Ordinarily, it's not polite to say "I told you so."
But, just this once, to Tom Downs, Betsy Reveal (Amtrak's semi-gone CFO and chief advocate of the Mercer Consulting route cutback plan), all the northeastern politicians on Amtrak's Board, NARP, and everyone else who gave any credence to or helped implement the route and frequency reduction plan generated by Mercer Consulting (based in Boston), implemented in 1995 and 1996, and which is now widely acknowledged to have failed miserably: WE TOLD YOU SO.
The Mercer-Downs-Reveal route cutback plan that slashed away at western markets and made only a few pinpricks in the sacred-cow NEC has proven to be a costly failure. Amtrak now admits that cutting trains like the Empire Builder to less than daily service costs more revenue, sometimes much more revenue, than it saves in costs avoided. WE TOLD THEM THAT, for free; for $1,400,000, Mercer told them otherwise, and Mr. Downs and his staff didn't know enough about Amtrak's national network to recognize that they were being sold a big pile of moose manure labeled as chocolate pudding.
They didn't know that route eliminations and less than daily frequencies on well-patronized long haul routes cut revenues faster and deeper than they cut costs. These trains almost always produce a net positive cash flow based on their own operating costs. The fixed costs which Amtrak arbitrarily allocates against these trains do not abate when individual routes are cut, they just get reallocated to the remaining trains. WE TOLD THEM THAT, but they were too caught up in their own preconceived acceptance of the supposed "success" of the Northeast Corridor to know that their net cash flow was coming from the long hauls.
They didn't know that route cutbacks had been tried before, and almost always failed. WE TOLD THEM THAT, but they didn't want to know. Cancellation of the InterAmerican in 1979 ended up costing Amtrak more than $10,000,000 a year in net losses. The 1983 deal to eliminate the Rio Grande Zephyr and reroute Amtrak's Central Transcontinental Corridor train off the Union Pacific high speed line across Wyoming onto the then-D&RGW scenic line across Colorado and Utah caused a net loss in those markets of 60,000 riders a year. Cutting the Empire Builder in February 1995 to 4-day a week service west of St. Paul cost Amtrak more than 100,000 customers -- high revenue long distance customers -- and more than $25,000,000 in lost revenues.
As long ago as 1966-67, the Western Pacific Railroad's analysis of the massive financial losses it was incurring with the original California Zephyr showed the WP that cutting the train to three or four day a week operation wouldn't help -- they would lose most of the off-days' revenues, and avoid some direct operating expense, but would eliminate none of their passenger infrastructure costs. Even in a crisis that threatened the solvency of the whole company, the WP wisely chose not to cut the frequency of the train.
Now, Amtrak has learned the lesson, again, that it can't starve itself into prosperity. One of its senior managers said this summer that they now understand that to be involved in any market, they have to be there on a daily basis. Better late than never that they come to this understanding.
One Amtrak official told the press that they had learned that people wouldn't arbitrarily change their travel plans to fit Amtrak's limited services. Duh. Mercer Management had told Amtrak's CEO and CFO otherwise, but Mercer was dead wrong and management didn't know any better.
The tragedy here is that while Amtrak was continuing to flounder in a fog of miscomprehension of their own product, discretionary vacation and personal travel in the U.S. continued to skyrocket. According to a travel industry trade association study, personal travel over 100 miles rose 2% this summer over last year, July's total airline revenue passenger miles rose 6.5% over July 1995, and total trips increased 45% 1985-1995.
America is a highly -- and increasingly -- mobile society. But Amtrak, fixated on the slowly dying markets of the decaying northeastern cities, is missing the boat.
What is still to be learned is the embarrassing nonsense being spouted by Tom Downs, Mark Cane (head of Intercity), NARP (which ought to know better), and others that NEC "operating profits" subsidize national system trains. Let's be clear about this: THE NEC EARNS NO OPERATING PROFITS. NEC trains have "operating profits" on Amtrak's books only because Amtrak doesn't charge NEC infrastructure costs (stations, track maintenance, headquarters, police, depreciation, yards, etc.) against NEC train operations, the way they do charge the same expenses against western long hauls. This practice creates a false and misleading impression of the net financial results of Amtrak's train operations in the Northeast.
When these NEC expenses are charged against train operations, the NEC shows annual operating losses that exceed $250,000,000 in cash, and close to $375,000,000 in terms of generally accepted accounting principles. These losses have grown steadily over the years. That's more than $1,000,000 a day in losses just in the NEC. That in turn is why Amtrak is in such a panic over reduced federal operating subsidies for fiscal 1997: the grant will provide more than enough cash to restore and preserve daily operations in the entire national system if that was where Amtrak management chose to spend it. But if that was where management chose to invest their federal subsidy, Tom Downs wouldn't have enough left to sustain the huge losses resulting from business as usual in the NEC, where the northeasterners who run Amtrak simply prefer to spend it.
The failure of the Mercer plan represents much more than a costly flub by overpaid, know-it-all Boston consultants. The fact that it was implemented at all represents a failure of vision by Amtrak management which will cost numerous cities and two more states (three, if you count Idaho) all of their passenger train service, in order to preserve two-trains-an-hour service in the floundering markets of the Northeast. That is bad business, bad policy, bad management, bad politics, and bad judgment. It is completely unnecessary.
Amtrak could easily restore daily service on all national routes and preserve most of the existing redundant services in the NEC on the level of federal handout they've been generously offered for FY97. We've told them how to do it, too, and for free. But Tom Down's doesn't want to know.
If the group currently running Amtrak can't figure out how to run a national rail passenger service, when they have more than $1.5 billion in annual revenues to do it with, then perhaps it would be good policy and about time to bring in a new team that can.
In mid-August, Amtrak announced major changes in what's left of the national system. The Downs-Reveal regime continued its gutting of the national system based on its false perception that their train operations drive financial losses (rather than focussing on the headquarters, NEC and other fixed costs that are the real problem). The routes being eliminated altogether include:
No changes were announced for the NEC, so business-as-usual, two-trains-per-hour operations will continue in the Washington, D.C.-New York market (and one train every two hours New York-Boston) at an annual total cost to the public that approaches $1 billion a year.
At the same time, Amtrak implicitly repudiated many of the destructive mistakes it has made over the last two years in cutting train frequencies (pursuant to the $1.4 million Mercer Consulting plan championed by Amtrak CFO Betsy Reveal) by announcing that daily service would be restored to these routes or portions of routes effective November 10, 1996:
In addition, the existing two trains a day between New York and Florida would be subdivided into three trains a day, but with no increase in daily seat- or car-miles, with the extra expense apparently being justified by the increased marketability that will come from more schedule flexibility. (All of which is odd in light of the very heavy load factors on the existing two trains.)
Amtrak also would reverse its stupid Mercer-driven decision last year to eliminate the Broadway Limited (Chicago-Pittsburgh- Philadelphia-New York), by reinstating a through train on that route which would also run through New York to Boston, supported by a new mail contract.
In addition, plans were in progress to secure a mail contract for trains 1 and 2, the Sunset Limited, which would be the foundation for finally getting the Sunset to daily operation.
Restoration of daily service to the Empire Builder should, in MinnARP's opinion, rapidly move that train back into its historical position as the biggest single generator of revenue in the entire system. Before Amtrak's stupid decision to cut the Builder to 4-day a week service west of St. Paul in February of 1995, it was the highest- grossing train in the system, bringing in well in excess of $60 million a year in revenues.
Amtrak's Intercity Division is also studying two significant innovations first developed by URPA: running trains 3 and 4, the Southwest Chief through Chicago to Washington, D.C. replacing the Capitol Limited, and running trains 7 and 8, the Empire Builder, through Chicago ... to New Orleans(!) in place of the City of New Orleans. These run-throughs would achieve significant savings in equipment utilization and facilitate new marketing efficiencies to serve customers better. Trains can't make money sitting in yards.
Amtrak's decision to eliminate all service to Dallas-Ft. Worth infuriated local officials, including U.S. Senator Kay Bailey Hutchison, the new chair of the Senate subcommittee with budget authority over Amtrak, and immediately jeopardized Amtrak's prospects to become the contract operator of a new regional rail commuter train service which is expected to start revenue service in 1997. Sen. Hutchison has been a major backer of the Reunion Center redevelopment project in Dallas, centered on Dallas Union Station.
These changes in service were justified by Amtrak management as necessary to operate within a reduced federal operating subsidy. But Amtrak's justification is phony. Amtrak gets plenty of money to run its full national system on a daily basis on every route -- the annual operating subsidy grant is well over 200% of the subsidy needs of the national system. What Amtrak's decision really represents is not financial failure in the national system (even trains like the Pioneer and Eagle generate positive cash flow based just on train operations apart from arbitrarily allocated fixed and system costs) but management's subjective and political preference to allocate all available subsidies to business as usual in the NEC, which will incur cash losses this year in excess of $250 million and losses, measured by generally accepted accounting principles, in excess of $375 million.
NARP tacitly supported Amtrak's decisions, while continuing to support Amtrak's efforts to extort money from states for basic national services ($15 million from Texas, for example, to retain the Eagle) and to whine for a dedicated capital source to fund perpetual improvements to the NEC.
The continuing deterioration of Amtrak's financial results in FY96 also proves conclusively that the Downs-Reveal- Mercer route and frequency cutbacks over the last two years were wrong and ineffective. Amtrak cut too many revenue- producing trains, not too few. The cutbacks this fall will have the same effects -- these trains are covering the direct costs of their operations, and there is no basis for thinking that Amtrak can or even knows how to cut its headquarters, RSO, shops, station, and NEC costs enough, after cutting these revenue sources, to come out net ahead. They didn't do that successfully before and there's no reason to believe they will do so now. Meanwhile, two more states and a half dozen major cities will lose their last intercity passenger trains.
At the same time it was slashing western routes and proposing to end rail service altogether in two whole states and several major western and midwestern cities, Amtrak forged ahead on its multi-billion dollar enhancement program for the NEC. The project to extend the electrification beyond New Haven to Boston cleared its final environmental assessment and ground was broken on July 3. That project, which will include track realignments, high speed crossovers, bridge upgrades, clearance enhancements, new signalling and new electric power distribution management in the 157 miles Amtrak owns between New Haven and Boston, will cost the U.S. taxpayers more than two billion dollars before it is done. The ultimate goal of the project is to get New York-Boston trip times down to air-competitive 3-hour times.
Amtrak has justified the investment of this two billion dollars in the northern half of the NEC by claiming that it will boost ridership there by factors of 200 to 300%, even though past "investment" of nearly five billion dollars in the southern half of the NEC has not boosted ridership one bit there over 1975 levels.
The dirty secret of the NEC is that it is a black hole for federal subsidies. Despite billions in capital subsidies, annual operating losses have climbed steadily for 20 years and traffic has remained dead flat, hovering at the level of 10 to 11 million per year. (About half of the NEC's total traffic rides just in the 90 miles between New York and Philadelphia.) This costs the public more than a million dollars a day in operating losses over and above the massive public capital subsidies, and limited state commuter subsidies.
The Empire Builder is an enigma to Amtrak's senior management. Its solid economic performance confounds every perception and "theory" the northeastern transit politicians who run Amtrak have about rail service. The train (west of Fargo and Grand Forks and all the way to Spokane) traverses a demographic wilderness, some of the least populated geography in the 48 states. The Empire Builder in Montana is farther removed from the rest of the route system (or what's left of it) than any other Amtrak train ever is, even the Sunset Limited. It traverses the most challenging climate of any Amtrak train -- winter weather often reaches extreme cold temperatures of 30 degrees below zero with windchills of -80 degrees and worse. It runs (at best) only once a day. It runs on a heavily trafficked, mostly single track, main line of the BNSF, the former Great Northern "high line."
The Builder's "peak loading" point (outside the Chicago-Milwaukee urban corridor), the point at which it typically has more people on board than at any other point on its itinerary, usually occurs near Wolf Point, Montana, which is in an extraordinarily unpopulated part of North America. But the typical boardings at Wolf Point rarely exceed four or five lonely souls per trip.
And yet ... run on a daily basis, and with a mail contract, the Empire Builder pulls in more revenue than any other single train in the system, and throws off more than $20 million in positive cash flow above direct operating costs.
An Amtrak internal study last year based on Mercer Consulting's data and badly flawed methodology suggested that Amtrak thought it could save tens of millions of dollars annually by not running a train at all between Grand Forks and Spokane!
Why is this? How do we explain these seeming contradictions? Amtrak's senior management sure doesn't get it. What is it about the Empire Builder that can pull in more than $60 million a year from the amazingly unpopulated area it serves?
The answer is simple and it is exactly the factor that management fears because of its flawed understanding of what drives costs and revenues in a national rail network. The answer is distance.
The economic structure of the Empire Builder is remarkably similar to that of a 747 flying across the North Atlantic ocean: nobody lives out there, there aren't any on-and-off passengers and it's remarkably expensive to operate the vehicle on a per hour (or per mile) basis. But the passengers (and mail and express business) on board are also paying in revenue on a per mile basis. Even with fare taper (where per-mile prices diminish as the total distance increases), the more miles that 747 covers the more revenue it brings in and the easier it becomes for those additional miles' revenues to cover not only the incremental direct operating costs of the vehicle but also the airline's fixed costs (headquarters, hangars, terminals, taxes, etc.) that enable the airline to incur the variable costs (labor, fuel, food, ticketing, etc.) of flying the plane. Northwest Airlines carries fewer than 20% of its passengers on its long haul overseas flights but those passengers produce 40 to 50% of the company's revenues and a similarly disproportionate share of its worldwide profits. Amtrak's long hauls collectively do exactly the same thing: carrying 25-30% of system passengers, they consistently product 50 to 60% of system revenues.
Item: The Empire Builder has the longest average trip length of any Amtrak train.
Sadly, Amtrak headquarters is blinded by their own faulty internal accounting systems and believes that the Empire Builder really costs them money rather than earning. The failed Mercer frequency cuts should teach Mr. Downs a useful lesson. Amtrak needs more trains like the Empire Builder, not fewer.
"... will not achieve our goal of becoming North America's best railway. The lifeblood of prosperity is growth."CN President and CEO Paul M. Tellier, as quoted in the August 1996 Railway Age.
On a recent visit to our daughter in Seattle, we took the opportunity to try the Talgo train, and made a one-day round-trip to Vancouver, BC. It was delightful, though not fast. Very likely the tracks are not up to is potential speed. And the tracks follow the coastline, largely, so it is a long way to Vancouver compared to the highway. It took four hours; one can drive in about two.
The Talgo coaches are noticeably smaller than American cars -- only three seats and an aisle across (1, aisle, 2) and the ride was somewhat bumpy because of the roadbed (there have been recent washouts on account of the rains). The "Mt. Baker International" has both a lounge car, where one can get snacks, and a real diner with table cloths and napkins. The food is only passable since it is obviously microwaved. On our return we improved our dinner considerably by ordering the smoked salmon appetizer and an excellent piece of chocolate cake for dessert. No microwaving!
[Ed. note: Despite its capacity-limiting fixed consist, the Talgo has become a very popular train. WashDOT, co-sponsor of the service with Amtrak West, expects it to carry 100,000 riders in its first year.]
The above are not my ramblings, but I think they are very important opposing views to Amtrak's analysis of the national rail passenger system. I tend to believe the above analysis is more accurate than the analysis that has been done to date. You should form your own conclusions and then write to Amtrak, your Congressman and Senators. Before passenger rail can be expected to survive into the next century, we must know today where it is succeeding, where it is failing, do more of what is succeeding and less of what is failing. An inaccurate perception of what works and what doesn't will most likely lead to the termination of Amtrak's profitable routes while unprofitable routes continued to be financed. Even that can only continue until taxpayers become frustrated with funding a non-existent rail passenger system and pull the final plug on everything!