July 19, 2004

July 19, 2004 | WebMemo on Smart Growth

Can Canada Teach Us How to Hold The Line on Amtrak Funding

Emerging as one of Washington's predictable summertime rituals is Amtrak's annual search for ever-larger taxpayer subsidies to keep its trains running. Serving less than one percent of America's intercity passengers, Amtrak has lost money in every single year of operation, and since 2001, annual losses have exceeded a billion dollars, after running in the $800-900 million range for most of the 1990s. In 2003, Amtrak managed to lose nearly $1.3 billion, its worst performance ever. Amtrak's ticket sales don't even cover its wage and salary costs, and total revenues from all sources cover less than two-thirds of its costs, leaving it with losses equal to more than 60 percent of revenues. Amtrak seeks a $1.8 billion subsidy for FY 2005, but Congress should limit the payment to no more than the $900 million proposed by the President and demand that Amtrak adopt the improvements that have worked successfully for passenger railways in other countries.

 

In a normal business confronting the flood of red ink that Amtrak does, management would hunker down and look for ways to cut costs and raise revenues. The major airlines, for example, have used this approach to stay afloat during the past few years of depressed business following the terrorist attacks of 2001. In response to burgeoning losses, United Airlines, for example, has pared its operating costs significantly, and its unionized employees have agreed to restructured contracts that cut wages and benefits by $2.5 billion per year. VIA Rail Canada, the Canadian national passenger rail system, responded similarly when the Canadian government dramatically reduced rail subsidies, forcing VIA to improve operations or go out of business. The railroad opted for the former, and today it carries more passengers than a decade ago, but at a per passenger mile subsidy two-thirds less than what it was in 1990.  

 

Amtrak, in contrast, has done little to reform its costly operations. Contracts have not been renegotiated, archaic work rules remain unchanged, and employees have not even been asked to consider wage reductions to help save the system. And why should they? Despite exploding losses, Amtrak's management and staff know there are enough rail fans in Congress to bail them out. Annual federal subsidies to Amtrak have increased from $571 million in 2000 to $1.3 billion in 2004.

 

Despite rising subsidies, rising losses, and worsening on-time performance, Amtrak and its supporters see only success. In particular, they cite the rise in the number of passengers over the past few years and the possibility that ridership in 2004 will probably reach a record 25 million. But that improvement, while impressive, is primarily the consequence of a booming economy and special-offer ticket prices that, on some routes, cost less than taxi fare to the station.

 

In late April 2004, for example, Amtrak offered to take passengers from Washington, DC, to Miami for $21.10, and from Washington to Orlando for $17.10. The fare for a trip from Chicago to Indianapolis was offered at $6.20. Also in April, Amtrak extended the hours during which off-peak fares would be available on several of its regional trains. A year before, Amtrak reduced its fares on the Acela, which operates on the Northeast Corridor. Not surprisingly, ridership increased, but losses have widened. Because Amtrak loses money on every route it operates, the more it sells the more it loses, and taxpayers make up the difference.

 

The increase in rail passengers also reflects a healthy economy that has benefited all carriers. While Amtrak's passenger total in April was up 4.3 percent from 2003 levels, airlines saw their passenger totals increase by 11.9 percent over the same period.

 

Perpetuating Amtrak's money losing operations is a pliant Congress willing to cover the railroad's worsening loses with taxpayer bailouts. Earlier this year, Amtrak claimed it would need at least $1.8 billion annually to stay in operation, up substantially from the $1.3 billion subsidy it currently receives. In response, Senator Kay Bailey Hutchison (R-TX) attached an amendment to the highway bill that rounds up Amtrak's request to the nearest billion by proposing it receive $2 billion per year between FY 2004 and FY 2009. Her amendment will have to be resolved in the House/Senate conference. To his credit, President Bush cited the inclusion of Hutchison's bailout as one of several costly provisions now in the highway bill that will force his veto.

 

Senator Hutchison's unexpected generosity, however, has emboldened Amtrak's management. The month after the Senate's generous giveaway, Amtrak's president announced at a press conference that he would ask Congress for an extra $3 billion for a five-year project to fund short-haul passenger lines. Meanwhile, an Amtrak spokesman told reporters that the system would soon ask Congress for $40 billion over the next five years, and $60 billion over ten, to invest in passenger rail service.

 

Before Congress agrees to provide Amtrak with any more money than the minimum needed to maintain current service, it ought to take a close look at how the Canadians have achieved stunning financial improvements in their government-owned passenger rail system over the past decade. Although no two passenger rail systems are alike, Canada's is more similar to ours than most other national systems because it serves a widely dispersed, continental-sized market and does so on rails it shares with freight trains.

 

Like Amtrak and other passenger rail systems through out the world, the Canadian system, VIA, loses lots of money and requires substantial taxpayer subsidies to operate. Where it differs from most others, however, is that its management has imposed a series of productivity-enhancing and cost-saving measures that have dramatically reduced operating costs over the past dozen years even as ridership has grown.

 

Whereas VIA's government subsidy fell by 41.7 percent between 1990 and 2002, from $441 million to $257.1 million (Canadian), Amtrak's government subsidy has increased by 48.1 percent over the same period, from $629 million to $931.5 million, including "loans." VIA's cost savings did not stem from major service reductions; over the same period VIA increased ridership by 15.1 percent, compared to Amtrak's 5.4 percent increase. While VIA's management has learned to do a lot more with a lot less, Amtrak's management adopted the strategy of doing a little more with a lot more.

 

One of the keys to reducing costs and raising productivity was a substantial reduction in VIA's labor force, which in 1990 was badly bloated, even by Amtrak standards. Between 1990 and 2002, VIA reduced its labor force by 32.5 percent, from 4,525 employees to 3,054. Over the same period, Amtrak's workforce fell by 9.1 percent, from 24,523 to 22,298. Relating passengers to workers, these numbers imply that Amtrak "moves" 105 passengers per year per worker, while one worker at VIA moves 130 passengers. This suggests that Amtrak could probably get by with fewer workers.

 

While VIA's recent cost and service performance appear impressive, comparing railways across borders is not without pitfalls and misunderstandings. Analysis is limited to what data both systems make available to the public, and those data contain notable gaps. Amtrak, for example, has not issued a comprehensive annual report since its 2000 fiscal year, and the monthly performance measures it does provide do not lend themselves to year-to-year comparisons. At the same time, VIA has not been without problems: ill considered remarks by its chairman forced his recent resignation, and its unions are threatening to strike over wages.

 

Nonetheless, what information is available from both systems suggests that Amtrak could make similar improvements. To this end, Congress should ask its independent research institutions-the General Accounting Office, the Congressional Research Service, and the Congressional Budget Office-to take a close look at the two systems and offer their findings at open hearings that include other rail experts and Amtrak and VIA officials.

 

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow