Amtrak and the U.S. freight railroads – what’s the essential business model difference?

The birth of Amtrak and Conrail

Amtrak was created in 1970 by the U.S. Congress to save intercity U.S.  passenger rail service.
Total passenger railway volumes had been dropping since the 1920-30 period. The exception took place during World War II, when trains were used for mass movements of members of the Armed Services and civilians who were diverted to the railroads because of the impact of gas rationing. By the mid-1960s, both the railroads and the politicians not only realized that the intercity passenger rail business was losing money, but that is was likely that passenger rail service would not recover without government assistance.

Simultaneously, railroads like the Rock Island Railroad, the New York Central and the Pennsylvania Railroad were losing money on their freight business. Something had to give way.  It was the passenger sector. Meanwhile, the money-losing freight railroads in the northeastern U.S. became “Conrail.”

The term “for profit” was an aspirational goal for what became Amtrak. Few professional railroaders in 1970 saw a glide path for Amtrak’s growth and profitability. Even fewer think it is possible now…

Amtrak inherited a fleet of older passenger cars and locomotives. Its business renewal was – and continues to be – dependent upon the “generosity” of Congress. Please note that Congressional generosity is actually taxpayer generosity…

The essence of “the deal” was that Congress would offer enough subsidy funding and capital for Amtrak “to survive.” There have been occasional bursts of capital for some newer cars and locomotives and track improvements between Washington, D.C. and Boston on the heavily traveled Northeast Corridor. A deeper examination reveals, however, that these projects are better described as catch-up against decades of deferred passenger network maintenance.

But as rail experts like Lou Thompson (World Bank and passenger rail consultant) suggests – Amtrak’s situation then and now is “not enough funding and capital to succeed.”

Amtrak does not offer world-class, high-speed transport on the Northeast Corridor. In order for Amtrak’s service on the Northeast Corridor rail line to become competitive with the best-of-class French, German, Japanese (and now Chinese) very high-speed rail passenger corridors would require capital investment in excess of $30 billion.

Amtrak’s way forward?

Amtrak recently suggested a strategic plan with a price tag of billions of dollars to improve its aging infrastructure (track and bridge structures) and its railcar fleet. Realistically, Amtrak can only execute what Congress funds. As of now, there is no such funding bill with the solid support of both houses of Congress and the White House.

Without funding, Amtrak can only offer a concept for debate (by Congress, the media, the freight railroads, its critics and its supporters). Amtrak’s Board cannot self-fund or offer tangible assets to investors as collateral for its concepts.

This lack of investment-grade assets and positive passenger cash flow from current and  proposed future business volume is a fundamental distinction when compared to the prospects and the current returns in the rail freight sector.

Now in its 43rd operating year, Amtrak’s recent fiscal year ridership overall was up – but only by 1.3 percent. It’s calculated operating ratio (percent of expenses versus customer paid revenue, with the lower the number the better) is above 100. Freight railroads’ operating ratios are currently in the 60 to 65 range. That’s a world of difference.

Amtrak has never been profitable; and at best its management predicts only a possible near break-even status (excluding debt repayment and interest on capital – which must be “free”).

Amtrak owns very little right-of-way. The majority of its long-distance passenger trains operate under a special track use deal that Congress negotiated as a quid pro quo for freight railroad financial relief back in 1970. Amtrak trains still operate today over the private freight railroad lines at “an avoidable cost” fee.

What’s avoidable cost?  The best economic definition might be this – Amtrak typically pays a freight railroad whose rails it uses only the cash equivalent of what would thereafter be an actual expense if the passenger trains suddenly stopped running. That is not a self-sustaining business model.

Why so cheap? First, because few original Amtrak sponsors in Congress saw a realistic profit potential for Amtrak without such low use fees. Secondly, because the nearly bankrupt freight railroads in 1970 needed to receive some minimal track use compensation as part of “the deal.”

Over the past 43 years, Amtrak’s cumulative loss has exceeded $60 billion. In comparison, the seven biggest U.S. freight railroads typically spend more than that every year in capital maintenance and improvement.

Another way to look at the issue – Amtrak’s cumulative loss is more than what Warren Buffet paid to purchase the entire BNSF railroad freight company (which runs at a profit). As playwright Andrew Lloyd Webber observed in Starlight Express, “Freight is Great.”

The freight railroads since the 1970s…

In contrast, the 1970’s U.S. rail freight network – back then also facing dim financial prospects
– has instead witnessed a strong growth in traffic, revenues, cash flow and ton-miles.  

At the time of Amtrak’s creation, few economists and rail industry experts expected a rail freight Renaissance period.  Back then, many freight railroads were at best “hanging on.”

They were wrong. Traffic growth was powered by Powder River low-sulfur domestic coal – plus the commercial success of the double-stacked container trains.

The major improvements in the intervening 43 years include: much longer train lengths; axle loading increased freight cars from 263,000 pounds to more than 286,000 pounds; the size (and therefore the cost) of on-board train crews were reduced; and the freight railroads were allowed new rate-making freedom under the terms of the Staggers Act.

Freight efficiency improved over stages to the 80 to 85 range; it is now below 69 (lower is better). Multiple iterations of freight’s rail model occurred.

The Current Challenge in 2019

Rail freight growth in ton-miles and carload units has slowed since about 2012.  Yet the freight profit margins are continuing to improve as seen in year-to-date financial reporting by all seven Class 1 U.S. rail carriers.

Some origin-destination corridors continue to see traffic growth and increased traffic congestion. It’s on some of these freight lines that Amtrak wants to run more passenger service (as do a few urban commuter operators like the North Carolina Department of Transportation and the California Department of Transportation). This congestion was not envisioned by the original sponsors of the legislation that created Amtrak.

In summary, the old railroad freight business model changed and the freight railroads have prospered. In contrast, Amtrak’s business model has struggled. It has never evolved to something better.

Here is the next generation’s railway passenger challenge. What would a self-sustaining Amtrak (or its replacement) commercial structure look like?  

As always, contrary facts and opinions are welcomed.