March 16, 2005

March 16, 2005 | WebMemo on Federal Budget

Amtrak Bankruptcy: It's Time

With Congress nearing enactment of a bankruptcy reform bill, a long overdue bankruptcy comes to mind: Amtrak. That's right. Despite receiving $29 billion in federal subsidies over its troubled existence, Amtrak is a private corporation and, as such, is subject to the nation's bankruptcy laws. And like any other private business that hemorrhages money year after year, it is time for Amtrak to declare bankruptcy and get itself reorganized for a better future.


Amtrak's Sorry Financial Performance

Last year's subsidy-topping $1 billion-amounted to more than one-third of Amtrak's operating budget. But despite that aid, Amtrak remains a trivial -and underperforming-part of America's transportation network, now carrying less than 1 percent or inter-city passengers. That's not a lot of bang for the buck.


This year, the President proposed the elimination of Amtrak's federal subsidy[1] to force long overdue reforms on the carrier. Already, Amtrak has eliminated a few costly trains set in motion a few other reforms to cut costs. Nonetheless, much more needs to be done, and a bankruptcy filing is the best option.


Bankruptcy is Not the End of Amtrak

Over the last several years, both United Airlines and U.S. Airways have gone through bankruptcy without any major interruptions in service. The bankruptcy process did force major changes in the airlines' operations, including significant cuts in worker pay and loosening of work rules. This prescription can mend what ails Amtrak.


If Congress "zeroes-out" the Amtrak subsidy from this year's budget, bankruptcy and its accompanying restructuring would likely come to the passenger rail sector. For too long, subsidies have protected a status quo business model despite its poor record. Whereas the struggling airlines cut bloated wages and counterproductive work rules to stay in service, in 2003 Amtrak gave workers belonging to one union a 6.6 percent wage increase.


This immunity from market realities has led to worsening losses and declining on-time performance. 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. Claims that ridership is improving doesn't really hold up, either. In the most recently completed reporting period, trains run solely by Amtrak actually lost passengers (especially the Acela), while those lines that are state supported saw a 14 percent increase in ridership.


Bankruptcy adjudication would force Amtrak to confront reality and change for the better. Unprofitable assets will be liquidated, states will have more say in operations, and unaffordable labor contracts will be renegotiated.


Will the Trains Still Run?

Under bankruptcy regulation, the trustee appointed to handle the process will likely reorganize the corporation before any asset liquidation is attempted. Some promising lines will likely be taken over by state, local, and regional authorities, while others will likely be abandoned entirely, as President Jimmy Carter did in 1979 when similar financial problems led him to shut down four money-losing routes.


Commuter trains, which often share Amtrak's tracks, may be forced to purchase the tracks they use or lease from freight rail companies. A Government Accountability Office (GAO) report commissioned to examine this issue found that "Two commuter authorities-New Jersey Transit and Southeastern Pennsylvania Transportation Authority-told us that they would not need all of the tracks and other infrastructure currently in place on the [Northeast] Corridor."[2]


Furthermore, because these trains run slower than Amtrak's Acela, "They believe that the physical plant could be pared back to reduce costs."[3] In the long view, commuter rail will be largely unaffected by an Amtrak bankruptcy.



It is time for a serious restructuring of Amtrak. Bankruptcy should be welcomed as a tool to affect the substantial reform that is long overdue. Just as United Airlines and U.S. Airways continued to fly throughout their recent bankruptcies, the trains will continue to run throughout Amtrak's. And when it is all done, more of them might run on time.


Keith Miller is Research Assistant, and 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.

[1] See Ronald D. Utt, "The President's Proposal to De-Fund Amtrak Will Force the Railroad to Adopt Needed Reforms," Heritage Webmemo No. 655, February 7, 2005.

[2] GAO/RCED-98-60, Issues Associated With a Possible Liquidation, US General Accounting Office, March 1998, p 19.

[3] Ibid. p. 20.

About the Author

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