Feeling Railroaded?

The tragic accident in Philadelphia should be a reminder. The real train wreck is Amtrak itself—–a colossal waste of taxpayer money and the very embodiment of what is wrong with state intervention in the free market economy. Worse still, the pork barrel politics which drive its handouts from Uncle Sam virtually guarantee that as time goes on it will become an increasing hazard to public safety, as well.

It seems like only yesterday, but one of my first assignments as a junior staffer on Capitol Hill was to analyze the enabling legislation that created Amtrak in the early 1970s. I was working for an old fashioned conservative Congressman and his first question was “how will it ever make a profit when we are running the trains from the Rayburn Building?”.

He couldn’t have been more clairvoyant. While it sponsors claimed Amtrak would be spewing black ink by 1974, the answer to my boss’ question was simple: never!

But you didn’t need to wait 43 years to prove it. There is not even a remote case that subsidizing intercity rail travel is a proper or necessary function of the state. Amtrak accounts for well less than 1% of intercity passenger miles. On every one of its 44 routes there are bus and air travel alternatives, and that is to say nothing of automobile travel—–whether in cars with drivers today or in the driverless kind tomorrow.

Moreover, the evidence overwhelmingly shows that passenger trains will never be economically competitive outside of a handful of densely populated corridors. By contrast, what was absolutely guaranteed from day one back in 1970 is that a government controlled passenger rail system crisscrossing the United States would become a monumental Congressional pork barrel—–an endless rebuke to rational economics.

And that it has. The cumulative taxpayer subsidy since 1972 totals more than $75 billion in dollars of today’s purchasing power. During the span of nearly a half century, Amtrak has operated upwards of 40 routes that have never, ever made even an “operating profit”.

Yet the operating profit test is itself a red herring. Like its aviation competitor, Amtrak is massively capital intensive.  It maintains 21,000 miles of track, 100 rail stations, operates around 2,500 locomotives and passenger cars, and requires an extensive, costly infrastructure of communications and signaling systems, electric traction networks and a huge array of bridges, tunnels, switching yards, repair facilities, fencing and other right-of-way improvements and ancillary buildings. On a replacement basis, its entire capital asset base would easily amount to $50 billion (about $40 billion of track and infrastructure and $10 billion of rolling stock).

And that giant figure underscores the economic part of the Amtrak hazard. Even with a generous assumption that the useful lives of its equipment, rolling stock and infrastructure would average 25 years, Amtrak’s economic depreciation would amount to $2.0 billion per year. Since it generates roughly 8 billion passenger miles annually, this means that its capital consumption expense amounts to about 25 cents per passenger mile.

So here’s the thing. The average airline fare in the US is about 15 cents per passenger mile and the average bus fare is about 11 cents per mile. Now how in the world does it make sense to operate a lumbering passenger rail system in which the true economic cost of its capital assets alone is 65% to 130% higher than the profitable fares charged by the perfectly adequate and available alternative modes of transportation?

Stated differently, you are deep in the hole before you start  even one Acela train on its route between Washington and Boston or one long distance train, for example, on its 1,750 mile route between Chicago and Los Angeles. But in the operations department it goes without saying that Amtrak—–burdened as it is with its endless array of Congressional mandates and directives—– is not exactly a model of efficiency or financial discipline.

Thus, Amtrak’s annual fully loaded wage and benefits tab is about $2 billion spread over 20,000 employees. Needless to say, at $100,000 per employee Amtrak’s costs are not even in the same zip code as its far more efficient for-profit competitors in the airline and bus transit industries.

On top of its massively bloated and featherbedded payroll, Amtrak also generates another $1.3 billion of expense for fuel, power, utilities, supplies, repair parts and operational and management overheads. Accordingly, its total operating budget at $3.3 billion amounts to about 40 cents of expense per passenger mile. That is, its operating costs are 3-4X the ticket price of its air and bus competitors!

The economic arithmetic is thus insuperable. On a system-wide basis, Amtrak’s combined capital and operating expense would amount to about 65 cents per passenger mile. That is, in the absence of Federal and state subsidies and the implicit subsidies that private railroad companies transfer to Amtrak via deeply below-market fees for utilization of their tracks and facilities. Indeed, 95% of Amtrak’s routes and 70% of its passenger miles are generated on lines leased from freight railroads, which—-owing to regulatory mandates—-Amtrak pays a trivial 2 cents per passenger mile—-a figure not remotely reflective of the real economic costs.

By contrast, Amtrak’s ticket revenues amount to hardly 30 cents per passenger mile. So contrary to Amtrak’s claim that it has nearly reached break-even, its true economics reflect the very opposite. Namely, a giant political pork barrel in which system revenues cover less than 45% of its all-in economic costs to society.

Nor can this disability be remedied by reforming the system and paring back its routes to just the profitable corridors. Even the northeast corridor generates only 10 cents of operating profits per passenger mile. Throw-in the capital costs and even Amtrak’s so-called profitable lines are still deeply underwater.

To wit, a recent inspector general report estimated that the replacement cost of the northeast corridor infrastructure alone was about $15 billion, which would amount to $400 million per year on an amortized basis or 20 cents per passenger mile. Add in another 5 cents per mile for locomotives and passenger cars and you have 25 cents of  capital costs.

So there is a reason why even the northeast corridor has never been privatized. It would lose at least 15 cents on each of the 2 billion passenger miles that Amtrak/northeast corridor generates annually in the absence of much higher fares.

And those are the baleful facts regarding the Acela and regional routes in the Washington-Boston corridor. The rest of the system embodies just plain economic waste. The aforementioned Chicago-Los Angeles route, for example, has operating costs of 35 cents per passenger mile; and total costs with capital consumption would be at least 50 cents per mile–even giving allowance for the lower capital intensity of long distance routes.

The problem is that you can get a airline coach fare today between the Chicago-Los Angeles pair for $200 or 11 cents per mile. And you don’t need to spend 22 hours on the train, either.

As it is, Amtrak’s current fare on this route is about 15 cents per passenger mile and apparently it cannot go much higher if it wishes to remain competitive with air. Yet why in the world should bus drivers in Minneapolis pay Federal taxes in order to provide what amounts to a $600 subsidy per ticket on the 180,000 tickets that are sold annually on the Chicago-Los Angeles route? And the latter is only typical of most of the other routes outside the northeast corrdidor.

Obviously, there is no means test to get a $600 subsidy from Amtrak, or any other plausible criterion of public need. Like so much else which emanates from Washington, these Amtrak subsidies are distributed willy-nilly——in this case to retirees with enough time and money to see the country at leisure or to people with fear of flying who don’t wish to drive.

So Amtrak is a white elephant as a matter of economics, but when it comes to public safety it is actually a wounded one. That’s because when push comes to shove and Congress is faced with limited budget headroom, it always elects to short change the capital budget rather than reduce the scope of Amtrak’s far-flung operations and eliminate any of the 44 routes which crisscross the nation’s congressional district.

I actually learned that lesson during the so-called Reagan Revolution. My original plan was to eliminate Amtrak entirely, and it would have saved upwards of $60 billion in the decades to come. At the get-go, the Gipper was all for it. Not a proper function of government, he averred.

Then his Secretary of Transportation and previously chief GOP fundraiser and governor of Pennsylvania explained that the Gipper was right—but not quite. The northeast corridor (NEC) routes provided a valuable economic function——so by paring the system back to these high density routes the  Amtrak budget could be cut in half. Moreover, after some up-front capital spending, the NEC could be transformed into a profitable business and eventually sold to the private sector in an IPO. That’s just the thing, said the President.

Then it got to Capitol Hill and the Republican politicians said we are all for cutting the Amtrak budget by 50%, but to get the votes we need to do it our way. Upon which the Gipper replied, yes, we are here first and foremost to shrink the runaway Federal budget, so do what you must to get those savings.

They did. They drastically pared back the capital budget and kept virtually all of the routes and operating subsidy costs in place.  When Uncle Sam came up short, capital investment could be deferred, but the pork barrel had to be feed.

In the bye and bye, of course, Amtrak’s budget was restored  all the way back to Jimmy Carter’s “wasteful” levels and actually hit record amounts during the Republican government of 2001-2008. But even then there was never enough appropriations to keep this giant white elephant properly fed——so capital investment was perennially short-changed and the system’s fixed assets steadily deteriorated.

Whether this week’s disaster was human error or not, the larger certainty is that the system has been chronically starved of capital. But the solution is not for a bankrupt government in Washington to pour more money down the Amtrak rat hole in the name of “infrastructure investment”, as the big spenders are now braying in the wake of this week’s disaster in Philadelphia.

Instead, Amtrak should be put out of its misery once and for all. Otherwise its longstanding hazard to the taxpayers is likely to be compounded by even more public safety disasters like this week’s tragic event.

Reprinted with permission from David Stockman’s Corner.