Graphics by Nina Tagliabue
The BRB Bottomline: Amtrak currently survives on grants given by the government to make up its losses, but losing the longer distance routes would chip away at valuable tourism, jobs, and opportunities for rural Americans. Operating passenger rail services throughout the United States and some parts of Canada, Amtrak is government-owned, but operates as a profit-making firm. This article discusses the implications of its restructuring.
In Amtrak’s financial statements, services are divided into three subgroups: the Northeast Corridor, State-Supported and Long Distance routes.
The Northeast Corridor—connects Washington D.C., Philadelphia, New York City and Boston through high-speed rail. By calculation, its most profitable type of service yields an average of $90 of profit per passenger.
The Northeast Corridor serves 17% of the US population, but covers 2% of the land in the US. In a 2014 report by Amtrak, the Northeast Corridor helps support the education and powerhouses that are located in the area. The train is competitive because it connects multiple affluent urban areas within a short distance of each other. From a passenger’s standpoint, the travel time and costs are comparable to driving or flying. Through price discrimination, Amtrak is able to charge higher prices for the consumer.
The reason why the Northeast Corridor is financially successful is the same reason why the long-distance routes are not. Often slower and covering less affluent and rural America, many of these routes run at major losses and run less frequently. All of the routes are unprofitable, losing the company an average of $81 to $417 per passenger in 2018.
Government Grants and the Path to Profitability
Donald Trump’s 2020 budget proposed to slash funding for Amtrak’s operations from 2021 onwards, from $1.9 billion to $936 million. This is intended to incentivize Amtrak to lower its losses. Amtrak has never recorded a single year of annual profit. Rather, it relies on government aid to help make up the difference. The cuts should theoretically make Amtrak more efficient.
The company has already started its restructuring process. In 2017, Amtrak appointed former Delta CEO Richard Anderson to help restructure Amtrak. In comparing the January 2018 and January 2020 reports, we found that 11 out of Amtrak’s 15 long distance routes found reduced operations, in spite of increased passenger count. Conversely, the Northeast Corridor saw 5% more capacity. From a financial standpoint, this would make sense. One simple way to gain profitability would be to cut loss-making trips, while increasing service between lucrative destinations. Alongside business optimization, the business managed to halve its losses, from $75 million in 2018, to $30 million in 2019. Analysts have predicted that without the coronavirus in 2020, Amtrak would achieve its first full year of profitability.
Amtrak’s Market Segment
The California Zephyr—Amtrak’s longest route spanning 2400 miles scheduled to take 51.5 hours—connects Chicago and San Francisco. In a position paper by Amtrak, trips taken are increasingly shorter. Because of delays, long travel times and once-a-day service, travelers rarely find Amtrak’s service appealing.
For a traveler intending to travel from Chicago to San Francisco, flying is often a more viable option. With multiple airlines competing for market share, they offer non-stop services under 5 hours at competitive prices.
Rather, Amtrak’s service is catered towards rural communities, connecting them to larger towns and cities.
Rail’s Economic and Social Benefits
Amtrak’s operations require routine maintenance and staffing—and although the company hires 24,000 workers, it supports 80,000 additional jobs through manufacturing of train components. For its passengers, rail connects those living in rural regions with a scope of opportunities far beyond their immediate community. When there is a growing wage gap between urban and rural America, rail can often help erase the income inequality by offering a means of better work placement through easy transport to larger towns and cities.
The benefits are not limited to social mobility. Amtrak also provides a valuable contribution for the leisure industry. In California, 3 million Amtrak passengers were tourists, bringing in an additional $99.3 million in tourist expenses. Throughout all of Amtrak’s services, tourists contribute a total of $521 million worth of goods and services expenditure to the economy.
There are a few competing modes of transportation that aim to replicate Amtrak’s role. The U.S. has a sprawling interstate system. That said, not everyone can afford a car, and many of the communities are far from the nearest interstate.
The Essential Air Service, a government subsidized program to make air travel affordable for small towns. Because the air service routes are expensive to run and unprofitable, extending this service to replace Amtrak would also cost the government millions of dollars.
The Essential Air Service also needs a small airport, which requires extensive infrastructure construction—which would only see a few flights per day. By contrast, all of the towns that Amtrak serves already have train tracks and a simple station which requires minimal maintenance.
Instead of building new infrastructure, or cutting services at the expenses of rural Americans, the U.S. already has an extensive rail network that serves hundreds of small communities.
A Final Cost
While Congress gives Amtrak $1.9 billion every year, Amtrak contributes $8.3 billion to the U.S. economy and provides for 100,000 jobs. Thus, the external benefits Amtrak provides far outweigh its yearly losses. While Congress may be looking at the fiscal cost, Amtrak—being government owned—has an obligation to provide accessible transport for those who need it the most. Revitalizations for the Northeast Corridor are already underway, with more efficient services starting in 2021. However, unless the long-distance routes receive more funding and development, America’s rural population will be left behind. That is the true cost of divestment.
The way Amtrak is run places it at an interesting crossroads. If it was just a government-owned company, it would continue to run all the unprofitable routes. As a privatized for-profit corporation, it would have focused extensively on the Northeast Corridor. While the government doesn’t want to spend billions on an inefficient and expensive transit system, funding cuts would take away a substantial link for jobs, opportunities and resources.
Brian is a junior studying Business Administration and Global Studies at UC Berkeley. He is interested in socially responsible investing and how institutional decisions impact the community they serve in, which is why he joined BRB’s community column and stayed there since. He hopes to continue writing about little known topics and breaking them down into easy-to-read articles. Outside of class, you can find Brian watching Broadway musicals, binging on Netflix, or taking part in half-marathons.