November 15, 2005

November 15, 2005 | WebMemo on Smart Growth

Leadership Change Could Put Passenger Rail Back on Track

In a long overdue move, Amtrak's board of directors fired David Gunn, Amtrak's president, on November 9. The board finally lost patience with Gunn and his lack of progress in improving service and reducing losses. Hastening Gunn's demise was a recent report by the Government Accountability Office which concluded correctly that "Amtrak lacks a meaningful strategic plan that provides a clear mission and measurable corporate-wide goals, strategies, and outcomes to guide the organization." While Gunn's lack of vision and commitment to preserve a failing system made him a popular figure among Amtrak's unionized workforce, train hobbyists, and Members of Congress, those same qualities did not sway Amtrak's board in the end. With Congress's cooperation, Amtrak's board now has the opportunity to improve service while reducing the rail service's billion-dollar federal subsidy.

 

Although heavily subsidized by U.S. taxpayers-the federal subsidy for 2005 will likely match total ticket sales-Amtrak is organized as an independent corporation, and federal law provides its board with broad powers to set the company's objectives and hire and fire its officers. Until recently, however, Amtrak's directors were distinguished by their lack of experience in transportation and business, and the ensuing vacuum was largely filled by the company's president, who could operate with little interference from the inexperienced board. Indeed, under the Clinton Administration, presidential appointees to the board possessed so little business and transportation experience that in 1997 Congress passed a law requiring Amtrak board members to "have technical qualifications, professional standing, and demonstrated expertise in corporate management, finance, rail or other transportation operations."

 

Among the many frictions between the new board and Gunn was his opposition to President Bush's plan to restructure Amtrak by allowing more private sector participation, encouraging more cost-sharing partnerships with the states, and separating infrastructure ownership from the operating company along the Northeast Corridor. Apparently committed to preserving much of what he found when he arrived, including a costly unionized work force, expensive and unpopular routes, and low quality service, Gunn resisted these reforms, and this opposition likely contributed to his firing.

 

Some in Congress reacted angrily to the board's effort to improve service. Chief among them was Rep. James Oberstar (D-WI), ranking member of the House Transportation Committee. Joined by only 27 members of Congress, Oberstar sent a letter to Amtrak Board Chairman David Laney to "express our outrage," "demand to know the reasons" for the firing, and urge Laney to reconsider his decision.

 

Among the only Amtrak accomplishments Oberstar cites to justify Gunn's continued employment is the oft-noted growth in ridership to a "record high" of 25.4 million passengers in 2004. But this more reflects the "soft prejudice of low expectations" than a meaningful accomplishment. In a growing economy, almost every measure of activity that changes from one year to the next is at a "record high." Today the minimum wage is at a record high, and so is the price of a movie ticket, the U.S. population, the post-colonial deer population, sales of the drug Lipitor, and the number of Americans who own a cell phone, to name just several.

 

According to Amtrak's most recent performance report, ridership over the first 11 months of this fiscal year (FY) increased by only 0.7 percent year-over-year, and that gain came entirely from new ridership on the 19 state-supported routes that Amtrak runs under contract for a dozen or so states. Ridership on the state routes rose by 7.1 percent over the period, while ridership on Amtrak's own 23 routes fell by 2.7 percent. Recognizing this dramatic difference in performance, President Bush's reform plan would require Amtrak to arrange more state partnerships to improve performance on some of the 23 routes it controls.

 

In keeping with its record-breaking performance, Amtrak's most recent annual report reveals that its FY 2004 losses amounted to more than $1.3 billion, a new record. (The previous year's loss was also a record.) Amtrak's losses are attributable to operating costs that are double what Amtrak earns in passenger revenues. Although modest progress has been made in eliminating a few of the routes that lose substantial sums of money, many costly lines remain, including the Southwest Chief, running at a loss of $206 per passenger so far this year, and the Sunset Limited, which loses $413 per passenger-the highest in the system.

 

Amtrak also loses substantial sums on the food and beverage service it provides on some of its routes. Recent testimony to Congress by the Government Accountability Office (GAO) and the Amtrak Inspector General revealed that Amtrak loses an estimated $150 million per year on food and beverage service. In a July 2005 report, the U.S. Department of Transportation Inspector General concluded that "Our analysis shows that eliminating sleeper cars, dining cars, entertainment, lounge seating, checked baggage service, and food and beverage service on Amtrak's long-distance routes could save between $375 million and $790 million in operating savings and $395 million in avoidable planned capital expenditures over 5 years." With Amtrak's cash losses running close to an estimated $700 million per year, these savings would allow Amtrak to operate with a much lower federal subsidy.

 

More recently, the GAO published a comprehensive review of Amtrak's operations. It concluded: "[W]hile Amtrak has recently reduced costs, revenues are declining faster than costs, leading to operating losses exceeding $1 billion annually. These loses are projected to grow by 40 percent within 4 years; no effective corporate-wide cost containment strategy exists to address them."

 

Amtrak's board has announced that it will conduct a nationwide search to find the right candidate to replace Gunn and restructure the system to improve service, reduce losses, and perhaps even turn a profit on sales of burgers and beers. Amtrak's next president will face severe challenges, not the least of which is a meddling Congress, fearful of change. With some in Congress threatening to use the current appropriations process to oppose the board's reform effort, President Bush should be prepared to veto any legislation that would undermine his efforts to improve the railroad.

 

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