November 9, 1982

November 9, 1982 | Backgrounder on Smart Growth

End of the Line for Amtrak

(Archived document, may contain errors)

226 November 9, 1982 END OF THE LINE FOR AMTRAK INTRODUCTIO N The ten year.existence of.Amtrak has cost the U.S. economy over 12 billion and more than 125,000 jobs. It is very likely that these losses will be exceeded in coming years yet to experience a year of reducing its losses worse, Amtrak is planning a !'sec o nd wave of capital investment in the mid-1980s. This upcoming re-revitalization, according to Amtrak, is needed to rehabilitate or replace equipment revital ized in the "first wave Amtrak has To make matters I Amtrak management has become so emboldened, p e rhaps by congressional resistance to the Reagan Administration's proposed modest funding cuts, that it is prepared to ask for even more taxpayer subsidy. The failure to achieve the original objective .of turning Amtrak into a Iffor profitt1 corporation no w serves as the justification for a !'second wavef1 of capital outlays. If the If first" mandates a llsecondll, won! t a Ilsecondll call for a Will the assaults on the taxpayers ever end so long as Amtrak has access to public funds In making its assaults o n the taxpayers, Amtrak and its advocates spare no rhetoric. For example, despite a decade of unrelenting financial disaster, of which 1981 was the worst year Amtrakls 1981 Annual Report is filled with self-congratulation.

As the management of Amtrak sees it, 1981 was the corporation's finest hour.I1 This despite losing nearly $900 million. Amtrak's published statements constitute a propaganda blitz bearing little resemblance to truth.

The true financial profile has to be pried out of the Annual Reports. U nusual terminology, strange classifications, and fre quent reshuffling of methodologies are used to conceal unpleasant data and trends. According to the Annual Report, for example, 2 the taxpayers are not subsidizing Amtrak losses, but purchasing services . With this logic, if enough money could be extracted from the taxpayers, there would never be any reported losses.

Despite receiving subsidies over 100 times larger than any other mode of passenger transportation, Amtrak only manages to attract a tiny fra ction of the intercity passenger trips a decade of operation, Amtrak has shrunk rail's market share from a tiny 1/2 percent to an even tinier 3/10 percent. Other means of transportation are cheaper, faster, and more convenient After Undaunted by the finan c ial disaster and demonstrable lack of need for subsidized rail pas.senger service, apologists for Amtrak insist that there are "other factdrsIfi to consider. Most frequen tly cited are the "other factors of energy, environment, safety and welfare. Under c lose examination, however, these provide no argument on behalf of Amtrak. Instead, there is persuasive evidence that the total economic impact of Amtrak is negative.

Relieved from the discipline of the marketplace, Amtrak wastes scarce capital which could have been productively employed else where. The social opportunity cost of this waste is a reduction in human living standards. Unless the taxpayer is willing to subsidize Amtrak endlessly at ever greater amounts it is time to subject the Agency to cold, tough scrutiny. If Amtrak cannot succeed in a decade, perhaps it cannot succeed at all.

PROMOTIONAL PROPAGANDA If a person were to rely upon Amtrak's own evaluation of its performance, he might well conclude that it is one of the most successful business o perations in America. Amtrak's admiration for itself is boundless In the 1980 Annual Report, for example, Amtrak called itself IIa sound businessfil--no matter that it had never made a profit in any year In fact, the rail passenger operations have never c overed their marginal cost of operation. The firm today shows a negative net worth on its balance sheet. Is this IIa sound busi ness"?

After another year of even larger deficits, the 1981 Annual Report proudly announced that Amtrak was ."the business surpr ise of the year Surprise, of course, is an ambiguous word. Some might be surprised that Amtrak was still receiving taxpayer subsidies after ten years of failure. Amtrak, however, boasts of being the sixth largest transportation company in the United State s-a position attained, according to former President Alan Boyd, Ifwithout extensive recognition and against great odds."

The trouble is that Amtrak has attained such size only because of its access to the public treasury. Despite the 8 bi1lion.h subsidies since 1971, Amtrak's 1981 Annual Report shows a net worth of minus $599 million. In short, Amtrak appears to be one of the all-time business fiascos. After years of Ifinvestinent1l of 3 public funds, it has succeeded in accumulating liabilities, not asset s.

Exaggeration and distortions also abound when it comes to Amtrak's assertions of growth and improved relative performance.

The 1981 Annual Report proclaims that Amtrak is !'operating a t increasingly high efficiency levels,lI that 1981 was a year of Isuperiorl' performance, lldemonstrating consistency and vitality justifying !'aspirations for the future ever It is also true that between 1972, the first full year of percent. Unfortunatel y, the costs for Amtrak have grown faster than revenues. During the decade, operating expenses were rising by 300 percent and deficits by 400 percent. From 1972 to 1981 passenger basis, the loss has soared f,rom $9.48 in 1972 to $38.30 in 19

81. The'percen tage loss has grown from 50 percent per year to 62 percent per year. Amtrak's performance has grown progres sively worse. This may demonstrate ilconsistency,gl but it hardly adds up to ''vitality, much less justifying future Ilaspirations If It is true th a t 1981 passenger revenues were the highest operation, and 1981, passenger revenue increased by over 200 I the operating loss went from $150 to $750 million. 'On a per Amtrak's aspirations for the future are not paltry. Former President Boyd saw "great. pr o mise for the future of a national railroad.passenger system.Ir What this means is another massive infusion of taxpayer supplied investment capitall' in the next few years When Amtrak was created, private railroads were criticized for trying to kill the pa ssenger train alleged to be downgrading passenger service deliberately in order to drive away riders.

Amtrak was going to reverse these policies and revitalize rail passenger operations. Amtrak poured billions into new equipment. Yet after a decade of equi pment upgrading, rail's share of the intercity passenger travel has declined. When Amtrak started, five of every thousand intercity passenger trips were made by train; Amtrak now provides three of every thousand trips first wave" of Amtrak investment, wha t reason is there to be lieve that there will be sufficient ridership growth to justify a Ifsecond wave" of investment? There is no evidence or logic to support a contention that future ridership demand merits additional investment Private rail firms were Passenger cars were in poor shape.

If the market share of the rail mode declined during the FINANCIAL FINAGLING Interpreting Amtrak's financial statements requires substan tial effort. In the 1981 Annual Report's "Statement of Operations 4 and Changes in A ccumulated Deficiti1 (the equivalent of an income statement in most annual reports prepared by private businesses we find a net loss figure of only $179 million for fiscal year 19

81. This net loss figure seems strangely understated. We know that passenger revenues cover less than 40 percent of operating costs. Since passenger revenues are just under 500 million for 1981, the actual net loss must be in the vicinity of $750 million.

Consulting the footnotes to the financial statement, we discover that Amtr ak has reported federal and state subsidies prior to calculating the net results. The net loss figure of 179 million reported by Amtrak is the loss in excess of the subsidies received during-the year. The footnotes also disclose that, beginning next year, the method of accounting for these subsidies will change. The effect of the change, if applied to this year's statement, would be to increase the net loss by over 700 million. After studying the small print it becomes apparent that Amtrak's real net loss for 1981 was close to $900 million.

Another disturbing Amtrak financial reporting practice is the frequent changing of accounting methodology. The Congressional Budget Office complained that these changes make year-to-year comparisons difficult. The CBO co ncluded that some of the apparent performance improvements on selected routes were due to changes in the method of cost a1location.l Another unusual procedure to be changed in fiscal 1982, has been the method of accounting for the federal subsidies used t o purchase equipment As the equipment depreciates, a portion of the capital assistance is recorded as income. In the private sector, depreciation is a cost of doing business, not a source of income. From Amtrak's perspective, however, the capital assis tan ce apparently is revenue-a payment by a grateful government for the benefit of having passenger trains.

Bowing to congressional demands, capital provided by the government as of 1982 will be considered an ilinvestment.il Shares of stock will be issued to reflect this investment.

The issue of stock certificates may enable Amtrak to cloud its financial condition even more than it has been. Amtrak claims, for example, that it will enjoy a return-on-investment yield of 28.6 percent on a 2.3 million capital out lay on the Washington section of the Broadway Limited (New York-Chicago route. Amtrak provides no hint as to how the 28.6 percent return on-investment is derived. What is known is that the route in which the capital outlay was invested lost over $30 milli on in 19

81. This route has never covered its cost. There is no reason able prospect that it ever will See CBO's Federal Subsidies for Rail Passenger Service (July 1982 p 46 5 Of course, the investment in the New York-Chicago Broadway Limited is just one e xample. The 1981 Annual Report implies that there are many more such examples, yet there is not a single route on the Amtrak system producing revenues in excess of costs.

None of'the routes yields any kind of return-on-investment.

Amtrak's management and other advocates of subsidized rail passenger service complain that the firm should not be judged on the basis of full costs. Instead it is asserted that only avoid Boyd claimed that if Amtrak can cover short-term avoidable costs from passenger revenues i t will be operating on a par with all other forms of public transportation.

This assertion is puzzling because the norm for other forms of public transportation is to cover full cost. If private transpor tation companies do not cover their full cost, they run the risk of bankruptcy. able costs are relevant.

The only other transpo rtation entities to which Boyd could have been referring are government subsidized municipal transit systems.. Goals of covering avoidable.costs are typical only in government funded undertakings T.he goals set by the Reagan Administration and Congress ca ll for Amtrak to cover avoidable costs out of passenger revenues by 19

85. Amtrak is still quite far from attaining this objective.

One way that Amtrak seems intent on reaching this goal is by redefining 'lavoidable costs I1 An example of how a redefiniti on of avoidable costs can show an apparent improvement in performance is illustrated in the treatment of costs on the so-called llMontrealerll route. Based on the coverage of avoidable costs, this route showed improvement between 1980 and 19

81. In 1980, all costs of running the entire route were allocated to the I1Montrealer.l1 In 1981, the costs of the portion of the route between Western Washington and Boston was redefined as llunavoidable.ll Only the incremental costs of service between Boston and Mon treal were classified as llavoidable.ll Thus, performance improvement was achieved by means of redefining llavoidablell vs. I1unavoidablef1 costs.

HIGH COST/LOW QUALITY In a free enterprise economy, every product or service must find a niche in which to su rvive. Some products are budget items. The quality may not be the highest, but the price is right. Other products offer top quality, but at a price. But Amtrak occupies a strange niche--providing low quality service at a high price. Perhaps this is why it s market share is a paltry 0.3 percent of the intercity passenger travel.

Consider the alternatives to travelling by train. Intercity buses offer a comparable travel time and are less costly to the passenger. Private automobiles also offer a comparable tra vel 6 time, comparable costs per passenger, and the maximum flexibility in departures, arrivals, and routes. Commercial airlines offer much faster travel times at fares that range from comparable to much higher than rail fares. All these other modes serve more origins and destinations than Amtrak. All these other modes have more frequent departures and arrivals than Amtrak.

What these modes also have, insist Amtrak supporters, are favors from the federal treasury exceeding those enjoyed by rail.

How valid is this assertion? In viewing the distribution of federal outlays for various transportation purposes, rail passenger proponents appear to have a case. In fiscal year 1980, for example, rail received less than 10 percent of the federal outlays for passen g er transportation that federal outlays for other modes of transportation are financed in part, by users' fees. These fees are more similar to passenger revenues .than to subsidies. Taking these users' fees into account rail's share of the net outlays grow s to nearly 31 percent. Rail passengers are the only travellers who do not pay users' fees The problem with this statistic is Total expenditures by mode of transport do not give a complete picture of the relative favoritism shown to the rail passenger mode .

Amtrak riders are, by far, the favored few. Estimates of govern ment subsidies per'passenger mile are subject to some variations.

Honest analyses of cost allocations can reach various conclusions depending upon how common costs are assigned among users. For example, how much of the common.cost of the air controller system should be assigned to commercial aviation and how much to general aviation? Different decisions on these cost assignments result in variations in estimated subsidies per passenger mile . Nonethe less, an order of magnitude comparison shows that, on a per passenger mile basis, Amtrak receives more than one hundred times the subsidy of the next closest alternative means of passenger When the actual transportation provided is considered, tr a vel Amtrak ESTIMATED SUBSIDIES BY MODE In Cents Per Passenger Mile Commercial Airline Private Auto Intercity Bus CBO Estimate2 23.6 2 1 1 ADOT Estimate3 27.91 26 21 15 CBO, op. cit p. 12 See, Arizona Department of Transportation, Tucson/Los Angeles Rail S t udy February 1982), p 47. 7 As the above table reveals, Amtrak is the most favored means of passenger transportatiog when it comes to dishing out federal monies. On a trip from Phoenix, Arizona, to Los Angeles, Califor nia, for instance, the Amtrak fare i s about 60. Amtrakls cost of providing the service is approximately $2

80. The taxpayer bill for each person carried is $220, or nearly 80 percent of the cost In contrast, a flight between the same two points costs the passenger about 40 in fare and user t axes. The government subsidy would amount to less than a dollar per passenger. If the airline makes a profit it will also pay an income tax. There is no hope that Amtrak would ever make a profit, much less pay tax on it.

That rail passenger service should perform so poorly and consume so much in subsidies is nothing new for the Interstate Commerce Commission in 1958 characterized the passenger train as a hopeless enterprise. Ridership had been declining since the end of the World War I1 as alternate means of transport, such as the auto and airplane, became economical and convenient. Yet a little more than a decade after the publica tion of the 1958 report, the federal government decided to revital ize rail passenger service A study published OTHER FACTORS W hen advocates of subsidized rail passenger service concede as d'd the California Department of Transportation and the Federal justified on financial grounds, they counter by insisting that other factors justify continued subsidies. Topping the list of the s e "other factors1' are considerations of energy conservation environmental impact, and safety Rail oad Administration in a 1978 report, that Amtrak cannot be Energy Conservation The American economy was hit with enormous energy price The advocates of subs i dized But the impact of Amtrak jumps in 1974 and again in 1979 rail passenger service claim that Amtrak can make an important contribution to energy efficiency operations on the U.S. energy supply has been negligible. In its Northeast Corridor operations, Amtrak saves about 544 BTUIs British Thermal Units) per passenger mile. If Amtrakls service were restricted to.this corridor and certain technology improve ments made, trains running 100 percent filled would be able to reduce U.S. energy consumption by le ss than 1/100 of one percent.

Under normal operating conditions, Amtrak yields a net loss of energy; that is, more energy is consumed than if all the passengers were to travel by other means. The actual fuel effi ciency of Amtrak is about the same as the private automobile.

Each achie ves between 40 and 50 passenger miles per gallon of gasoline or diesel consumed a In theory, rail ought to move more people more miles at greater energy efficiency To attain efficiency, however, would require transporting passengers in a manner similar to the way railroads handle freight. Trains would have to be very long.

Passengers would have to be prepared to wait for hours, or days in some cases, on rail sidings while these long trains were formed. Arrivals would be considered Iton time" if the destina tion were reached within 24 hours of the scheduled time. Not many passengers would be attracted by this klnd of service.

Between the energy crises of 1974 and 1979, Amtrakls energy efficiency, measured in passenger miles per gallon of fuel, did not improv e. During this same period, the private automobile made some progress toward efficiency. Commercial airlines, mean while, made a fairly substantial improvement. (See the table below ENERGY EFFICIENCY OVER TIME In Passenger Miles Per Gallon of Fuel 1974 19 7 5 1976 1977 1978 1979 Intercity Bus 145 140 137 140 141 144 Amtrah 45 39 44 41 38 47 Private Auto 40 41 41 41 42 44 Commercial Air 17 18 19 20 22 24 Auto fuel efficiency is expected to continue to improve as older gas guzzlers are replaced by newer, more f uel efficient cars. Commercial airline fuel efficiency is expected to increase as the Boeing 757 and 767 jets are brought into service during this decade. At the same time, Amtrak is expected to remain Itrelatively inefficient in its use of energy:Il4 Env i ronment Moving people out of cars and into Amtrak trains is not an unmixed environmental blessing It is true that autos produce more carbon monoxide and hydrocarbons per passenger mile than does Amtrak. It is also true, however, that Amtrak produces more n itrous oxide, sulphur oxide, and particulates per passenger mile. If those who ride on Amtrak are diverted from other public carriers rather than from autos, pollution would get worse, not better. Amtrak emits more pollutants in every category than either intercity buses or commercial airlines is to reduce air pollution, Washington should be encouraging Americans to get off the train and onto a bus or plane If the objective CBO, op. cit p. 15. Safety 9 Travel by rail is safe-=so is travel by any other publ i c carrier. The most impressive travel safety statistic compares the private automobile with all public carriers, whether trains planes, or buses. Fatalities per passenger mile for autos are about 50 times more risky than for public carriers. In recent yea r s, auto travel has averaged around 140 deaths per 10 billion passenger miles; buses, trains, and planes have averaged about two or three deaths per 10 billion passenger miles. Rail passenger transport, however, enjoys no obvious safety advantage over othe r public carriers promote safety if they were available for other uses. For ex ample, a billion dollars spent on removing drunk drivers from the roads surely would save more lives than the same sum spent on subsidizing rail passenger service Resources expe n ded on Amtrak might do more to Social opportunity Cost The magnitude of the economic cost makes the National Rail road Passenger Corporation's performance a major social disaster The reason for the uniformly poor results of enterprises like Amtrak is the e xemption from market discipline afforded the government. Because capital is provided via congressional appro priation, the government corporation is denied the opportunity to benefit from the judgment of holders of capital resources. Pri vate firms are of t en deterred from infeasible projects by the inability to obtain funding in the financial markets. Given the diversity of sources of capital and the voluntary nature of investment transactions in the private sector, failure to secure financing is generally a good indication that a project lacks promise. Unwillingness of the private sector to finance the schemes that are devised by government is simply a resounding vote of no confidence. Government funding of programs like Amtrak, because no investors will a ccept the risk, is a virtual guarantee of enormous losses. Some of Amtrakls losses are hidden social costs. The net result is that the general welfare suffers.

Amtrak asserts that it stimulates the U.S. economy to the tune of at least $4.5 billion per year and that 125,000 jobs owe their existence to Amtrak ates this economic activity. This is true in only the most superficial sense. Various suppliers are employed by Amtrak.

While these specific suppliers might not enjoy the equivalent amount of business w ere Amtrak to close, someone else would. The reality is that Amtrak is a consumer of resources, not a producer of value investment it subtracts from economic activity. The magnitude of this subtraction is clear in the following table The implication is th a t Amtrak cre Since rail passenger service generates no return on If the nearly 8 billion that has been Ilinvestedl' in Amtrak had been invested in businesses like those comprising the Dow Jones Industrials, the capital stock of the nation would be larger b y about $12.5 billion. Because it requires capital to 10 OPPORTUNITY COST OF THE AMTRAK PROGRAM YEAR 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 AMT. EXPENDED ON AMTRAK OPPORTUNI Ty IN MILLIONS) COST R.O.I 40.0 170 Ob 140.0 276.5 601.2 750.7 11 6 0.0 1269.0 1279.4 2273.1 9.6 11.0 13.4 14.3 10.1 12.3 11.1 13.4 14.0 14 2d 15.1 a Does not include value of contributed equipment b Amt. for 1973 rescinded in 1974 c Based on Dow Jones Industrial Average after tax return d Estimate on equity R.O.I Return- o n-Investment CAPITAL LOST TO PRODUCTIVE USE IN MILLIONS 43.8 237.4 269.2 467.7 819.3 1595.3 2606.4 4271.1 6315.7 8673.6 12599.7 provide employment opportunities the net employment effect of the Amtrak program thus far has been a permanent loss 0.f over 12 5,000 jobs. This contrasts with Amtrak's obviously empty claim that it creates 125,000 jobs.

The $12.5 billion capital loss is based on the modest al ternative of the returns possible from mature, nongrowth indus tries. The opportunity cost of the alternat ive employment of resources in more dynamic industries would have produced even greater returns.

CONCLUSION Like all business enterprises of a similar size and scope Amtrak issues annual reports providing insight into the opera tion. By selectively dealin g with the events of the year for which the report was issued, Amtrak management can reveal or conceal a great deal. These distortions are the lifeblood of the notion that this government operated railroad is a success. By any reasonable standard, the gov e rnmentfs claimed achievements for-its passenger service operation are false. In ten years of trying, Amtrak has never made a profit out-of-pocket costs. Far from Ifyielding a substantial return on the investment,Il Amtrak has been depleting the capital po ured into it. This amounts nearly eight billion dollars between 1971 and 19

81. Creditor claims and outstanding liabilties total more than the assets, leaving the qacorporationll with a negative net worth It cannot even cover its 11 Amtrakls assertion that "there is great promise for the future of a national railroad passenger systemit is, at best naive. Amtrak will never be self-sustaining. The grand scheme of 1971 to establish a government railroad system as a "for profit corporationvt has staggered from an inauspicious beginning to an unbroken series of widening deficits. Congressional Itrea listst1 have addressed this flood of red ink by modifying Amtrak's mission to have it run Itas if it were a for-profit corporation.I1 Redefinition of objectives, how ever, cannot mask Amtrak's failure.

The plain truth is that Amtrak-or any government enterprise lacks the incentives to succeed in the difficult task of discerning and serving consumer demand the motions, mimicking economic processes that it can neither ex perience nor understand. They imagine that incorporating issuing stock, and appointing a board of directors will make the government corporation just like any other business Government businesses can go through A public policy of support and subsidy for p rofitless ven tures endangers American future prosperity and ultimately survival.

Essential and necessary services and products will be provided by the marketplace for someone to provide it it will produce a return on investment lity is a signal to investo rs to reallocate resources to better meet consumer needs ignores market signals to the detriment of the general welfare action for the betterment of the nation resources by eliminating Amtrak from the budget would be an encouraging sign that Congress does take seriously its Consti tutional obligation to promote the general welfare If a service is essential, it will be profitable The absence of profitabi If a product is necessary, supplying Public subsidy for unprofitable enterprises Congress has an annual o pportunity to take-constructive Ending the waste of Prepared for the Heritage Foundation by John Semens Senior Economist Transportation Planning Division Arizona Department of Transportation 12 SOURCES Amtrak's Economic Impact on the Intercity Bus Industr y (General Accounting Office, January 1979).

Amtrak: The National Railroad Passenger Corporation by George Hilton (American Enterprise Institute, 1980).

Federal Subsidies for Rail Passenger. Service An Assessment of Amtrak (Congres sional Budget Office, July 1982).

National Railroad Passenger Corporation 1980 Annual Report.

National Railroad Passenger Corporation 1981 Annual Report.

Rail Passenger Service Study (Wisconsin Department of Transportation, August 1981).

Railroad Passenger Train Deficit by Howard Hosmer (ICC Docket 31954, 1958 A Taxpayer's Perspective on Amtrak by Francis Mulvey (National Taxpayers Union, May 1981 Tucson/ Los Angeles Rail Study (Arizona Department of Transportation, February 1982).

West Coast Corridor Study: California Subcorridor (Caltrans and the Federal Railroad Administration, June 1978

About the Author

Related Issues: Smart Growth