Second in a Series: Cutting Service Actually Costs More

Written by David Peter Alan, Contributing Editor
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This year, Americans held what may have been the most subdued observance of the Fourth of July in the nation’s history. There were few parades, town celebrations or fireworks displays in recognition of the nation’s birthday. In short, there were essentially no parties or events, so few people had reason to go anywhere.

The first article in this series, published on July 4, was somber as well. It outlined Amtrak’s threat to curtail mobility for millions of riders who depend on its trains. Americans have always considered the freedom to travel as one of the features that “Made America Great” but “America’s Railroad” (as Amtrak calls itself) is now prepared to require customers to consult a calendar to find out whether or not Amtrak will permit them to travel on the day they wish to take a trip.

Amtrak President and CEO Bill Flynn.

On May 24, Amtrak President William J. Flynn asked Congress for a supplemental appropriation of $1.475 billion, on top of the $1.02 billion that the railroad has already received under the CARES Act. The new demand came in light of the shutdowns caused by the COVID-19 virus and the precipitous drop in travel that ensued when much of the country was locked down. At this writing, Amtrak is still running most of its national network—a skeletal web that has historically included only about a dozen long-distance (L-D) trains every day—as it has since 1997, except for the two that only run three times per week. Effective Oct.1, every L-D train that caters to riders without automobiles (the Auto Train will be the sole exception) will join those two. Amtrak has already implemented the first reduction by cutting service between New York and Florida in half. That started on Monday, July 6.

Amtrak Auto Train.

The southbound Silver Meteor (Train 97, via Fayetteville and Charleston) leaves New York Mondays through Thursdays, while the Silver Star (Train 91, via Raleigh and Columbia), leaves New York Fridays through Sundays. The northbound Silver Meteor (Train 98) leaves Florida Sundays through Wednesdays, while the Silver Star (Train 92) leaves Florida Thursdays through Saturdays. Some riders in the Carolinas now face the prospect of waiting for up to five days for a train that will serve their city or town. Trains 89 and 90, the Palmetto, an all-day train between New York and Savannah via Charleston, will continue to operate daily, at least for now. So Amtrak has already begun the dismantling process, to demonstrate that it “means business.” Congress and USDOT officials, please take notice!

Amtrak claims that the purpose of cutting the L-D network back to three-day-a-week operation is to save money. That does not make economic sense, and Amtrak knows it. The fixed costs of operating continue, no matter how few or how many trains Amtrak (or any other provider) runs. The more trains that run, the smaller the fixed cost becomes as a component of the overall cost, whether amortized over the number of trains, the number of cars or the number of riders. If fixed costs are the same for a train that operates every day and one that operates three times per week under comparable circumstances, every dollar of the fixed cost of the daily train becomes $2.33 for the tri-weekly train. Cutting service saves some of the variable operating costs, but the extra fixed cost is a lot to overcome.

“Amtrak claims that the purpose of cutting the L-D network back to three-day-a-week operation is to save money. That does not make economic sense, and Amtrak knows it.”

Transportation economist and Railway Age Contributing Editor Jim Blaze said that Amtrak needs to maximize revenue against the sunk costs of rolling stock and available track capacity: “Parking cars with seats already on the balance sheet is naïve at best. Discouraging business with less frequent service  is a very bad economic/marketing/financial idea.” Thus, equipment utilization is an important factor in keeping the L-D trains financially healthy, or at least to keep them going. Blaze has more to say in commentary following this one.

There have been proposals that would have remedied the deficiencies of Amtrak’s two historically tri-weekly operations, purportedly to Amtrak’s benefit, as well as that of the riders. At a conference sponsored by the Rail Users’ Network (RUN) in 2013 in Chicago, Brian Rosenwald, Amtrak’s manager in charge of L-D trains at the time, presented his plan for improving scheduling and equipment utilization on the tri-weekly Sunset Limited and still-daily (for now) Texas Eagle. Rosenwald’s plan would have allowed the Sunset to operate daily, with no additional equipment and at very little additional cost. Under his plan, the full-consist train (including sleeping cars, coaches, and food service cars) would have run between Chicago and Los Angeles through Texas, along with a connecting daytime train between San Antonio and New Orleans; the latter carrying coaches and a diner-lounge car. There was also an initiative (still ongoing in some form) to run the Cardinal between New York and Chicago, through West Virginia, every day. It requires two consists to run that train on a tri-weekly schedule, but with a third consist added, it can run daily. If those two initiatives had been implemented, the entire Amtrak L-D network could have run every day. They were not.

“The fixed costs of operating continue, no matter how few or how many trains Amtrak (or any other provider) runs. The more trains that run, the smaller the fixed cost becomes as a component of the overall cost, whether amortized over the number of trains, the number of cars or the number of riders.”

Amtrak is fully aware that running trains less-often than daily results in a loss of revenue. Years ago, Amtrak hired Mercer Management Consulting to suggest ways to save money. Mercer recommended eliminating some routes and running others three or four times per week. That happened in the mid-1990s, and there are managers at Amtrak today who were there during that period. So Amtrak still has the institutional memory of that failure.

Ross B. Capon, who was Executive Director of the National Association of Railroad Passengers (NARP, now the Rail Passengers Association, or RPA) at the time, remembered the experiment and described it as not producing the desired results. This writer remembers how difficult it was to plan a multi-segment itinerary on Amtrak during those times, especially having to figure out the days when connections between trains were available, and planning the entire trip around those connections. For example, the connection from the now-defunct Pioneer to the now-defunct Desert Wind at Denver worked only one day a week (on Thursdays, as it turned out). Both trains were discontinued in 1997.

After some of the cuts had become permanent and other trains were restored to daily operation, it had become widely-known that the Mercer cuts had actually cost Amtrak more than it saved, regardless of the inconvenience caused to the riding public, or maybe because of it. The Government Accountability Office (GAO) noticed that, too, and reported it to Congressional committees on May 14, 1998. The report, entitled INTERCITY PASSENGER RAIL, with a subheading Financial Performance of Amtrak’s Routes, was issued in connection with the Amtrak Reform and Accountability Act of 1997.

The GAO report noted: “Amtrak closed 4 routes, truncated 6 routes, and reduced the frequency of service on 11 routes, typically from daily to three or four times per week. Amtrak achieved $54 million in cost savings in fiscal year 1995; however, it subsequently restored much of this service because the ridership and financial performance of routes with less than daily service were worse than anticipated.” The report also noted that the two trains that historically operated on tri-weekly schedules (and still do), the Sunset Limited (which ran between Los Angeles and Orlando, Florida at the time) and the Cardinal were the only L-D trains for which operating expenses exceeded passenger revenue by a factor of three. The only corridor route that shared the distinction was the Wolverine service between Chicago, Detroit and Pontiac, Michigan.

Amtrak Wolverine, June 2019. Michigan Central Lines photo.

Regarding the Mercer cuts themselves, the report described some new state-supported services initiated at the time, and summed up the adverse effects that the cuts had on Amtrak’s bottom line (at 13): “These route and service changes resulted in a 13% reduction in the total miles that Amtrak trains traveled from fiscal year 1994 to fiscal year 1996 and $54 million in cost savings in fiscal year 1995. However, during fiscal year 1996, Amtrak’s overall ridership dropped by 1.1 million passengers, or 5%, and anticipated reductions in operating costs were not realized on routes with reduced frequency of service. Amtrak officials told us that these problems occurred because (1) while passengers affected by frequency reductions generally adjusted their travel plans to conform with Amtrak’s more limited service in 1995, this rider behavior did not continue into 1996; (2) management did not cut costs as much as planned; and (3) less-than-daily service caused less efficient usage of equipment and other unforeseen problems.”

Amtrak’s own officials at the time were aware that the Mercer cuts cost more than they saved; at least after the fact. Thomas M. Downs, who implemented the cuts as President of Amtrak, is still around and on the scene, fully capable of speaking out about the situation. His successor and fellow New Jerseyian, the late George D. Warrington, did. At an Oversight Hearing on Amtrak, held before the Senate Committee on Commerce, Science, and Transportation on September 26, 2000, Warrington said, “I will tell you, though, that generally, in retrospect, all of those eliminations back in 1995 and 1996 ended up costing the company more in lost revenue than we were able to take out in the way of expenses, given the fixed-cost nature of the operation.”

The record presents proof that Amtrak officials were aware of the adverse financial effects of cutting service to less-than-daily on L-D routes. Warrington’s admission to the Senate committee establishes this (see Rule 801(d)(2) of the Federal Rules of Evidence), and Amtrak managers today cannot deny their own company’s institutional memory of the economic folly of offering service only on certain days. The cited statements and documents appear to establish a prima facie case that Amtrak is acting maliciously or with reckless disregard for the public. What defenses can Amtrak now assert?

Executive Vice President and Chief Marketing and Commercial Officer Roger Harris.

Ironically, Amtrak now claims that the impending cuts might be only temporary. Executive Vice President and Chief Marketing and Commercial Officer Roger Harris (another airline man, like Richard Anderson and successor Bill Flynn), reportedly wrote to Amtrak employees on June 15 that daily service could be restored as demand warrants, possibly as soon as the summer of 2021. This writer finds that assertion very difficult to believe, because it is reasonable to expect that Amtrak will lose more money running fewer trains, so the additional funds available to restore daily operation next year will not be available.

As far as demand is concerned, riders are effectively required to be familiar with the schedules now, or it is difficult to get them. Amtrak has not displayed train schedules on its website since the COVID-19 virus hit, which makes it very difficult for potential customers to see when the trains run, particularly if they are not familiar with Amtrak operations. This will become much worse if the riding public cannot easily find out the days when Amtrak will permit them to travel. In effect, Amtrak is keeping vital information away from the riding public,thereby suppressing the demand that it claims it needs to restore daily service. So, without financial help from Congress and possibly even with it, it does not make sense to expect that Amtrak could restore daily service on its own initiative.

Amtrak’s own website belies the assertion that more demand could convince managers to restore daily service. According to the “reservations” feature on the site (the only place where schedules can be found), Train 98 was sold out the day before its first departure as the only train heading northbound from South Florida, on July 6. That fact alone should dispel any argument that Amtrak could proffer about excess capacity that riders do not wish to fill, or about how additional demand could someday be accommodated with more-frequent service. With the difficulty that riders face in getting schedules, coupled with sufficient demand to fill all of the capacity that Amtrak is offering on the route, the only way that Amtrak could satisfy any “additional” demand would be to keep running the “additional” train that has just been eliminated, starting that day. Therefore, before the first service reduction was even implemented, Amtrak has demonstrated that it does not make sense. It seems clear that Amtrak appears to be exhibiting a motive other than saving money. We will have more about that later in this series.

VIA Rail Ocean.

A relatively recent article published in Canada highlighted a similar result on VIA Rail to Amtrak’s experience a quarter-century ago. Transport Action Atlantic (TAA) has been advocating for improved transportation in the Atlantic Canada region, which was served historically by VIA Rail’s Ocean train, running between Montreal and Halifax, Nova Scotia. Late in 2012, VIA Rail implemented several cuts, similar to the ones threatened by Amtrak. The Ocean was cut from running six days a week to three, while the transcontinental Canadian between Toronto and Vancouver was reduced from three weekly frequencies to two. VIA Rail made other cuts at the time, too.

Tim Hayman analyzed the numbers in a story in the Fall-Winter, 2016 issue of TAA’s Bulletin bearing the headline “Fewer Trains, Higher Cost – VIA’s Tri-Weekly Ocean Continues to Cost More Than 6 Day/Week Service.” He started by saying: “When VIA Rail cut service on the Montreal-Halifax Ocean in half back near the end of 2012, it claimed that the move was made to reduce the cost of running the service. The Ocean, like all of VIA’s services (and indeed, nearly all public transportation systems worldwide), operates at a net “loss,” with subsidies required to offset the operating costs of the service. Trains like the Ocean require a somewhat higher subsidy per passenger than VIA’s Corridor services, and VIA management was supposedly looking for ways to reduce spending across the system. So the Ocean was reduced from six-day-per-week operation to only three. Examples from Canada and elsewhere in the world continue to show that frequency reductions are not an effective means of reducing costs. While they may result in some immediate cost savings, any cost reductions are offset almost without fail by greater reductions in ridership as a result of the less convenient service.”

Predictably, the savings that VIA Rail realized at first were meager, but Hayman found that that it would have cost less to run the train more often. He reported that costs fell by about 10%, while revenue dropped by 25%. The shortfall for six-day operation was C$34.9 million. It was reduced in 2013 to C$33.4 million under tri-weekly operation. Even if VIA Rail could have argued that the savings of roughly 4.3% justified the inconvenience to the traveling public, the shortfall later increased, and had grown to C$36.7 million by 2015; an increase of 5.4% over the net cost of running the train twice as often. In short, VIA Rail was losing more money by running a train half as often as on the previous schedule, three days per week, when it formerly ran six days per week.

VIA Rail Canadian at Jasper.

Hayman also reported that the subsidy per passenger-mile had grown from C55¢ in 2011 to C89¢ in 2015; a 60% increase. His summary: “The problem with reduced frequency is that costs don’t come down enough, while revenues plummet … Basically, VIA’s argument that cutting frequency to three trains a week was necessary to save costs was simply wrong. Reducing the frequency has, as many predicted, caused a decline in ridership that offset any savings from running fewer trains, and has resulted in a service that costs VIA more both in absolute terms, and on a per-passenger basis.”

Today, neither the Ocean or the Canadian are running at all, and will not run until this coming November, at the earliest. Would Amtrak suspend future tri-weekly trains in a similar manner? Amtrak could label them “experiential trains” or “cruise trains” and claim that they are not an essential travel option. If it happened at VIA Rail, it could happen at Amtrak, too. Even if those trains keep running on tri-weekly schedules, how much additional loss would Amtrak incur by continuing to run them?

Hayman’s report is similar to those that followed the Mercer cuts at Amtrak. Revenue did not drop much at first, but it did later. It appears that at least some riders were willing to accommodate Amtrak’s choice of travel days for a short time, but they later gave up and found some other way to get to their destinations, or they did not make the trip. It is also possible that they stayed loyal to Amtrak for a while, hoping the cuts would be temporary. Some of them were, but the service reductions lasted for two to three years. Other trains that were discontinued at the time never came back.

Amazingly, Amtrak requested less money toward its FY2020 budget than Congress had actually appropriated, according to a report by Jeff Davis in the March 21, 2019 edition of Eno Transportation Weekly headlined “Amtrak Requests $141 Million Cut in Its Own Budget.” Davis reported that Amtrak’s request for the Northeast Corridor (NEC) was $50 million below the Congressional appropriation, while the request for the L-D trains was $91.6 million less than Congress had appropriated. Amtrak turned down nearly $100 million that Congress had offered for those trains last year, but many of the same managers are still running the railroad (despite Flynn replacing Anderson), so Amtrak’s current protestations that it is necessary to cut service to same money do not make sense on their face.

In the same report, Davis listed the financial performance numbers of all of Amtrak’s L-D trains, including on a passenger-mile basis (which corrects for the length of trips that riders take). Again, the results do not support Amtrak’s arguments about cutting service to limit losses. Davis reported numbers from fiscal 2018, the latest available at the time. Amtrak’s two tri-weekly trains, the Cardinal and the Sunset Limited, showed the biggest losses per passenger-mile by far, exceeding those of the worst-performing daily train (the Crescent between New York and New Orleans) by more than 50%. During the same year, the two tri-weekly trains carried slightly fewer than 100,000 passengers, less than half the number carried by the Capitol Limited (between Washington, D.C. and Chicago, via Pittsburgh). So Amtrak management knows that running trains only three times per week discourages riders from using those trains, and renders the revenue losses for those trains significantly worse than for trains that run every day. It cannot deny numbers that are only two years old.

So, why would Amtrak threaten such severe and demonstrably costly service cuts? Maybe Amtrak is using hardball negotiating tactics with Congress, even though it is government-owned, but that appears highly unlikely. To this writer, at least, it appears far more likely that Amtrak’s opposition to its L-D trains is ideologically based. We will explore that possibility in the next article in this series.

JIM BLAZE: A RAILROAD ECONOMIST’S  PERSPECTIVE

Jim Blaze

Amtrak’s current sunk cost fleet and its trackage rights with now far less freight train congestion is at a strategic fork in its medium- to long-distance passenger market relevance. Regardless of route chosen, senior managers and the Amtrak Board will leave their fingerprints on the outcome.  They have nowhere to hide, professionally speaking.

The economic principles are simple. There are two choices:

  1. Sunk costs of assets can be milked during difficult times to earn revenues that cover much of the variable costs, like fuel and crews. Preserving public service at a base daily level requires pricing service marginally to remain market-relevant. Preserving service generates market presence—an image.
  2.  Alternatively, consider those thousands of Amtrak coach seats as just accounting liabilities. Written off for scrap, the generate almost no cash—zero earning value. Simultaneously walking away from a temporarily lower customer base means shifting toward an “out of sight/out of mind” market absence.

The first choice marks the character of a market aggressor. That characteristic is strategic—in it for the long haul role. Gambling with already-spent “house money” because the taxpayers are the owners of those seats, and the ones whose representatives authorized a business- like growth effort.

The second choice, the path of service frequency cuts, reflects passive thinking based upon cost control accounting and far lower market relevancy efforts. It’s based on protecting the U.S. government from an Amtrak bankruptcy. It’s completely risk adverse, a tactical economic outlook.

Let’s be honest. Amtrak’s shift to three-days-per-week service signals an exit strategy. Storing lots of these already-possessed train seat-miles provides almost zero business evidence that the long-distance trains will return as a big-time role player.

Therefore the strategic play is to stay the course: Re-price a bit lower to maintain presence and modest cash flow. It’s a simple equation used by freight railroads. That’s the cash flow model.

Every financial and market leader comprehends this strategic approach. There is no mystery here. Just modify the freight rail term “carloads” to passenger seats. Take those thousands of daily car seats in hundreds of Amtrak cars and be aggressive. Use those car seat-miles—or take the low risk path. Adapt, improvise, grow—or become irrelevant.

Reducing a possible failure risk by maybe a hundred million dollars or so? Against a possible federal $4 trillion stimulus deficit, an Amtrak “cut and store the seats” approach is a federal budget accounting rounding error.

Collectively, the choices that Amtrak’s C-Suite senior managers and board make will be their “professional legacy”—which is beginning to look more and more like an oxymoron.

David Peter Alan is Chair of the Lackawanna Coalition, an independent non-profit organization that advocates for better service on the Morris & Essex (M&E) and Montclair-Boonton rail lines operated by New Jersey Transit, and on connecting transportation. In New Jersey, Alan is a long-time member and/or board member of the NJ Transit Senior Citizens and Disabled Residents Transportation Advisory Committee and Essex County Transportation Advisory Board. Nationally, he belongs to the Rail Users’ Network (RUN). Admitted to the New Jersey and New York Bars in 1981, he is a member of the U.S. Supreme Court Bar and a Registered Patent Attorney specializing in intellectual property and business law. Alan holds a B.S. in Biology from Massachusetts Institute of Technology (1970); M.S. in Management Science (M.B.A.) from M.I.T. Sloan School of Management (1971); M.Phil. from Columbia University (1976); and a J.D. from Rutgers Law School (1981).

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