Ken:I would really enjoy sitting down with you over a diet cola or adult beverage and discussing costing of transportation. My experience in LTL trucking was similar to the carload railroading. At certain points it becomes next to impossible and you just have to go with assumptions. How does one allocate costs for humping 3 extra cars at Markham...or the costs of 3 pallets thru a terminal? I basically figured the LTL peddle run was a fixed cost and tried to throw as much freight onto that truck as possible, both for deliveries and pickups.
I read Phillips' column last night and have this possible explanation for the difference in depreciation between the LD trains and the NE Corridor.
Depreciation for LD and other trains are basically determined by the equipment. Let's say you have a train of 10 cars plus 2 locomotives = investment of $40million (may or may not be accurate). Depreciation schedule - 15 years/ straight line depreciation = $2.67 million per year or $7305 per day.
Now, run that train on the NE Corridor, lets say from Boston to Florida and the depreciation costs are much more. Not only does one allocate the equipment, but also Amtrak owns the NE Corridor. What is the value of NE Corridor? I have no idea, but let's say $2 B. Depreciation of that over 40 years = $50,000,000 per year for property. Divide that by the number of trains and one has significantly higher depreciation rates for the trains running on the NEC. Add in the station costs, etc. and soon you are talking real $$$.
Not an accountant, but I do read annual reports, so I have a little idea of how finances work.
The best method of analyzing profitablity of a company is looking at the Cash Flow statement. Is the company generating positive cash flows yearly? Not much a CFO can do to cook those books.
Ed
CSSHEGEWISCHI'm not sure how much discretion is allowed in determining depreciation rates since there has to be consistency in this matter.
It would indeed be informative to know if Amtrak uses the same projected service life that the private railroads used back in the day.
My recall is that the last time I priced sleeper service, the charge appeared way too high. And a few months later I read somewhere (perhaps an item in Trains mag?) that the service life projections were being shortened.
At the time is was just a 'wrinkle the eyebrows" moment for me, but for an expert like Phillips to take notice might be worth pondering.
I'm not sure how much discretion is allowed in determining depreciation rates since there has to be consistency in this matter. Allocation of costs can be discretionary, those of us with some seniority can remember the discussion in the pre-Amtrak era over "fully allocated" vs. "solely related" costs as related to passenger train contributions to the bottom line.
John WRDo you suggest (as Don Phillips does) that Amtrak misrepresents their long distance trains as loosing large amounts of money when in fact most long distance trains make a profit?
Seems like I recall reading a few years back, that Amtrak was (arbitrarily) shortening the projected life of some of it's equipment, based upon experiences it was having with some equipment. When you do things like that you force the cost to be amortized over fewer customer uses, so it's DEFINITELY possible that games such as those mentioned are being played.
Hypothetical scenario: If properly maintained sleeper cars can expect a 15 year service life, but budgeted maintenance funds are redirected elsewhere, and the cars are allowed to fall in such severe disrepair that they ultimately are scrapped after 8 years, CAUSING a revision to the life expectancy of all cars of it's type, and accounting practices are subsequently revised to amortize the car cost over the new lifespan....couldn't the claimed "cost" of operating the long distance trains can be conveniently inflated to the point that they no longer make economic sense to operate?
erikem greyhounds That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL. Understood. I would argue about electricity being easier to cost out than RR freight traffic, especially when intermittent generation is involved. Subtracting out the incremental costs for the mainline portion of the run is the most favorable analysis for keeping a branch line, if the branch doesn't pass that test, then there almost no way that keeping the line can be justified. A branch line that barely breaks even under this analysis is still a good candidate for abandonment as incremental costs don't include lost opportunity losses. - Erik
greyhounds That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
Understood. I would argue about electricity being easier to cost out than RR freight traffic, especially when intermittent generation is involved.
Subtracting out the incremental costs for the mainline portion of the run is the most favorable analysis for keeping a branch line, if the branch doesn't pass that test, then there almost no way that keeping the line can be justified. A branch line that barely breaks even under this analysis is still a good candidate for abandonment as incremental costs don't include lost opportunity losses.
- Erik
Cost models are terrible "what if" tools. They are good at before/after however.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
greyhoundsThat would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
Exactly!
The allocation of costs is really squishy business. For example. I have two trains running from A to B. One has two locomotives and 10 cars. One has one locomotive and 7 cars, but those 7 weigh as much as the 10. The first train carries 50% more people than the second, but generates 75% more passenger miles. I have to allocate the cost for the track, crew, train dispatchers, fuel, locomotive dwell between trips. How do I allocate? By train count? Train miles? Passengers? Passenger miles? By time? By distance? By track capacity consumed? How do I divvy up the dwell between trips? Does it belong to where I use the locomotive next? Part of the previous trip? Split the difference?
Depending on how you proceed, you can get radically different...and misleading...answers, none wholly right or wrong.
henry6Phillips may or may not be right in his interpretation.
Certainly many Amtrak watchers believe that Acela is Amtrak's most successful venture. However, Phillips would have us believe that all such people have been deceived by misinformation from Amtrak reported by young and naïve reporters.
erikem Ken, Keeping in mind that the goal of the company is to produce net income, I'd first subtract out the incremental cost of moving the car from Council Bluffs to Bloomington, then compare the remainder with the pro-rated costs for moving the car from Bloomington to the destination. If the remainder is less than the pro-rated costs then the branch line is almost certainly a loser, with the exception based on keeping an otherwise profitable customer. You're right in that the is a great deal of subjectivity in cost and revenue allocation. - Erik
Ken,
Keeping in mind that the goal of the company is to produce net income, I'd first subtract out the incremental cost of moving the car from Council Bluffs to Bloomington, then compare the remainder with the pro-rated costs for moving the car from Bloomington to the destination. If the remainder is less than the pro-rated costs then the branch line is almost certainly a loser, with the exception based on keeping an otherwise profitable customer.
You're right in that the is a great deal of subjectivity in cost and revenue allocation.
It's not like electricity where there is one product moving in one direction from one location (or a very few locations.). Boxcars aren't kilowatts. There is a great diversity of movement on a rail network that is lacking on an electric network. I know, there are all kinds of formulas, computer programs, etc. that purport to provide "The Cost". But they all rely on averages and they don't provide specific information detailed enough to begin to determine the incremental cost. I mean, just what was the incremental cost of taking two or three extra carloads of lumber over the hump at Markham each month? It had to approach $0. Same thing with putting those cars on a Council Bluffs-Markham manifest train. What do you get? Car hire and a very few gallons of fuel?
We could identify the costs of the branch because we could isolate its costs from the network. But when you're dealing with the mainline network it is impossible to isolate costs. They're part of a flow and increasing the flow by a few cars produces zilch in added costs.
However, if you go down this path and manage by those incremental numbers, you'll keep your branches and starve your mainlines. If you decide to keep the branches you've got to spend the money to operate them. What's left for the mainline? Can't spend the money twice.
But, it would be another number to take into consideration on what would eventually and inevitably be a judgment call.
Putting additional business on the mainline using incremental costing as a floor is a whole different can of worms
Assigning the depreciation of the NEC ROW to the NEC is standard accounting practice. However, since most of the rest of Amtrak's operations rent ROW, it gives a misleading conclusion about the comparative inefficiencies of its operations. Given the net profit of revenue over operating expenses there with Acela, and the enormous loss on operations on LD services, it is easy to conclude, as Joe Boardman does, that LD services [if deemed essential] should be separately funded [perhaps like EAS?] rather than be subsidized by Acela.
C&NW, CA&E, MILW, CGW and IC fan
Information regarding Amtrak's depreciation policies and practices can be found on Pages 14 - 16, Notes to Consolidated Financial Statements, of the company's 2012 Consolidated Financial Statements. These are the lastest audited annual financial reports.
Amtrak uses the group method to depreciate classes of capital investment. This means, for example, that all the equipment in a class, i.e. Superliner I sleeping cars, would be depreciated over the same time period at a constant rate even though they may have gone into service over a year. Grouping significant capital assets for depreciation is not unusual.
In reading the notes I noted that Amtrak periodically engages engineering firms to assess its depreciation schedules, i.e. useful lives, fair value, salvage values, rates, etc. Firms that do this work are not likely to sully their reputations by bending their best judgement of Amtrak's depreciation practices to play to management or a special interest audience.
How much depreciation do the long distance trains wear? Without access to Amtrak's detailed property records, it is impossible to say. It is reasonable to conclude, I believe, that the bulk of Amtrak's depreciation is driven by its investments in the NEC. In several of my analysis's I have arbitrarily assigned 80 per cent of the depreciation to the NEC and 10 per cent to each of the other product lines, i.e. short haul corridor trains and long distance trains.
I wrote (real paper and envelope) to Mr. Phillips asking him from whom he got his information regarding Amtrak's cost allocation information. It is important to support the conclusions that he arrived at. I am seeking information regarding the company's depreciation schedules, inasmuch as they could be quite informative. I have not heard from him.
The depreciation expense driven by the long haul trains would be primarily on the locomotives and cars, plus any allocated depreciation when these trains are operating over Amtrak's owned infrastructure and any billed depreciation from the hoist railroads.
Amtrak's depreciation in FY12 was $663.7 million. The long distance trains lost $600.9 million in FY12 before depreciation, interest, and ancillary charges. They wiped out the NEC operating profit without any help from depreciation. Their results are worse after application of depreciation, interest and ancillary charges.
In an analysis that I performed on FY10 numbers year or so ago, I calculated that the fully allocated loss per passenger mile for the NEC was 20.8 cents vs. 16.5 cents for the short haul corridor trains and 23.1 cents for the long distance trains. Again, I had to make some assumptions about depreciation, interest, and ancillary charges.
Phillips and others are correct when they say that the Acela or NEC is not profitable. They had an operating profit of $281.9 million before depreciation, etc. in FY12. However, if my assumption that the NEC wears 80 per cent of Amtrak's depreciation is anywhere near being correct, then the loss on the NEC, which would be skewed onto the Acela because of the capital improvements made to hoist it, would be in the neighborhood of $241.2 million. Again, without access to Amtrak's books, my assumptions could be wrong. The loss could be greater or less.
You cannot say "checked facts don't apply". Checked facts are very important in forming an opinion, especially an informed opinion. Opinion comes from the interpretation of facts and one's experience with the facts, the situation, and the people involved. I understand what Don is saying and why. I don't think he is ignorning facts nor not fact checking but merely interpreting what he sees and telling us what he believes to be. I don't think he'd disagree with what I have said about Boardman but just disagrees with what Boardman has done and how Boardman behaves. I don't know Boardman that well and have not dealt with him in any way in over 30 years. Phillips may or may not be right in his interpretation.
RIDEWITHMEHENRY is the name for our almost monthly day of riding trains and transit in either the NYCity or Philadelphia areas including all commuter lines, Amtrak, subways, light rail and trolleys, bus and ferries when warranted. No fees, just let us know you want to join the ride and pay your fares. Ask to be on our email list or find us on FB as RIDEWITHMEHENRY (all caps) to get descriptions of each outing.
henry6Define "misrepresents".
Henry,
The word Don Phillips uses for Amtrak's financial descriptions is "misinformation." And he attributes the "misinformation" to "Amtrak officials." And he includes Joe Boardman among those "Amtrak officials." That is in the third paragraph of his article. So I think it is reasonable to say Mr. Phillips alleges Amtrak misrepresents financial information.
Bit I cannot imagine that Joe Boardman or anyone at Amtrak would have any reason to report all long--distance trains loose money if some of them make money nor can I see any reason why lgreater ooses should be claimed than actually happen. Mr. Phillips claims of that leave me wondering what to think of him.
So please understand I was simply trying to accurately report the article. I remain unpersuaded at Mr. Phillips allegations are true.
John
jeffhergertMy take on what Mr. Phillips is saying is not that long distance trains actually make a profit. It's that they don't lose as much money as Amtrak says they do.
Jeff,
Here are Don Phillips' words from his second paragraph: "What's more, long-distance trains are money losers but not big ones. If Amtrak calculated long-distance train financials the same way it counts Acela financials, most long distance trains would be profitable." (emphasis added). You are as able to draw conclusions from that statement as I am.
Is it just possible that Mr. Phillips, like Mr. Boardman, also has (like many reporters) his own "agenda" in writing this article? It should be remembered that he writes an opinion column, not straight news reporting, and so the journalistic standards of checked facts don't apply. On the other hand, it is rather facile to dismiss the audited financial statements without any evidence that the numbers are a "misrepresentation" of the realities.
John WR Convicted OneNo wonder the long range trains are all "losing" money, if Amtrak insists upon amortizing entire cost of their sleeping cars well before their actual service life has lapsed? Do you suggest (as Don Phillips does) that Amtrak misrepresents their long distance trains as loosing large amounts of money when in fact most long distance trains make a profit?
Convicted OneNo wonder the long range trains are all "losing" money, if Amtrak insists upon amortizing entire cost of their sleeping cars well before their actual service life has lapsed?
Do you suggest (as Don Phillips does) that Amtrak misrepresents their long distance trains as loosing large amounts of money when in fact most long distance trains make a profit?
Define "misrepresents". Any and all accountants, CPA's and politicians use numbers and statistics as they need...businesses do too, of course. Joe Boardman is well versed in operations of transportation, as well as anyone who has gotten to the position. But he has come up through government agencies from small NY counties transit operations to the State of NY Transportation Department as Commissioner (where he held sway over Amtrak's Empire State services including balking at paying for the Turbos when he deemed them unfit for use and overly expensive) so he has more political savvy than any other Amtrak president. So, I don't think he "misrepresents" the accounting so much as he uses it to his advantage in dealing with politicians who hold the purse strings.
My take on what Mr. Phillips is saying is not that long distance trains actually make a profit. It's that they don't lose as much money as Amtrak says they do. That if costs to the long distance trains were calculated in the same manner that they are for the Acela trains, the LD trains would also show a profit. That the Acela trains without some tweaking of the numbers also actually lose money.
Mr. Phillips isn't the first one to suggest this. There have been a few articles in Trains Mag over the years that have said Amtrak and other entities who want to ditch the LD services, if not all of Amtrak, have played with the numbers to make the LD trains look worse than what they are.
Jeff
Since according to Amtrak's financials, depreciation represents only ~15% of Amtrak's expenses, it seems unlikely that the claims made by Phillips are credible. But perhaps an expert like sam1 could shed more light on this.
diningcarThe Phillips column in the June issue takes substantial issue with accounting methods used by Amtrak in reporting the profitabilty, or lack thereof, for different Amtrak operations
I have not yet had the opportunity to read the article in question, however it has often appeared to me that Amtrak must accelerate the amortization of their plant and use the inflated cost figures that result for shock value. How all the better to justify those inflated charges for sleeper service?
No wonder the long range trains are all "losing" money, if Amtrak insists upon amortizing entire cost of their sleeping cars well before their actual service life has lapsed?
As mentioned, there is a lot of fuzzy stuff in accounting. Look at your own home budget. You may have a limited budget for entertainment, etc, but if you consider dinner at your favorite restaurant as part of your food budget, then the entertainment budget stays on (or under) the budgeted amount, while your food budget goes high.
A friendly auditor wouldn't have a problem with this. Someone looking to make you look bad would have a field day.
As Disraeli (famously quoted by Twain) said - "There's lies, damned lies, and statistics." And accounting...
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
henry6I get the feeling at Don Phillips mistrusts Boardman quite a bit.
I agree, Henry. But it is more than a feeling and it goes beyond Joe Boardman. Consider Don Phillips' second sentence: The misinformation is spread by confused and shallow politicians, young reporters who have no idea of what they're talking about, and by Amtrak officials who have learned they can count on the first two groups not to understand their technical jargon." (Emphasis added). Don Phillips charges there is a deliberate and successful effort by "Amtrak officials" to decieve just about everyone.
Then in his second paragraph, the one he wants us to read three times and think about, he makes two statements about Amtrak. First, Generally Accepted Accounting Principles would show Acela "loses money, big-time." Second, "If Amtrak calculated long-distance train financials in the same way it counts Acela financials, most long distance-distance trains would be would be profitable."
So Amtrak officials deliberately provide a "mass of misinformation" to get us to believe Acela makes money when it doesn't and long-distance trains loose large amounts of money when they do not do so.
The word that covers all of that is mistrust. In fact, deep mistrust.
ASC stands for Accounting Standards Codification. It was effective for interim and annual periods after September 15, 2009. ASC reorganized thousands of GAAP pronouncements into roughly 90 accounting topics and displays all topics in a consistent structure. It makes GAAP easier to understand, at least for accountants as well as reasonably sophisticated financial statement users.
ASC appears repeatedly throughout Amtrak's financial statements.
An examination of the Amtrak 2012 Consolidated Financial Statement audited by Ernst and Young says only adhering to GAAP, without specifying FASB or FASAB.
In one section it does refer to FASB ASC topic 20 in reference to Fair Value Measurements.
Overmod Sam1As per the external auditor's report, Amtrak keeps its books in accordance with, "accounting principles generally accepted in the United States of America", which is frequently referred to as GAAP. It's standards, which are promulgated by the Financial Accounting Standards Board, are codified in FASB Statements, Interpretations, FASB Staff Positions, Technical Bulletins, and EITF Abstracts. These are the standards that govern Amtrak's accounting, although it may adhere to some government accounting standards. Just as a reminder for those 'not in the know' -- FASB and FASAB are two very different organizations. FASB is general accounting, and FASAB is Federal application. It is a matter of discussion which of these is more applicable to determining a proper form of GAAP for Amtrak as a 'quasi-public' (and therefore by implication quasi-Federal) organization, but anyone considering the issues should look at BOTH when discussing the issue.
Sam1As per the external auditor's report, Amtrak keeps its books in accordance with, "accounting principles generally accepted in the United States of America", which is frequently referred to as GAAP. It's standards, which are promulgated by the Financial Accounting Standards Board, are codified in FASB Statements, Interpretations, FASB Staff Positions, Technical Bulletins, and EITF Abstracts. These are the standards that govern Amtrak's accounting, although it may adhere to some government accounting standards.
Just as a reminder for those 'not in the know' -- FASB and FASAB are two very different organizations. FASB is general accounting, and FASAB is Federal application. It is a matter of discussion which of these is more applicable to determining a proper form of GAAP for Amtrak as a 'quasi-public' (and therefore by implication quasi-Federal) organization, but anyone considering the issues should look at BOTH when discussing the issue.
What you say is true. My impression is that the biggest difference between public company accounting and government accounting is that the latter uses fund accounting. Otherwise the overwhelming majority of the principles are the same.
Amtrak's Balance Sheet has an owners equity (capitalization) category just like a business. It does not have a general fund like a government agency.
The key point is neither Amtrak's management or anyone else just makes up their own accounting rules as they go along. Management must follow generally accepted accounting principles and practices or be called out by the external and internal auditors. I have read nearly every Amtrak financial report for the last eight years. I don't recall the auditors every issuing anything other than a clean audit report.
The audit community (external, internal, private, government, etc.) has gotten a few black eyes over the years. And people out of the know like to generalize the outliers to the whole. All up, however, auditors do a pretty good job. They get it right most of the time, frequently to the chagrin of management.
I like Don Philiips and read his column and appreciate his insights. The same with Frred Frailey. But the two do not agree on everything. I think Don's opinion of Boardman is less than Fred's. although Fred has criticised Boardman on occasion as well. But I agree with Henry that, with all his faults, and he is not a Rystrup or Claytor or Gunn, he may be the best man for Amtrak at the present time, better than the three just pentioned, again for the present time. Of course it depends on what you want Amtrak to be. I think Boaaaardman understands what the majority of concerned Americans want Amtrak to be, and I believe I agree with them and h im. Inlcuding the retention of dining and sleeping cars and long distance trains.
Phillips makes a number of statements regarding Amtrak's accounting procedures that appear to be without support. He quotes a Mr. Seldon as someone who has insight into Amtrak's cost allocation methods, i.e. loading the long distance trains operating in the NEC with extraordinary costs if I remember correctly. How Seldon got his information remains a mystery. What is even more interesting is the fact that he was the only source willing to be named in Phillips article. To know how Amtrak allocates its costs, one would have to be an insider or have an insider give him or her access to the company's books.
As per the external auditor's report, Amtrak keeps its books in accordance with, "accounting principles generally accepted in the United States of America", which is frequently referred to as GAAP. It's standards, which are promulgated by the Financial Accounting Standards Board, are codified in FASB Statements, Interpretations, FASB Staff Positions, Technical Bulletins, and EITF Abstracts. These are the standards that govern Amtrak's accounting, although it may adhere to some government accounting standards.
The implication that Amtrak's officers are unduly influencing the company's accounting procedures and practices, i.e. not following GAAP as well as governmental accounting principles where applicable, is not supported. The further implication that the external auditors from one of the world's most highly regarding accounting firms are turning a blind eye to these accounting irregularities is likewise without foundation.
Amtrak follows the same accounting principles as every other stock company in the United States. That is not to say that they don't have some wiggle room in how they interpret and apply accounting standards, especially when it comes to estimates, i.e. depreciation, amortization, retiree benefits, etc., but any estimates that they use must be supported, and they must be consistent.
greyhounds' example of allocating a part of the revenue to the branch line move makes me think of the former practice (is it still the practice?) of revenue allocation to a short line which had a part in a particular movement--the short line received more than its proportional share of the total revenue when its mileage was compared with the total mileage.
Johnny
Another item of subjectivity is whether the recipient of that carload would be happy with it being hauled only to Bloomington. If not, then the railroad looses the entire $600 if that branch line is gone. That loss may not impact the balance sheets much today, but may well do so at a future point when enough branch lines are dropped due to their perceived individual lack of profitability.
Or the railroad may find itself stronger and more financially viable when it drops its branch lines and focus on the business it can generate on the main line.
Our community is FREE to join. To participate you must either login or register for an account.