‘AMTRAK reports record results’ has been a regular headline in recent years, and it was no different in 2018.
The company set earnings and revenues records during the year, which ended on September 30 2018. Total revenue was $US 3.38bn, a 2.2% increase over 2017, while the operator cut its overall loss by 13.3% to $US 168m, a result described as Amtrak’s best operating performance to date.
Yet, to the disdain of some conservative US lawmakers, the company is still some way short of making a profit. But this might be about to change.
Under CEO Mr Richard Anderson, the former Delta and Northwest airlines chief executive, who was appointed in 2017, Amtrak is on course to record an annual operating loss of $US 75m in 2019. The goal is to break even in 2020.
To get there, the company is undergoing a sweeping cost cutting programme while seeking to boost revenue on its most successful routes.
Amtrak has already terminated relationships with nearly 200 consultants and cut 400 management positions in a 2017 buyout. Anderson has overseen the closure of Amtrak’s Riverside call centre in California, eliminated large numbers of phone and fax lines, saving around $US 5m a year, and ended Amtrak’s membership of several travel industry trade associations. Plans to spend hundreds of millions on developing a dedicated wireless network along the North East Corridor (NEC) to improve Wi-Fi service have been scrapped along with proposals to introduce TV screens in seat backs.
The operator has also streamlined many of its onboard services. Catering has been scaled back while amenities for some passengers have been eliminated. The operator is now working on controversial plans to reduce the ranks of Amtrak police. It is also trying to increase rental rates at its station for commuter operators.
Amtrak’s financial performance is underpinned by its NEC operations between Boston, New York and Washington, DC. Adjusted earnings were more than $US 524.1m in 2018, including $US 318.8m from Acela Express services.
The NEC accounted for 12.1 million of Amtrak’s 31.7 million passengers in 2018. Californian corridors carried 5.7 million passengers while the Empire Corridor in New York state and the Keystone Service from New York to Harrisburg via Philadelphia both carried 1.5 million. The operator has worked to increase ridership by overhauling marketing with targeted ads proving particularly successful at attracting new customers.
The United States though is a large and diverse country. While a long way from the heyday of the American passenger train, Amtrak still offers a nationwide service bearing many of the traditional service names, which is popular with passengers seeking an alternative view as they travel cross country.
Amtrak currently operates 15 long-distance routes, and while the majority of these trains are, or are close to sold out, they suffer from extremely poor reliability. Only 43.2% ran on-time in 2018, a symptom of sharing tracks with host freight railways. The financial performance of this segment is equally poor. While accounting for only 14% of ridership, the routes are responsible for 32% of all operating costs with Amtrak losing more than $US 540m from this segment in 2018, according to the Wall Street Journal. Ridership also fell by 4.3% from 4.7 million to 4.5 million during the year, which Amtrak attributes to the cancellation or truncation of hundreds of trains due to weather events, infrastructure outages and planned repairs, and poor on-time performance. Revenue also fell 2.7% from $US 504.4m to $US 491m.
With the Fast Act of 2015, Amtrak’s current Congressional authorisation, set to expire in 2020, Anderson believes that growing the operator’s inter-city offer and scaling back these loss-making and unreliable long-distance services is the preferred future strategy for the railway.
He says that only 4-6% of passengers use the long-distance trains for the entirety of their route, and feels there is greater opportunity to grow ridership in densely-populated corridors.
In a testimony to the House Committee on Transportation & Infrastructure on February 7, Anderson highlighted the importance of the NEC to the regional economy: the railway carries more passengers in the northeast than the airlines combined. It is a similar situation in California where Amtrak operates 70 inter-city passenger trains per day and in Chicago, the hub of the national network, which is served by eight of the 15 long-distance routes and nine of its 29 state-supported services. This equates to 55 trains per day, which carried 5.2 million people in 2018.
“Approximately 85% of Amtrak’s ridership comes from the top 100 metro areas,” Anderson said. “Further, approximately 96% of Amtrak trips are less than 1200km in length. In fact, the vast majority of our riders’ trips are less than 400km. The present network simply does not fit the future.”
Amtrak’s strength in urban corridors is reflected in upcoming expansions of service in California, Massachusetts, Oregon, Virginia, and Washington this year. Anderson told the committee that further growth is expected in Illinois, Kansas, Louisiana, Oklahoma, Pennsylvania, Texas, Vermont, and Wisconsin. There is also “significant local interest” in introducing or expanding services in Coachella Valley serving Palm Springs, the Front Range centred on Denver, Colorado, Illinois’ Quad Cities, the Twin Cities, Indiana, and south of Richmond, Virginia, to Raleigh, North Carolina.
Anderson similarly cited Atlanta, Houston, Dallas, Orlando and Tampa, Denver, Salt Lake City, Las Vegas, Phoenix, Nashville, Austin, Cincinnati, New Orleans and Birmingham as major population centres underserved by Amtrak but with the potential to develop inter-city services. Most are currently reached only by long-distance services daily or three times a week while Las Vegas, Phoenix, and Nashville have no service at all.
“The demand is clearly there for additional short corridor services throughout the US, which includes both additional frequencies for existing routes and establishing new routes between city pairs,” Anderson says.
The Trump Administration appears to have adopted a similar view for the future of Amtrak.
The administration’s 2020 Budget proposal calls for Amtrak to refocus on routes of less than 1200km, replacing long-distance trains with bus services on rural routes.
These would be developed in partnership with bus providers and initially supported by a $US 550m transitional fund to help states take over these routes. Grants for the NEC would also be cut in half from $US 650m to $US 325.5m while the plan includes no funding for the key Gateway Project in New York City.
House Democrats were quick to condemn the policy. Chairman of the House Transportation and Infrastructure Committee, representative Mr Peter DeFazio of Oregon, described the proposed budget as “shirking responsibility when it comes to our nation’s infrastructure” and “putting a massive burden on cash-strapped states.”
However, Amtrak could yet adopt similar policies in recommendations for the future of its long-distance services. The operator will issue a National Network Plan by the end of the year as part of its five-year reauthorisation process. In Amtrak’s Five Year Service Line Plans for fiscal 2020-24, which is part of the reauthorisation proposal and was released in March, the operator says it is targeting growth of services in corridors of 640km or less, and “improving frequencies and schedules to match customer demand.”
In practice, while iconic cross-country services such as the California Zephyr, The South West Chief and The Cardinal are not under threat just yet, many industry analysts believe they are likely to be tweaked and potentially split in the future. This could see existing long-distance corridors altered to fit with the inter-city corridor plan, existing state-supported routes expanded, and buses filling in the gaps.
If Amtrak’s suggestions for the future of long distance do indeed follow this path, they are likely to find dissenters during the reauthorisation process from representatives of the rural communities that might lose out. Freight railways with which Amtrak will need to share tracks for an expanded inter-city service are also likely to have concerns about such plans.
Anderson though appears keen to push ahead. He almost seems to relish a fight.
Reports from a meeting between Anderson and six senators and a congressman in June 2018, cite Anderson’s refusal for Amtrak to pay to upgrade a 352km section of the BNSF-owned line between Trinidad, Colorado, and Santa Fe, New Mexico, used by the Southwest Chief. Anderson said repeatedly that the railway would pursue “alternative solutions” - splitting the journey in two and replacing the train with a bus for 760km from Dodge City, Kansas, to Albuquerque, New Mexico. His refusal to back down left his hosts incensed.
The debate rumbled on until March when Amtrak finally agreed to provide its $US 3m match for the $US 26m upgrade project. However, it might be a sign of the battles to come.
To support his argument for future investment in inter-city corridors, Anderson consistently refers to the Passenger Rail Investment and Improvement Act (PRIIA) of 2008. The act states Amtrak’s mission is “to provide efficient and effective inter-city passenger rail mobility consisting of high quality service that is trip-time competitive with other inter-city travel options.”
Anderson also references larger macroeconomic trends and societal changes occurring in the United States. “If you look at today’s Amtrak route map, it looks eerily similar to the one created in 1971,” Anderson told the committee. “Yet, this nation has grown and changed during this time period, and this is expected to continue, and in fact accelerate, for several reasons.
“Population and economic growth, and the continuous trend over the last 20 years towards urbanisation, are driving congestion and demand in major metropolitan areas and the corridors that connect them. In particular, the millennial generation, set to become the majority of the US population this year, is changing the overall travel landscape with their preference for flexibility, constant connectedness, and affordability. While highway and air capacity is limited, and performance is likely to get worse for these modes, inter-city passenger rail is a solution for future travel demands. This pressure appears to be inevitable.”
Nevertheless, the financial challenges to deliver this inter-city development plan are substantial - the 584km NEC alone has a state-of-good-repair (SOGR) backlog of $US 40bn.
Anderson praises the 18-member Northeast Corridor Commission, founded as part PRIIA, for providing a reliable source of funding for NEC improvements and repairs. Amtrak, states, and commuter railways are set to contribute $US 3.2bn to capital renewals over the next five years, following a $US 1.46bn investment in 2018. The savings made in 2018 have also allowed more money to go back into maintaining the NEC - the budget for track and power maintenance has risen by 15% to $US 480m, for example. However, this remains a drop in the ocean. Anderson told the committee that the railway and the states alone do not have the funds to reduce the NEC SOGR backlog, let alone fund major capital projects which are crucial to the future of the service.
Among these are components of the $US 30bn Gateway project to improve NEC infrastructure in New Jersey and New York City (p16). This includes repairs to the century-old Portal North Bridge over the Hackensack River in New Jersey, which is used by 450 trains per day. While securing around $US 600m, the project still requires federal funding to meet the $US 1.6bn cost. The much-needed reconstruction of the Hudson Tunnel in New York City, which was damaged by Super Storm Sandy, and carries 200,000 commuters every day, is also pending. Similarly, reconstruction of the East River Tunnel in New York, estimated to cost more than $US 1bn, the Baltimore & Potomac Tunnel Replacement ($US 5bn), and a replacement for the Susquehanna Bridge in Maryland ($US 1.7bn) are all at various stages of development but require more funding for work to begin.
In addition, Amtrak’s average fleet age is 33 years, and increasingly unreliable. While plans to replace the Acela Express trains are underway and the railway has received new electric locomotives, Anderson said in his testimony that the cost of outstanding fleet acquisitions could reach $US 3.5bn by 2024. Replacing the Amfleet coaches could cost a further $US 1.4bn and upgrades to existing coaches and locomotives another $US 1.38bn. Beyond 2024, a further $US 1-1.5bn is expected to be required.
Amtrak is also committing significant funds to improving stations, particularly its five largest hubs at New York Penn, Washington Union, Philadelphia 30th Street, Chicago Union, and Baltimore. $US 1.8bn will be spent up to 2024, although needs again far outweigh available resources.
Inevitably developing new inter-city corridors will require even more funding, potentially tens of billions of dollars over many years. Anderson’s strategy to convince Congress seems to rest on presenting a rosier financial picture for the railway against the need to solve America’s urban infrastructure crisis.
This is reflected in the operator’s 2020 budget proposal, which requests $US 141m less than appropriated in 2019 although it is in line with the figure authorised in the Fast Act in 2015. By making the operator financially sustainable and less of a burden on the taxpayer, Anderson believes he will have a more compelling case to secure a reliable funding source to develop future inter-city corridors.
“Every day that goes by without a funded plan to address these projects brings us one day closer to having an irrelevant transportation system stymied by unreliable structures creating reduced speeds and capacities, resulting in prolonged commute times and travel delays,” Anderson told Congress.
This approach is no doubt a gamble. And it has inevitably drawn criticism from those within and outside of the industry. Some question the financial viability of the proposal (p34). Others are reluctant to let go of long-distance routes. Former Amtrak CEO, the late Mr Joseph Boardman, argued in an op-ed for IRJ’s sister publication Railway Age in December 2018 that limiting the narrative to financials and comparative statistics is unbalanced because of the value Amtrak brings to the nation, states, communities, employees, and passengers.
It is also a risk in the context of the current political climate.
For decades Amtrak’s relatively small funding appropriation has been used as a political football by politicians on both sides. Trump’s budget proposal is the latest chapter in this story. Substantial proposed cuts to funding makes depressing reading for proponents of federal support for public transport infrastructure, and reflects the general reluctance of his side of the aisle to support these investments - emphasised by the lack of support for the Gateway Project. With little to suggest that the current partisan and unpredictable state of American politics will change, finding a cross-party agreement to fund an inter-city rail network looks unlikely.
For many, it is incredible that approaching 50 years since it was founded in 1971, Amtrak remains in operation. But once again it is at a crossroads. Anderson’s plan to transform the operator into the backbone of a sustainable and efficient inter-city rail network that will ease congestion in the US’ car-choked cities is certainly a radical change in strategy. It could be the shot in the arm that Amtrak needs. Equally, it could also mark the beginning of the end.
Deciphering the Amtrak puzzle
Expanding long-distance services is a more economically-viable proposition than Amtrak’s plan to expand inter-city connections, argues Andrew Selden, president of the United Passenger Rail Alliance.
AMTRAK CEO Mr Richard Anderson’s strategy to reposition the national carrier’s train operations is a puzzle. It appears incapable of working. He proposes to end most long-distance services in favour of higher frequency corridor services connecting nearby urban areas. Yet, much better opportunities exist that are easier to exploit and promise much higher returns on invested capital.
The short corridors Amtrak already operates, outside of California, are Amtrak’s smallest, commercially-weakest segments (with the lowest annual output, load factors and market shares in their respective corridors), and the segments least capable of organic growth.
The long-distance segment that Amtrak disdains has the highest annual output, load factors and market shares of all of Amtrak’s trains. Because their load factors are at or near sold-out levels, and their routes weakly interconnected, they are the trains most susceptible of both organic and scale growth.
Amtrak’s strategy can’t work for several reasons.
For trains to compete against private cars in shorter-distance markets, given road’s overwhelming market share dominance, flexible schedules and routes and door-to-door convenience, rail frequencies must be inversely proportional to distance. That demands 10-minute headways in urban transit applications, and probably an hourly service in 300-600km inter-city markets. Where in the United States can existing rail infrastructure accommodate hourly fast passenger trains as an overlay to existing and future freight operations?
Because the necessary infrastructure does not exist, Amtrak’s strategy requires tens or perhaps hundreds of billions of dollars in new rail infrastructure all across the United States to upgrade secondary main lines and to add new passenger track(s) to primary main lines - as Brightline/ Virgin Trains USA is doing in Florida, and Amtrak has done in Michigan and Illinois. Amtrak has not identified a budget or source of funds for that kind of spending on passenger rail.
Even if the tracks existed, Amtrak has not acknowledged that it has no intention of operating any trains at all in any shorter regional markets outside the Northeast Corridor unless someone else pays the company to do so. Few if any new states appear willing to do that.
The new strategy thus would require pouring capital that likely does not exist into Amtrak’s smallest and commercially weakest markets, to create infrastructure that does not exist yet, to operate speculative new services, but only if highly-unlikely state sponsorships materialise.
If Amtrak is serious about its strategy - it already has the legal authority and resources to demonstrate the concept on its own initiative in any suitable city pair - why has it not done so?
So, the new strategy is a real puzzle. Amtrak has made no sign that it can achieve a positive rate of return on capital invested in this scheme.
A better strategy would be to invest more of the company’s existing and freely-available capital into the largest and most commercially successful segment of the business, where trains are often sold out, inter-city ridership and output is the highest in the system. However, the service is plainly undercapitalised because demand chronically exceeds supply, and large amounts of free cash flow - $US 423m last year, according to Amtrak - are already being generated.
Amtrak has the legal authority to shift capital resources (the annual subsidy grant) between accounts to where it can earn the highest returns. The use of capital that promises the greatest return on the investment (both financially and in incremental annual passenger-km) is also Amtrak’s greatest immediate need: to replace and enlarge the Superliner fleet on long-distance trains, where demand today exceeds capacity. Here, with these trains generally sold out, growth is unavoidable, not speculative. These fleet assets can also be leased, not purchased, to minimise initial costs.
Strategic, individually minor investments in infrastructure in the inter-regional markets can also yield immediate and positive returns. Better weather-proofing the Chicago yards would be a good place to start. Partnering the installation of run-through tracks at Los Angeles Union is another. In addition, re-installing the connecting track from the ex-Southern Pacific to the ex-Katy (Missouri-Kansas-Texas) main line at San Antonio would take only a few weeks and yield immediate benefits.
Increasing the capacity of the western long-distance trains will allow new customers travelling very long distances on generally sold out trips - the average in sleeping cars in the west is about 1900km - to begin buying thousand-dollar tickets as soon as the capacity is added. Adding additional coaches to existing trains requires no new infrastructure, even for maintenance.
The potential volume of the highest-revenue customers can be multiplied by better interconnecting existing routes with very modest additions to the existing route system.
Examples include extending one Missouri River Runner between Kansas City and Omaha to connect downstate Illinois and Missouri to the California Zephyr, dropping through cars for Phoenix and Tucson from the Southwest Chief at Flagstaff, and originating the Maple Leaf train at Boston rather than New York and scheduling it to make cross-platform transfers at Albany/Rensselaer with the Adirondack. The Silver Meteor should originate in Montreal and Toronto, and the Heartland Flyer should go to Kansas City, or perhaps Denver via La Junta.
Modelling modest route enhancements like these on an assumption of only the same level of service and only the same degree of market penetration as existing sold-out trains suggests that the enlarged matrix of origin-destination pair possibilities will multiply aggregate demand in Amtrak’s largest business by a factor of six or more.
If Amtrak doesn’t want to pursue these opportunities, the DOT should openly auction the routes and rolling stock off to competitors who do.
Amtrak’s financial rate of return on the $US 3bn in capital invested into the Acela Express programme 20 years ago has been negative. For example, Amtrak’s reported state-of-good repair deficit from deferred NEC maintenance has tripled since introduction of the Acela fleet. Let’s not repeat that experience with a misguided pursuit of speculative short corridors now, when far greater opportunities, much more easily and inexpensively available, are right before us.