Amtrak: Management and Accountability Issues Contribute to Unprofitability of Food and Beverage Service
Published: 2005-06-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Amtrak has provided food and beverage service on its trains since it began operations in 1971. Amtrak has struggled since its inception to earn sufficient revenues and depends heavily on federal subsidies to remain solvent. While a small part of Amtrak's overall expenditures, Amtrak's food and beverage service illustrates concerns in Amtrak's overall cost containment, management and accountability issues. This testimony is based on GAO's work on Amtrak's management and performance as well as additional information gained from Amtrak and other transportation providers. This testimony focuses on (1) the provisions written into Amtrak's contract with Gate Gourmet to control costs, (2) the types of management controls Amtrak exercises to prevent overpayments, and (3) the information Amtrak collects and uses to monitor the service and to report to stakeholders such as its Board of Directors.
section_title: What GAO Found
paragraphs: Amtrak's financial records show that for every dollar Amtrak earns in food and beverage revenue, it spends about $2--a pattern that has held consistent for all 3 years GAO reviewed. In GAO's estimation, Amtrak has lost a total of almost $245 million from fiscal year 2002 through fiscal year 2004 on food and beverage service. Since 1999, Amtrak has contracted out the responsibility to Gate Gourmet International (Gate Gourmet) for managing commissaries and for ordering and stocking all food and beverages and related items managing under a contract that expires in September 2006. Amtrak's current cost reimbursable contract with Gate Gourmet creates, if anything, an incentive to increase Amtrak's costs unless properly monitored. Gate Gourmet can charge Amtrak for the cost of the food and beverage items, as well as management, labor, and other expenses. Without defined controls and management, this type of contract structure provides little incentive for a contractor to reduce or contain costs to provide better value to its customer. GAO found five different management controls that Amtrak did not fully exercise regarding oversight of its food and beverage service. These controls include: (1) requiring an independently audited financial report, (2) auditing for all applicable rebates and discounts that Gate Gourmet could have applied to food and beverage items purchased for Amtrak, (3) adequately monitoring purchase price information for its food and beverage items, (4) not considering Amtrak's food and beverage labor costs, as a part of product markups, and that (5) not utilizing Amtrak's procurement department in negotiating the current contract. Information that could provide both internal and external accountability for the food and beverage function is limited. Amtrak does not include any information about its food and beverage expenses in any of its internal or external reports, including its monthly performance reports, its internal quarterly progress reports or its annual consolidated financial statements. This lack of information makes it difficult for internal and external stakeholders to gauge the profit or loss of the operation as well as to assign accountability.

section_title: Letter
paragraphs: I appreciate the opportunity to testify on issues concerning the National  Railroad Passenger Corporation’s (or Amtrak) food and beverage service,  which will clearly illustrate Amtrak’s challenges in controlling its costs.  Since Amtrak started operations in 1971, Amtrak has struggled financially,  and has depended on a federal subsidy of more than $1 billion a year since  fiscal year 2003 to remain solvent. For fiscal years 2002 through 2004,  Amtrak’s food and beverage expenses were about $487 million—or only  about 5 percent of the company’s total expenditures. However, during that  same time period, Amtrak’s food and beverage service earned about $243  million in revenue. This means that Amtrak spends about $2 to earn $1 in  food and beverage revenue. Of Amtrak’s total food and beverage  expenditures, about 53 percent was for labor costs for Amtrak employees  serving the food, about 38 percent was for food costs and fees to Gate  Gourmet International (Gate Gourmet)—the contractor for food and  beverages and operation of Amtrak commissaries—and about 9 percent  for other Amtrak costs.
At your request, my statement today relates primarily to the contractor’s  portion of this expense, as well as Amtrak’s oversight and control over its  food and beverage service, and what Amtrak is doing to oversee and  control contract costs. I will specifically address what we have learned in  examining three major types of cost controls: (1) the provisions written  into Amtrak’s contract with Gate Gourmet to control costs, (2) the types  of management controls Amtrak exercises to prevent improper payments,  and (3) the information Amtrak collects and uses to monitor the service  and to report to stakeholders such as its Board of Directors. We also  talked with three other passenger transportation providers to get  background and comparison information on their food and beverage  services. The information I will present is based on completed work done  in the course of our ongoing review of Amtrak’s management and  performance which we will report on later this year. We also collected  supplemental information from Amtrak, and on the food and beverage  operations of VIA Rail Canada (VIA Rail) and the Alaska Railroad, two  other providers of intercity passenger rail, and two major U.S. air  carriers—Northwest Airlines and American Airlines.
In summary, we found that:    The provisions of the contract for food and beverage services provide little  incentive for Gate Gourmet to reduce or contain the costs of food and  beverages. The contract is a cost reimbursable contract, and under it, the  contractor can charge for the costs of items purchased, in addition to  management and other fees. Given the way Amtrak is managing the  contract, none of the contractor’s profit is tied to controlling costs.  Although the contract included a discussion of performance standards,  these standards and related measures were never created, even though  they were required 45 days after the contract was signed in January 1999.  Performance standards would have allowed for performance incentives  and penalties. If these incentives had been developed, then they could  have been used to pay Gate Gourmet based on such things as finding  lower-priced food products of similar quality to what is being purchased  now.
Amtrak is not fully exercising prudent management techniques to control  its food and beverage costs and prevent potential improper payments. We  found three examples of this mismanagement at Amtrak. First, Amtrak has  never required the contractor to submit an annual report (which would be  independently audited) of budget variances for key line items, even though  the contract requires such a report. Such a report could detect improper  payments by Amtrak to Gate Gourmet for food and beverage items.  Second, Amtrak has never audited the contractor’s purchase data—which  is allowed under the contract—to ensure that the contractor is passing  along any discounts or rebates the contractor receives on items  purchased. For example, Gate Gourmet reported passing along about  $550,000 in rebates and discounts on purchases for Amtrak totaling about  $6.5 million out of $90 million total purchases for Amtrak from fiscal year  2002 through fiscal year 2003. Finally, Amtrak does not adequately  monitor purchase prices reported by the contractor to identify variances  or products with high costs. To further test purchase data, we non- statistically selected 37 payment transactions and reviewed the underlying  supporting documentation and found evidence of widely variable product  prices. For example, Amtrak paid between $0.43 and $3.93 per 12-ounce  bottle of Heineken beer. (See fig. 1.)
The level of information Amtrak collects and uses to monitor its food and  beverage service and report results to external or internal stakeholders  inhibits accountability for its performance. Externally, Amtrak does not  report food and beverage expenditure information in its monthly  performance reports or its annual consolidated financial statements. While  Amtrak reports the combined revenue of its food and beverage services in  its monthly performance reports, it does not do so for its food and  beverage expenses. By combining revenue, it is difficult for managers to  determine the amount of revenue attributable to food services compared  to beverage services. By not reporting expenses, it is difficult to determine  how much is spent on food and beverage service. This lack of information  inhibits Amtrak’s ability to assign accountability for performance  internally or allow for any external accountability to key stakeholders.  Other transportation companies we studied have a different accountability  structure for their food and beverage service. Because VIA Rail has a fixed  subsidy from the federal Canadian government, VIA Rail’s management  has an inherent incentive to control its costs in all areas of its operation,  including its food and beverage service. The Alaska Railroad receives bi- weekly reports from its contractor detailing its labor and food costs that  show, among other things, contractor performance against the contractual  cost caps.
subsections: section_title: Background
subsections: section_title: How Does Amtrak Operate Its Food and Beverage Service?
paragraphs: Food and beverages have been served onboard Amtrak trains since  Amtrak was created. Amtrak’s eleven commissaries are located around the  country and are responsible for receiving, warehousing and stocking food,  beverages, and other items for Amtrak’s onboard dining and café service.  Until January 1999, Amtrak ran these commissaries with its own  employees. Since then, Amtrak has contracted out the responsibility for  the commissaries and for ordering and stocking all food, beverages, and  related items under a contract that expires in September 2006. Gate  Gourmet (the contractor), is also a supplier of food and beverages to  several major airlines. During fiscal years 2002 through 2004, the 3-year  period we focused on in our audit work, Amtrak paid Gate Gourmet  between $59 and $64 million a year in reimbursements and fees. Gate  Gourmet personnel operate Amtrak-owned commissaries and order,  receive, store, and stock trains with food, beverages, and other related  items such as table linens and napkins. Food and beverage stock are  charged to Amtrak employees who account for the food en route. When a  train arrives at its final destination, all remaining stock items are returned  to a commissary. Gate Gourmet charges Amtrak for the items used, as well  as for labor, management, and other fees. The contract requires that Gate  Gourmet provide Amtrak an independently audited annual report within  120 days following the expiration of each contract year.
Amtrak’s model for handling its food and beverage service is similar to  other passenger transportation companies, with some important  differences. Northwest Airlines has outsourced their kitchen and  commissary operations and have food and beverages delivered to each  airplane before each flight. VIA Rail Canada, Canada’s national passenger  railroad, serves food on most of its trains and owns and operates its own  commissaries. Food and other items are delivered to each train, consumed  during the train’s run and restocked at the destination. The Alaska  Railroad, however, has a private contractor that orders, stocks, delivers,  prepares, and serves all of its food and beverages on its trains using their  own labor force. With certain exceptions and limits, all food and beverage  revenues and expenses are the responsibility of the contractor.
section_title: How Much Is Amtrak Losing on Food and Beverage Operations?
paragraphs: Amtrak’s financial records show that for every dollar Amtrak earns in food  and beverage revenue, it spends about $2—a pattern that has held  consistent for all 3 years we reviewed. (See table 1 and fig. 2.) Amtrak’s  financial records also indicate that Amtrak has lost a total of almost $245  million for fiscal year 2002 through fiscal year 2004 on food and beverage  service. Section 24305(c)(4) of Title 49, United States Code, states that  Amtrak is not to operate a food and beverage service whose revenues do  not exceed the cost of providing such service. About half of the total food  and beverage expenditure is labor cost for Amtrak staff who prepare and  serve the food aboard the trains. About 38 percent is reimbursements and  fees to Gate Gourmet, representing the cost of food and other products in  addition to other fees paid to Gate Gourmet. About 9 percent is for other  Amtrak costs. While Amtrak’s labor costs for its food and beverage service  are significant, these costs are part of Amtrak’s overall labor cost  structure, and as such, are beyond the scope of work we did for this  testimony. However, a recent Amtrak Inspector General report suggested  that Amtrak could save money on its food and beverage labor if the cost of  this labor was similar to that of the restaurant industry.
Amtrak has responded to these continued losses with some incremental  reductions in food and beverage service. On July 1, 2005, Amtrak plans to  discontinue food and beverage service on its routes between New York  City and Albany, New York, which would allow Amtrak to close its  commissary in Albany. An official in Amtrak’s Office of Inspector General  stated that Amtrak lost between $6 to $8 per person on food service on  those routes and that closing the commissary will save Amtrak about $1  million per year. However, achieving additional savings by closing  commissaries could be limited, as Amtrak’s other commissaries serve  multiple Amtrak trains that would continue to offer food and beverage  service. In other words, closing a commissary could affect multiple trains  on multiple routes. According to an Amtrak procurement official, a team  consisting of members of Amtrak’s procurement, legal, financial and  transportation departments is currently working to identify ways to reduce  Amtrak’s costs in its next commissary contract.
Other transportation companies have taken actions to better control their  food and beverage costs in recent years. For example, Northwest Airlines  officials stated that they pay particular attention to food and beverage  expenses. Since 2002, Northwest has reduced its food costs by 4 percent.  This has been achieved by reducing or eliminating complimentary food  service for coach passengers on domestic flights (even to the point of  eliminating pretzels on these flights), aggressive pricing of food products  and flexible budgeting that adjusts each month to reflect increases or  decreases in ridership. VIA Rail officials told us they have considerable  flexibility in hiring its onboard service personnel to adjust its labor force  to respond to peak and off-peak tourist seasons for its long-distance trains.  In addition, VIA Rail officials said they have considerable flexibility in how  onboard service staff are used; in essence, all onboard service staff can be  used wherever and whenever needed. The Alaska Railroad restructured  the contract with its food and beverage service provider to allow for food  price fluctuation within defined limits.
section_title: Current Contract Does Not Provide Incentives to Reduce or Contain Costs
paragraphs: One way to control costs is to build provisions into a contract that  motivate a contractor to keep costs as low as possible. Amtrak’s current  cost reimbursable contract with Gate Gourmet creates, if anything, an  incentive to increase Amtrak’s costs unless properly monitored. Under the  contract, Gate Gourmet receives a number of reimbursements, including  commissary, labor, and insurance costs, in addition to an operating fee.  The operating fee is defined in the contract as 5 percent of the total actual  cost of the onboard food and beverage items. This fee is an incentive for  the contractor to increase Amtrak’s food and beverage costs. These costs  can change in each yearly operating budget. This operating budget is  subject to review by Amtrak and is mutually agreed to by both Amtrak and  Gate Gourmet.
Incentives can also be written into a cost reimbursable contract to control  costs and enhance performance. Although the contract included a  discussion of performance standards, these standards and related  measures were never created, even though they were required 45 days  after the contract was signed in January 1999. Performance standards  would have allowed for performance incentives and penalties. If these  incentives had been developed, then they could have been used to pay  Gate Gourmet based on such things as finding lower-priced food products  of similar quality to what is being purchased now, or identifying ways the  food and beverage service could be operated more economically or  efficiently.
Other factors may not provide the needed incentives for Gate Gourmet to  aggressively seek to reduce Amtrak’s food costs. Under current contract  provisions, Gate Gourmet can charge Amtrak for food prepared in Gate  Gourmet facilities and delivered to Amtrak’s commissaries. The contract  provides considerable pricing flexibility to Gate Gourmet for these items  with no detailed definitions or price caps. This makes it difficult to  determine whether or not Amtrak is being charged a reasonable price. In  addition, the contract also provides that Gate Gourmet deduct any trade or  quantity discounts on items purchased for Amtrak either immediately from  Amtrak’s invoices or retroactively based on the proportion of Amtrak’s  purchases. Discounts applied retroactively are to be applied by Gate  Gourmet in “good faith” and retroactive payments are “an approximation  and that  cannot guarantee exactness.” The contract  stipulates these payments are subject to an audit by Amtrak. However,  these audits have never been conducted.
In contrast, while Northwest Airlines has cost plus contracts with its  largest food and beverage contractors (including Gate Gourmet),  Northwest’s management of them is different. Northwest’s caterer  contracts have labor and other rates specified in the contract. According  to Northwest’s food and beverage officials, they know quickly if they  change their menu, how much their suppliers will charge them—even to  the addition or subtraction of a leaf of lettuce served as part of an entree.  In addition, Northwest officials stated that each price charged by its  contractors is checked and invoices are audited.
section_title: Management Controls Over Food and Beverage Operations Not Fully Exercised
paragraphs: We identified five types of management controls that Amtrak did not fully  exercise regarding oversight of its food and beverage service. These  include the following:    Requirement for an annual report has never been enforced.
Amtrak’s contract requires Gate Gourmet to provide an independently  audited annual report within 120 days following the expiration of each  contract year; this report must also be certified by Gate Gourmet officials.  This report is to provide actual and budgeted amounts for key line items  and to provide a narrative explanation for any actual to budget variance  greater than one percent in the aggregate for all commissaries. However,  Gate Gourmet has not provided this report during the five completed years  the contract has been in place. Amtrak food and beverage officials could  not provide us with a reason as to why they had decided not to enforce  this provision. They told us that they relied on contractor-provided  monthly operating statements and on reports from Amtrak’s Inspector  General instead. Our review found that the monthly operating statements  lacked critical information that was to be included in the annual report,  were prepared by the party seeking reimbursement, and, perhaps more  importantly, were not independently reviewed or audited. By contrast, the  annual report was to be certified by contractor officials and audited by an  independent certified public accountant. The Inspector General’s reports,  while providing management with information on some aspects of  Amtrak’s food and beverage service activities, should not be viewed as a  substitute for a comprehensive audit and report.
Audits of discounts and rebates were not conducted. The contract  provides that Amtrak audit Gate Gourmet’s allocations of trade and  quantity discounts received from purchases of food and beverages.  However, Amtrak has never conducted an audit of the discounts credited  to it, nor has it requested that the contractor certify that all of the  discounts that Amtrak should receive have been credited to its account.
Information we reviewed indicates that such audits may yield savings for  Amtrak. For example, Amtrak officials advised us that discounts and  rebates totaling over $550,000 for fiscal years 2002 and 2003 had been  credited on gross purchases of about $6.5 million. However, total Gate  Gourmet purchases exceeded $90 million for the 2-year period—roughly  13 times the amount of purchases the contractor reported as being subject  to discounts and rebates. Because Amtrak did not require an independent  audit or otherwise analyze the trade and quantity discounts received,  Amtrak does not know whether or not it received all of the discounts and  rebates to which it was entitled. Amtrak could not provide us with reasons  supporting its decision or its consideration of this issue.
Adequate monitoring of purchase price information needs  improvements. Amtrak did not adequately monitor its purchase price  information for food and beverage items purchased by Gate Gourmet.  Amtrak officials said they monitored contractor purchases using daily  price reports that listed unit prices for purchases ordered the previous day  and the price the last time the item was ordered. However, given the  importance of purchase orders in a food and beverage operation, internal  controls need to be developed to systematically monitor and analyze  purchase information. These controls should then be monitored on a  regular basis to assess the quality of performance over time. For  example, controls should include processes to identify unit price variances  over established or pre-set amounts and actions taken to document follow- up work performed. Although Amtrak had some processes that compare  prices, the process was not robust enough to include a record of price  trends or follow up actions taken such as corrections of amounts billed.  Our testing of this control showed that if Amtrak had approached this  review in a more rigorous manner, it may have identified discrepancies  warranting further investigation. For example:   Monitoring of Purchase Order Pricing: Using data mining and other  audit techniques, we selectively reviewed more than $80 million of  purchase order information for fiscal years 2002 and 2003 and found  that the contractor was generating purchase orders with significant  variances in unit prices. For example, in 2003, the purchase order price  of a 10-ounce strip steak ranged from $3.02 to $7.58.
Monitoring of Actual Product Price Charged by Gate Gourmet: When  Amtrak officials told us that purchase order information did not always  reflect actual amounts paid, we tested actual prices paid by Amtrak to  Gate Gourmet. To test purchase order data, we nonstatistically  selected 37 payment transactions and reviewed the underlying  supporting documentation and found evidence of widely variable  product prices. For instance, in fiscal years 2002 and 2003, payments of  over $400,000 for 12-ounce Heineken beer varied from $0.43 to $3.93  per bottle.
Amtrak product pricing excludes labor costs. Our work revealed that  Amtrak’s product price to the customer does not take into account over  half of Amtrak’s total food and beverage costs. Amtrak’s target profit  margin is 67 percent for prepared meals and 81 percent for controlled  beverages. These target profit margins are expressed as a percentage of  sales over the item product cost charged to Amtrak. However, these target  profit margins do not take into account Amtrak’s on-board labor costs,  which our work has determined is estimated at over half of Amtrak’s food  and beverage total expenditures. Amtrak’s current food and beverage  product pricing seems to ensure that its food and beverage service will not  be profitable.
Available procurement expertise not brought to bear. Finally,  Amtrak’s procurement department was not involved in the negotiation of  the original contract. The current contract was signed by officials of  Amtrak’s now defunct Northeast Corridor Strategic Business Unit. The  contract’s initial period was for about 7 years (January 29, 1999, to  September 30, 2006), with a 5-year extension option. In addition, another  agreement to supply Amtrak’s Acela train service for food and beverage  items from Gate Gourmet’s flight kitchens was made verbally between  Amtrak’s former president and the president of Gate Gourmet. Amtrak  does not have any documentation for the contract terms for this service.
In contrast to Amtrak, other transportation companies we interviewed  closely monitor their invoices and contractor payments through periodic  audits or have given the responsibility for costs and pricing to the  contractor. For example, Northwest Airlines officials stated that they  conduct regular audits of “every  price” they are  charged from their contractors and have found errors in either prices or  labor charges in their contractor invoices. VIA Rail selectively audits their  food supplier invoices that are attached to every billing statement they  receive. Finally, the Alaska Railroad food and beverage business model  gives responsibility for food and labor costs to the contractor, subject to  contractual limits.
section_title: Information for Accountability Is Limited
paragraphs: Finally, information that would provide accountability over this service,  both internally and externally, is limited. We noted that while Amtrak  reports the combined revenue from its food and beverage services in its  monthly performance reports, it does not identify for stakeholders the  revenue attributable to each service. Amtrak also does not include any  information about its food and beverage expenses in any of its internal or  external reports, including its monthly performance reports, its internal  quarterly progress reports, or its annual consolidated financial statements.  Absent this information, it is difficult for internal and external  stakeholders to determine the amount of expense attributable to the food  and beverage service and to gauge the profit or loss of the operation. This  hinders oversight and accountability.
Other transportation companies we studied have a different accountability  structure for their food and beverage service. Because VIA Rail has a fixed  subsidy from the federal Canadian government, VIA Rail’s management  has an inherent incentive to control its costs in all areas of its operation,  including its food and beverage service. VIA Rail controls its food and  beverage costs in many different ways including fixed fee supplier  contracts, item price reports, monitoring of supplier markups and item  prices, and fixed food cost budgets to VIA Rail menu planners. Northwest  Airlines has a flexible monthly food and beverage budget that increases or  decreases with ridership levels. In addition, each supplier contract has  established markups on product prices and its contracts with food  preparation and delivery providers have detailed labor rates that are all  audited for accuracy. The Alaska Railroad receives biweekly reports from  its contractor detailing its labor and food costs that show, among other  things, contractor performance against the contractual cost caps. In  addition, the contractor and the Alaska Railroad will conduct annual  audits of its contractor’s performance under the contract.
section_title: Conclusions
paragraphs: Amtrak’s food and beverage service may represent a relatively small part  of the company’s operating budget, but it speaks volumes about Amtrak’s  need to get its operations in better order. In administering this contract,  basic steps for good management have been ignored or otherwise set  aside. Omissions include not completing agreed-upon provisions of the  contract, not carrying through with basic oversight called for in the  contract, and ensuring that the organization was getting products at the  most reasonable price. Prudence requires a stronger effort, beginning with  carrying out those steps that, under the contract, should have been taken  all along. Amtrak needs to take such steps not only to curb the losses in  this program, but to help convince the public that it is acting as a careful  steward of the federal dollars that continue to keep it operating.
section_title: Recommendations
paragraphs: Based on our work to date, we anticipate making recommendations to  Amtrak to improve controls over its food and beverage operations. Since  we did not have sufficient time to obtain Amtrak’s comments, as required  by government auditing standards prior to this hearing, the  recommendations remain tentative until that process is complete. At that  time, we anticipate making the following recommendations that Amtrak:  1.  Better contain its food and beverage costs through:    Following its own procedures for ensuring proper contracts and    Enforcing key provisions of the current Gate Gourmet contract  including annual reports that are independently audited by an outside  auditing firm and certified by Gate Gourmet officials and conduct  regular audits of discount and rebates.  2.  Prepare a written contract for food and beverage service on Acela  trains that specifies the service to be provided, includes incentives to  ensure efficient and effective contractor performance, and includes  regular annual reports and audits.  3.  Create separate revenue and expenditure reporting and other basic  food service metrics to allow for internal and external accountability  for its food and beverage service and create incentives to reduce costs  and/or increase revenue.  4.  Comprehensively review the revenue and cost structure of its food and  beverage service to determine the most cost effective solution that can  increase the financial contribution of its food and beverage function.
Mr. Chairman, this concludes my testimony. I would be happy to answer  whatever questions you or the other members might have.
section_title: Contacts and Acknowledgements
paragraphs: For further information, please contact JayEtta Z. Hecker at  heckerj@gao.gov or at 202-512-2834. Individuals making key contributions  to this statement include Greg Hanna, Heather Krause, Bert Japikse,  Richard Jorgenson, Steven Martin, Robert Martin, Irvin McMasters, Robert  Owens, and Randy Williamson.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.