profiable business, but that's another subject).
(4) Your question of why a freight railroad would want to take on a passenger franchise, is nevertheless a very good one. I would be very surprised if any of the Class I's would be willing to jump on this bandwagon. It doesn't have anything to do with "fully allocated costs". They likely have concluded that the lease payments they receive from Amtrak don't cover the "avoidable costs" that the freight railroads incur in hosting Amtrak trains, particularly when you include the costs they incur related to capacity and interference with other services (all of which would be "avoidable" if Amtrak weren't there). And that doesn't include the costs that Amtrak itself incurs in providing the services (which would, presumably be incurred by a substitute operator). The only way I can see that a Class I would have any interest in this program is if a substitute operator provided greater coverage of the host railroad's costs than Amtrak does, or restructured the service to impose less costs on the host, neither of which seems very likely. But we shall see what the future holds.
Don,
You are right about negative bids, that is how much will someone have to pay the contract operator. Since all long distance trains loose money, it is nonsense to immagine that anyone can operate a fragmented system cheaper than ATK can. Where are the economies to come from? Is labor going to take a cut so NS crews can replace ATK crews on the Crescent? Is UP going to speed up the Sunset enough that they can squeze a train set or two out of the equipment pool? If BNSF takes over the Seattle Coach Yard for the Empire Builder, will they contract with ATK to supply the labor? What about the WSDOT Talgo trains and the Coast Starlight and the Internationals that are also serviced here?
This whole thing is a bit of political theater that I think the Class I carriers are smart enough to avoid.
Mac
Falcon,
IIRC the "buy in" to join ATK was TWO year's losses. The good news was that it could be paid in equipment.
Excellent explanations on the other topics.
Falcon48
I appreciate your response. It is well thought out.
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.
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.
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.
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.
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?
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.
My point was in fact that Amtrak was born of different circumstances and procedures, etc. than we have today....so to superimpose today's thinking atop 1971 will not give you the answers needed. Nor would today's answers be the right answers for then. We need to know and understand history, then think what is today and see what we learned from the past and what we don' t know about the present.
PNWRMNM Don, You are right about negative bids, that is how much will someone have to pay the contract operator. Since all long distance trains loose money, it is nonsense to immagine that anyone can operate a fragmented system cheaper than ATK can. Where are the economies to come from? Is labor going to take a cut so NS crews can replace ATK crews on the Crescent? Is UP going to speed up the Sunset enough that they can squeze a train set or two out of the equipment pool? If BNSF takes over the Seattle Coach Yard for the Empire Builder, will they contract with ATK to supply the labor? What about the WSDOT Talgo trains and the Coast Starlight and the Internationals that are also serviced here? This whole thing is a bit of political theater that I think the Class I carriers are smart enough to avoid. Mac
I don't think it's nonsense that there exists someone who could run the LD trains cheaper than Amtrak. Amtrak is not a model of efficiency and the commuter operators already have most of the back office staff and systems they'd need to make it go. I suspect they sub-out the food and possibly the sleepers.
But you are spot on about it being political theater. No class 1 is going to want to talk about this much less touch it.
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