Repeat actions don’t produce different outcomes

Written by Andrew Selden
image description

Amtrak CEO Richard Anderson and his chief deputy, Stephen Gardner, have proposed eliminating the company’s interregional trains in favor of a scattering of discontiguous, higher frequency short corridors connecting nearby city pairs. But this reflects a deep misapprehension of the performance of the company’s three primary business groups, and a surprising emphasis on minimizing the returns on investment of the company’s capital resources.

It also amounts to repeating an action while expecting different outcomes. Reducing interregional service in favor of short corridors has all been tried before, and has never had a financially successful outcome.

On each previous occasion when Amtrak eliminated interregional trains to “cut losses,” the action had the opposite result. In 1979, when the company cut four interregional routes; in the mid-1980s, when it eliminated the Pioneer and Desert Wind; and again in the early 1990s, when then-CEO Tom Downs, on the advice of Mercer Management Consulting, cut frequencies of long-distance routes, Amtrak’s corporate loss and subsidy requirement in subsequent years rose rather than fell.

More recently, when the White House budget for FY2018 proposed eliminating all interregional services because, as Amtrak often claims, they purportedly lose gobs of money and don’t serve many customers, Amtrak’s then-CEO, Wick Moorman, told Congress, in writing, that such a step would increase Amtrak’s corporate loss and subsidy requirement by $423 million. Graham Claytor once told an open meeting of the Rail Passengers Association (at the time, NARP) that the interregional trains were “operating in the black.” This has been true for decades.

It is not possible to eliminate an activity that you claim “loses money” and then have the enterprise’s overall loss go up, not down. Yet that is what has happened each time Amtrak tried it—cut interregional service, and the next year the deficit is higher, not lower.

Anderson’s proposal also neglected to mention that under Amtrak’s use of the PRIIA law, Amtrak will not operate a train on a route shorter than 750 miles (except in the Northeast Corridor) unless a state (or other sponsor) pays it to do so. Most states are not lining up to pay for substitute corridor trains to replace the interregional trains that comprise the national network that Amtrak is chartered to operate. This means that Anderson’s proposal really is to do away with intercity service in most of the country.

Apart from the history, Anderson’s proposal also reflects a deep misunderstanding of the objective business performance of Amtrak’s three groups of trains. The interregional trains are critical to Amtrak’s future because they are the heart of Amtrak’s business. By objective measures (the same metrics that Delta and other airlines use to measure their performance), the interregional trains are Amtrak’s largest, strongest and by far its most commercially successful business segment. They are the only segment where Amtrak historically has earned a positive return on invested capital, and the only segment that is even capable of meaningful growth.

Amtrak goes to considerable lengths to conceal the consistent production by the interregional segment of the largest output of passenger transport measured in annual revenue passenger-miles of any of Amtrak’s three segments. These trains routinely produce half again the output of the NEC or the regional corridors. “Ridership” measures nothing useful in assessing Amtrak’s performance. If anything, what is truly remarkable about Amtrak’s long-distance services is how few customers it takes to outperform the larger number of customers in the short markets, and how staggering Amtrak’s growth and results would be with easily-attainable modest growth in these markets.

The interregional trains also consistently produce the greatest load factors (demonstrating both capital efficiency and the degree of underinvestment in these services), and market share for intercity rail in their respective corridors. The intercity market share of the interregional trains is often more than twice Amtrak’s market share in the NEC.

The short regional corridors that Gardner and Anderson prefer represent the smallest, weakest and least commercially successful trains Amtrak operates, by the same objective data. These trains serve useful functions, mainly feeding traffic to and from the interregional routes. But they suffer two significant handicaps: Their routes are half of the average trip length of the interregional trains, so they cannot possibly replace them, and they compete against private cars in cars’ strongest market. In the NEC, private cars’ market share of intercity—not commuter—passenger transport is approximately 30 times greater than Amtrak’s. As stand-alone services, the short corridors cannot, and do not, reflect a strong business (outside California). In terms of both output and market share, the short corridors (including the NEC) are Amtrak’s smallest and weakest segments.

This matters even more because the short corridors that are the focus of Gardner’s and Anderson’s preference are also the weakest of Amtrak’s businesses in generating positive returns on capital investment, measured either financially or in terms of incremental output of annual revenue passenger-miles per dollar invested. The interregional services by wide margins are the strongest by both measures of return on capital.

The interregional trains are the most capital-efficient segment of Amtrak’s business because their load factors are significantly higher than in any of the short corridors, including the NEC. Indeed, most of the interregional routes operate at a level that is statistically close to sold-out. Thousands of the highest revenue would-be passengers are turned away each year for lack of capacity, mainly in the sleeping cars. This alone demonstrates that the interregional services are undercapitalized (demand exceeds capacity) while the NEC, like the regional corridors outside of California, is overcapitalized (capacity exceeds demand). It surprises many to learn that, outside the commuter territories of Philadelphia-New York and New York-New Haven, and setting aside purely commuter passengers, Amtrak’s NEC load factor for intercity traffic does not (and arithmetically cannot) exceed about 25%. How many flights does Delta operate with a 25% load factor?

Commercial success and social relevance are both measured by market share—what proportion of market demand does a given product or service capture? Interregional trains in their respective corridors usually capture shares that are twice the share of any short corridor. The reason is simple: in markets of 100-500 miles, the private automobile is the overwhelming mode of choice for American travelers, capturing market shares of 90% to 95%. Air, bus and rail compete for the leftovers. And to be competitive with cars, trains have to offer frequency and reliability along with low fares. Frequencies must be inversely proportional to distance to compete against cars in their strongest market. Outside of California, Amtrak has never succeeded in that competition. And higher frequencies require costly infrastructure that Amtrak cannot afford.

That returns us to the subject of money. Amtrak needs lots of subsidy money, because the sum of its NEC train and real estate revenues plus state commuter agency track access payments falls as much as a billion dollars a year short of covering all of Amtrak’s ongoing costs of owning and operating its NEC railroad. Amtrak claims a mythical “operating” surplus in the NEC by concealing the massive ongoing fixed facility costs that are necessary to run trains and generate revenues in that corridor.

Amtrak then claims that its financial woes arise not from its unrecovered NEC infrastructure costs but from its interregional services, which we know in fact to be its only cash-positive business segment (to the tune of $400 million-plus a year, per Moorman). How can Anderson and Gardner think that cutting out a segment that reduces Amtrak’s loss will improve its financial results?

The explanation is hiding in plain sight. Amtrak publicly reports what it says is the performance of its various trains and routes by using data derived from its Amtrak Performance Tracking (APT) system. APT, which Amtrak says is its only route accounting system, is a one-off tool that purports to allocate all of Amtrak’s costs to all of its trains. It is deeply flawed and internally contradictory (as shown in a 2018 White Paper released by RPA, and in criticisms by Amtrak’s own Inspector General). But RPA missed the forest for the trees.

APT’s greatest failing is not its many internal flaws but that Amtrak misrepresents APT data as reflecting what businesses call their “financial results of operations.” But APT does no such thing. It cannot do so because APT is not a financial accounting or reporting system. It does not (and does not pretend to) conform to Generally Accepted Accounting Principles (GAAP). It is not audited. It is not necessarily consistent from one period to another. APT values instead reflect whatever management wants them to because 80% of APT data is made up from algorithms devised by management, rather than by tracing costs to the activities that incur them. And APT does not properly address capital costs.

Because APT is not a GAAP-compliant financial accounting system, it cannot and does not report financial results of anything. Its reported values are not “profits” or “losses” but an arbitrary artifact of management’s assumptions and biases (colored by its own internal flaws). This is the antithesis of financial statements that do reflect the financial results of operations of an enterprise in a given period. APT numbers are not a prudent foundation for making capital investment or strategic business planning decisions.

No one can know with any certainty why Anderson and Gardner continue to rely upon a tool that is incapable of doing what they say it does. But the result is their proposing, once again, to dismantle Amtrak’s largest, strongest business, the only one it has that produces an annual free cash flow of more than $400 million, and expecting that to improve the bottom line. No rational executive would abandon profitable lines of business in sectors where the company has its strongest competitive position and growth prospect to invest scarce capital instead into its smallest and weakest lines. This would be the same as Delta Airlines abandoning its lucrative trans-Atlantic and trans-Pacific routes, selling off the A-350s and 777s, and buying more 737s to go after only the short-haul markets inside the U.S. That is a remarkably counterproductive way to invest capital.


Categories: Commuter/Regional, High Performance, Intercity, Passenger Tags: ,