February 7, 2005

February 7, 2005 | WebMemo on Smart Growth

The President's Proposal to De-Fund Amtrak will Force the Railroad to Adopt Needed Reforms

Since its creation in the early 1970s, Amtrak has received a total of $29 billion in federal subsidies and billions more from states that have partnered with it to provide rail service, mostly on the Pacific coast. Despite these subsidies, which now cover a third of Amtrak's operating costs and top $1 billion annually over the past several years, Amtrak's service has not improved and its losses have widened. In the South, Midwest, and Mountain states, Amtrak is an inconsequential provider of intercity passenger service, passing through some cities only a few times a week. And on most of the routes it serves, including the Northeast Corridor where it has invested a disproportionate share of its time and money, Amtrak is the high-cost provider and ridership is falling off as stiff competition from airlines erodes its customer base. In short, Amtrak's inefficient, high-cost operation, which serves less than one percent of the intercity passenger market, cannot justify billion-dollar subsidies.

 

President Bush's plan to eliminate Amtrak's subsidy in FY 2006 and require it to restructure will give the railroad's workers and managers the incentive to reform their operation in the same way that government-owned passenger rail systems have been fundamentally reformed in Japan, Australia, Argentina, Canada, and Great Britain. These reforms often include full or partial privatization or sometimes just reducing the subsidy to force change, as in Canada. Previous successes holding Amtrak's annual subsidy below what Amtrak and its congressional apologists demanded have already forced changes for the better. Amtrak has canceled a couple of its most costly routes, reduced its work force, and eliminated its unprofitable freight and mail businesses.

 

Despite these changes, Amtrak continues to hemorrhage money and its service is getting worse. In FY 2003, Amtrak lost $1.3 billion, up from loses of $1.1 billion in FY 2002 and $800 million in FY 2000. In turn, these losses necessitate costly taxpayer bailouts, which have exceeded $1 billion annually in recent years. While Amtrak brags about recent gains in ridership, those extra riders are a consequence of cut-rate fares on select routes, and predictably, these fare reductions have contributed to higher losses.

 

Amtrak's monthly performance reports also reveal that its much-ballyhooed ridership gains are slipping away, particularly on the Acela, on which Amtrak has invested the most and staked its reputation. In the first two months of the current fiscal year, Acela/Metroliner ridership dropped 6.7 percent from the same period last year, and ridership on long-distance trains fell 3.5 percent, too. Amtrak blames a soft economy, but according to the indicators, the economy did just fine during that period and the airlines posted solid passenger gains, as well. A better explanation may be the deterioration in the quality of Amtrak's service. According to Amtrak's September 2004 Performance Report, Amtrak recorded an on-time performance rate of 74.1 percent in FY 2003, but that fell to 70.7 percent in FY 2004.

 

Unlike the private airlines that have been forced to make major changes in their operations to survive, including significant cuts in worker pay and loosening of work rules, generous subsidies have allowed Amtrak's management and unions to maintain the costly status quo. As a consequence of this complacency, Amtrak is losing what little market share it still has, and its problems are only likely to get worse. Increased competition in the bus and airline industries means that Amtrak is now the costliest way to travel between most cities, including New York and Washington along its flagship Northeast Corridor.

 

While Amtrak's well-organized apologists will describe the President's plan as the death of passenger rail, Amtrak's management could respond to the challenge by adopting and implementing the kinds of reforms that have worked so successfully abroad in both passenger rail and transit. Additionally, U.S. airlines' experiences could provide more ideas for improvement. These include:

 

  1. Renegotiate labor contracts. Railroad workers are among the highest paid in the transportation industry. They also benefit from rigid work rules that deter efforts to improve productivity and customer service while discouraging the adoption of some labor-saving technologies, as well. Over the past few years, unions in the airline industry have agreed to substantial pay cuts and rule changes in an effort to preserve their jobs. Amtrak workers should be expected to make similar sacrifices to preserve theirs.
     
  2. Require more state support from states that benefit from Amtrak service. Many of Amtrak's trains in New England and on the West Coast receive substantial financial support from the states served by these routes. In contrast, the states served by Amtrak's operations along the Northeast Corridor receive no state support and are subsidized exclusively by the federal taxpayer. This leads to the inequitable consequence that the taxpayers of California, Washington, and Oregon subsidize both their own train services and those serving passengers in the eastern states.
     
  3. Require Amtrak to adopt privatization and competitive contracting. Although most of the world has abandoned monopoly socialism, Amtrak's managers and its congressional supporters still believe, notwithstanding all evidence to the contrary, that it can be made to work. Without a federal subsidy, Amtrak will no longer have the luxury of embracing this odd belief and will instead have to implement cost-saving strategies common to private business and to passenger rail systems in other countries. The Japanese privatized their passenger rail service by selling its various routes to private investors. The British adopted a concession approach by encouraging private operating companies to compete to operate rail service along specific routes. Commuter rail operations in the Boston and Los Angeles areas have been contracted out to private companies, and a few tourist rail lines in the U.S. and Canada are now privately operated. Australia, Argentina, and South Korea have introduced significant private sector operations into their system. Amtrak should learn from these examples

Amtrak's management has known this sort of reform for years but has refused to adopt it, relying instead on generous taxpayer subsidies. But with those subsidies gone, Amtrak can no longer hide from reform, and both rail passengers and taxpayers will be better for it.

 

The President's budget proposes that Amtrak adopt some of these reforms but also suggests that some of them may be delayed until the completion of an indefinite transition period. Amtrak can do better than that, and there is no reason that the reform process cannot get started tomorrow.

 

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