Intercity Passenger Rail: Amtrak Needs to Improve Its Decisionmaking Process for Its Route and Service Proposals
Released: 2002-04-16T00:00:00

Letter

Background

Amtrak was established by the Rail Passenger Service Act of 1970, after the nation’s railroads found passenger service unprofitable. It operates a 22,000-mile passenger rail system over 43 routes. (See fig. 1.) Amtrak owns 650 miles of track, primarily in the Northeast Corridor, which runs between Boston, Massachusetts, and Washington, D.C. It operates the remainder of its routes over tracks owned by freight railroads and pays these railroads for this access. From fiscal year 1971 through 2002, the federal government provided Amtrak with about $25 billion in federal operating and capital assistance, or an average of $807 million annually (in nominal dollars).

Amtrak’s financial condition has been deteriorating and, in 2001, it experienced its largest net loss (revenues less expenses) ever of about $1 billion. In fiscal year 2001, only one of Amtrak’s 43 routes made enough revenue to cover its operating costs—the Metroliner/Acela Express service on the Northeast Corridor ($51 million). The other 42 routes had operating losses ranging from about $600,000 on the Vermonter (service between Washington, D.C., and Vermont) to $71.5 million on the Northeast Direct (generally service between Virginia and Massachusetts). (See app. I for the financial performance of all Amtrak routes.)

Amtrak has changed its general approach to route and service actions over time, from attempting to improve its financial performance by cutting service to attempting to achieve the same result by increasing service. For example, in 1995, Amtrak eliminated 9 routes, truncated 3 routes, and changed the frequency of service on 17 routes. These actions were intended to cut costs by about $200 million while retaining 90 percent of revenues and 85 percent of passengers. Amtrak said the presumption was that passengers would use other trains to meet their travel needs, allowing it to retain most of its ridership and revenue. Although initially the route cutting actions had some financial success, subsequent financial results were below expectations because (1) management did not cut costs as planned, (2) less-than-daily service caused less efficient equipment usage and other unforeseen problems, and (3) passengers were no longer adjusting their travel plans to fit Amtrak’s new less-than-daily schedules.

In 1998, Amtrak switched its strategy to increase revenues by expanding service. It used a market-based approach to identify the market for intercity passenger rail service. To do so, it used market research and computer-based models to determine the potential ridership, revenue, and costs of proposed route and service actions. According to Amtrak, this approach constituted a significant improvement in its route evaluation process because it represented the first comprehensive analysis of Amtrak’s route system, and the first attempt to apply rigorous financial analyses and modeling techniques to the design of Amtrak’s national network.

The Network Growth Strategy was the first product of the market-based network analysis project that Amtrak initiated in October 1998 to address route evaluation deficiencies. The intent of the market-based network analysis was to (1) develop the financial tools that Amtrak needed to perform reliable and objective analyses of route and service changes; (2) help Amtrak achieve operational self-sufficiency by December 2002 by identifying route and service changes that, if implemented expeditiously, would produce positive financial impacts before the statutory deadline; and (3) express Amtrak’s vision of how its national network could be enhanced and improved.

In December 1999, Amtrak’s board of directors adopted the Network Growth Strategy as part of Amtrak’s strategic business plan. The strategy consisted of 15 planned route and service actions, the majority involving the expansion of service. (See app. III.) Amtrak predicated the growth strategy on the acquisition of significant new revenue from hauling mail and express cargo and estimated that it would result in $65.6 million in net revenue through fiscal year 2002. In February 2000, Amtrak announced to Congress that it was going to implement the 15 routes in the Network Growth Strategy.

Status of the Growth Strategy

Amtrak has been unsuccessful in implementing its Network Growth Strategy. About 2 years after announcing the Network Growth Strategy, Amtrak has cancelled 9 of the 15 planned route actions without implementing them. Amtrak implemented three route actions, although it cancelled one of these in September 2001. Finally, Amtrak plans to proceed with 3 other route actions, although their implementation will be at least 1 or 2 years later than originally planned. (See table 1.) According to Amtrak, the capital funds for one of the projects in planning (Silver Service restructuring in Florida) were frozen on February 1, 2002, in a company-wide effort to reduce use of cash. (In all, Amtrak cancelled nine routes without implementing them. Some routes were cancelled for more than one reason.)

Amtrak Overestimated Expected Mail and Express Revenue

Amtrak told us that it cancelled six of the Network Growth Strategy routes before they were implemented, in part, because it overestimated expected increases to mail and express revenue under the Network Growth Strategy. Amtrak estimated that this expected increase would improve Amtrak’s bottom line by $65.6 million through fiscal year 2002. Specifically, it estimated that mail and express revenues would exceed costs by $68.2 million, offsetting a loss of $2.6 million from expanded passenger operations. Most of the revenue increase was expected to come from new express business. This expanded mail and express traffic did not materialize and Amtrak’s revised plans have reduced expected Network Growth Strategy-associated mail and express revenue by about half—from $271 million to $139 million (a $132 million reduction).

Amtrak said that there were several reasons why this overestimation occurred. The current president of Amtrak’s mail and express unit told us that Amtrak expected to substantially expand its route system to generate this revenue and to begin running longer trains mostly filled with express traffic. However, he said that at the time Amtrak made its mail and express revenue estimates, it gave little thought to whether such an expansion was feasible—that is, whether Amtrak could likely capture this business or whether freight railroads that own the tracks would agree to Amtrak’s expansion plans. According to Amtrak, it did not have a rigorous approach to estimating expected express business. Amtrak officials told us that, until recently, Amtrak estimated express revenue largely on the basis of an analysis of a database of commodities being shipped nationally. Amtrak estimated the portion of this business that it thought it could obtain. An Amtrak official said that it now focuses more on determining existing customers’ shipping needs, assessing these needs in light of current economic trends, and evaluating Amtrak’s ability to meet these needs given existing train capacity. Finally, Amtrak officials told us that express shippers were reluctant to enter into contracts for service that did not yet exist.

Amtrak officials also told us that the company did not know route-by-route costs for its mail and express program when it announced its Network Growth Strategy. This is because Amtrak has never separately identified these costs. Rather, it has integrated these costs into the overall financial results of its intercity strategic business unit. Knowing these costs was important because Amtrak expected that the expansion of mail and express service would produce the revenue needed to make its route expansion profitable. Not until 2000 did Amtrak begin efforts to separately identify mail and express costs and develop separate mail and express financial information. According to Amtrak, in October 2001, it began producing separate profit and loss statements for its mail and express business. However, an Amtrak official said the corporation still has a long way to go in producing reliable mail and express financial information and in understanding the true cost of this business.

Amtrak Encountered Substantial Difficulties in Expanding Service Over Freight Railroad Tracks

Amtrak could not implement its Network Growth Strategy unless it reached agreement with freight railroads over funding for capital improvements (such as upgrading tracks and signals to improve safety and support higher-speed passenger operation) and access to freight railroads’ track. Quick agreement was necessary because Amtrak wanted to implement the new routes and services to help it reach operational self- sufficiency by December 2002. Amtrak encountered substantial difficulties in gaining freight railroad agreement to allow Amtrak to expand service over freight railroad tracks. This difficulty in reaching agreement contributed, in part, to Amtrak canceling six of its planned routes.

Amtrak planned to operate the 15 Network Growth Strategy routes over freight railroad tracks, including the transportation of mail and express as authorized by law. However, Amtrak was largely unable to gain freight railroads’ agreement. Such agreement was critical to the implementation of Amtrak’s strategy. Freight railroads are required by law to allow Amtrak to operate over their tracks and to give Amtrak’s trains priority over their own. In addition, freight railroads are required to charge Amtrak the incremental cost—rather than the full cost—associated with the use of their tracks. These amounts are negotiated by Amtrak and the freight railroads. Federal law also gives Amtrak the authority to carry mail and offer express service. These mandates result in an ongoing tension between Amtrak and freight railroads for several reasons. One reason is that accommodating passenger trains affects freight railroads’ ability to serve their customers and earn a profit. Second, accidents involving passenger trains may create liability issues for freight railroads. Third, freight railroads believe that they are not fully compensated for providing this service. Finally, Amtrak’s express business may compete with freight railroads’ business and Amtrak may be able to offer lower rates than freight railroads, everything else being equal, because Amtrak only has to pay freight railroads the incremental, rather than the full cost, of operating on freight railroad tracks.

According to Amtrak, for some proposed actions, such as increasing service to daily frequency, reaching agreement with freight railroads is not difficult because the freight railroads’ infrastructure can support additional trains and the host freight railroad may already be used to having Amtrak operate along certain routes. In other cases—such as where substantial capital improvements are needed or where service is to be initiated over tracks that are operating at or near capacity, reaching an agreement might be more difficult, especially where Amtrak expects freight railroads to pay for some or all of the improvements.

Amtrak officials told us that they met with senior freight railroad officials in November and December 1999—before its board of directors approved the Network Growth Strategy—to tell them of Amtrak’s plan for expanded service. Amtrak officials stated that freight railroads did not then express opposition to proposed expanded routes and services. According to Amtrak, these were high-level discussions at the president/chief executive officer level, during which the railroad executives agreed to entertain more specific proposals. According to Amtrak, it met again with officials from each railroad, generally in January or February 2000, to outline specific route proposals. According to an Amtrak official, Amtrak discussed the proposed route and/or service actions and sought freight railroads’ overall reaction to the proposals. He said that, in some cases, freight railroads identified issues such as the need to upgrade track. However, generally freight railroads said that they needed to further analyze the proposals to determine their likely effect, with more detailed discussions to be held at later dates. Freight railroad officials told us that the initial and subsequent meetings focused primarily on the concept of providing new services rather than identifying whether there might be aspects of the proposals that would be easy or difficult to resolve.

While Amtrak recognized that capital improvements would be needed on freight railroads’ tracks to implement eight Network Growth Strategy routes, it did not include capital investment requirements or the source of these funds in its route evaluations until after it had decided to implement the action. An Amtrak official said that considering capital investment requirements any earlier would not be useful since, if capital costs were factored in, route proposals would appear to be unprofitable and not be considered further. As a result, Amtrak limited its analysis to whether revenues are expected to exceed operating costs. Amtrak followed this approach despite the fact that some route actions cannot be implemented—and its operating losses reduced—unless capital is available.

It was not until after Amtrak decided to implement the Network Growth Strategy in December 1999 and announced it to Congress that it began to develop an understanding of the capital investments needed to implement the route and service actions and other implementation issues critical to gaining freight railroad agreement. For example, it was not until spring 2000 that Amtrak learned from the Union Pacific Railroad that it might cost about $40 million to implement the Crescent Star (service between Meridian, Mississippi, and Dallas/Fort Worth, Texas). A Union Pacific official told us that his railroad was not willing to share the costs of this investment with Amtrak, nor was it willing to help Amtrak finance it over time. He said that capital investment had not been discussed with his railroad prior to this time.

Freight railroads were also concerned about having a competitor on their tracks. All four of the freight railroads we contacted that would have been affected by the Network Growth Strategy generally acknowledged Amtrak’s statutory authority to operate mail and express business. However, all expressed concern about Amtrak’s becoming a competitor for their freight business. This concern was heightened by Amtrak’s plans to begin running large numbers of express cars on their trains as it expanded its mail and express business. This concern contributed to Amtrak’s decision to cancel the Skyline service. A Norfolk Southern official said his company did not want Amtrak to solicit business on this route that was similar to its own freight business. Other freight railroads we contacted were similarly wary of Amtrak’s plans to use its route and service expansion to increase express business that could potentially compete with their own.

In addition, Amtrak did not identify potential operational problems that could be encountered, such as whether capacity constraints would be important. A good illustration is Amtrak’s planned Crescent Star service. This service, planned for implementation in summer 2000 over Union Pacific Railroad and Norfolk Southern lines, has not yet come to fruition.

According to a Union Pacific official, the company could not reach agreement with Amtrak, in part, because the planned routing would have worsened congestion on the line. In addition, a Norfolk Southern official told us that the rail infrastructure in Meridian would not support passenger train switching operations without serious interference with freight trains. As a result of these operational problems and because of funding problems, the routing of this still-to-be-implemented service has since shifted to another railroad. The proposed Twilight Limited faced similar problems. According to CSX Transportation officials, this service could have encountered significant line capacity and scheduling problems west of Albany, New York. Finally, a Union Pacific official told us that the Aztec Eagle (service from San Antonio to Laredo, Texas) could have created capacity problems because it would have utilized Union Pacific’s primary route to Mexico.

Amtrak officials agreed that routing of the Crescent Star was shifted to another railroad because of disagreements with Union Pacific. An Amtrak official said Union Pacific was initially receptive to proposed route and service actions but turned negative when plans became more specific. Amtrak officials also agreed infrastructure improvements were necessary in Meridian, Mississippi, but believed these were not insurmountable problems. Amtrak officials also did not believe there would be significant problems with the Twilight Limited because the proposed service was to replace existing trains in both New York and Michigan.

In other instances, Amtrak was not able to reach agreement with freight railroads on compensation for track access, especially for trains with additional express traffic. Freight railroads often receive additional compensation for handling Amtrak trains over a certain length and/or for cars carrying express business. Issues of compensation contributed to the cancellation of at least one route action—the Skyline. This route— establishing service between Chicago and New York City via Pennsylvania—involved Norfolk Southern. Norfolk Southern officials said they were willing to work with Amtrak on establishing this service and had even reached agreement with Amtrak about the operating arrangements for this train. (The train was to be handled similarly to a regular freight train, including operating at 60 miles per hour—a speed closer to freight train speed.) However, Norfolk Southern largely attributed the demise of this route action to the inability to reach agreement with Amtrak over the compensation to be paid for track access and additional express business.

Conclusions

Amtrak’s Network Growth Strategy has been unsuccessful because it overestimated (1) revenues expected from new mail and express service and (2) its ability to reach agreement with freight railroads over capital funding and other implementation issues. Amtrak said that it has improved it revenue estimation process. However, reaching agreement with freight railroads will always be a major challenge when Amtrak attempts to expand its business in areas that are operating at or near capacity, when the expansion appears to pose competition for freight railroads, or when freight railroads are expected to make capital investments to help implement the routes. We believe that, in any future major route and service expansions predicated on improving Amtrak’s financial condition, Amtrak’s decisionmaking process needs to more explicitly reveal the risks associated with successful implementation.

Recommendation for Executive Action

We recommend that, for any future major route and service proposals, the president of Amtrak disclose to Amtrak’s board of directors any significant risks that could impair the successful implementation of the planned actions and its plans to ameliorate those risks. These potential risks include the expected ability to obtain capital funding and reach agreement with freight railroads to operate over their tracks.

Agency Comments and Our Evaluation

We provided a draft of this report to Amtrak and to the Department of Transportation for their review and comment. Amtrak disagreed with the conclusions we reached about the benefits that might have been achieved through discussing its strategy with its key partners more substantively before—rather than after—deciding to expand its operations over freight railroad tracks. Amtrak provided its comments during a meeting with the acting vice president for government affairs and others and in a subsequent letter. (See app. VI.) The department generally agreed with the report’s conclusions via an e-mail message.

In commenting on a draft of this report, Amtrak agreed with our presentation of the reasons that it overestimated mail and express revenue. Amtrak also stated that a major theme of our report was that Amtrak should have delayed in communicating with Congress the route and service changes proposed in February 2000 to allow time for additional analysis and negotiations with freight railroads. By so doing Amtrak would have proposed considerably fewer new services and would have been more successful in implementing its proposals. We are not suggesting that Amtrak should have delayed announcing the Network Growth Strategy. Rather, our work clearly illustrates the need for Amtrak to perform due diligence to understand the likely positions of key stakeholders—whose cooperation is essential to successful route and service expansion—before, rather than after, committing itself to implementing them. However, we believe that Amtrak’s not examining more closely the capital improvements needed to implement their route proposals and whether freight railroads would likely agree to them were significant flaws in Amtrak’s strategy. We agree with Amtrak’s characterization of our opinion that, if it had a better understanding of the concerns of key stakeholders, it might not have proposed all of the resulting route actions. We would have viewed a decision to implement fewer or different route actions each with a greater likelihood of being successfully implemented, rather than a larger number of speculative proposals, as sound business judgment because it would have increased the likelihood that Amtrak could have realized operating profits and moved closer to the goal of reaching operational self-sufficiency. During our work, we received conflicting information about Amtrak’s early interaction with freight railroads. As a result of our meeting with Amtrak, we discussed this topic again with freight railroads and Amtrak and revised this report to better show this early interaction.

Amtrak also stated that (1) it needed to act quickly to reach operational self-sufficiency within 3 years, (2) the purpose of the Network Growth Strategy was to implement route and service changes that would more than cover their operating costs and therefore contribute to achieving operational self-sufficiency, and (3) not every route and service change requires lengthy negotiations. Regarding Amtrak’s first point, we agree that there was immense pressure on Amtrak to become operationally self- sufficient. However, we believe that this pressure made it even more important for Amtrak to conduct the due diligence needed before it decided to move ahead. Without an understanding of the likelihood that freight railroads would be receptive to Amtrak’s plans and that Amtrak could find the capital funds needed to implement these changes, Amtrak had little basis to expect that the route and service proposals it made could actually be implemented expeditiously so as to help reduce Amtrak’s need for federal operating subsidies. Amtrak appeared to tacitly acknowledge the necessity of doing so, at least where capital funding is an issue, when it stated in its comments: “he growing capacity constraints on many key lines mean that freight railroads can, not infrequently, demand large infusions of capital from passenger train operators to accommodate additional trains.” Regarding Amtrak’s second point, we agree that Amtrak’s goal was to implement routes in which revenues exceeded operating costs. It was not our intention to suggest that Amtrak should have only decided to implement routes that covered their capital costs too. We have revised our recommendation to remove such an impression. Regarding Amtrak’s third point, we agree that some proposed route and service changes may be implemented easily and have revised our recommendation to more explicitly recognize this condition.

In our meeting with Amtrak officials, Amtrak disagreed with the statement in our draft report that it had poor information on interconnectivity (revenues from passengers taking more than one train to reach their final destinations). Although this comment conflicts with statements made by Amtrak during our work, we acknowledge that Amtrak did have data on interconnectivity at the time it was performing its market-based network analysis. Accordingly, we have deleted references to interconnectivity in this report.

Finally, Amtrak believes that we did not sufficiently recognize the market- based analysis framework was a significant step forward in Amtrak’s ability to analyze the market potential for its services. We agree that the market-based approach was a significant step forward for Amtrak. However, the approach’s usefulness was ultimately undermined by Amtrak’s reliance on speculative data on expected express business and unrealized assumptions that the route and service changes could be implemented quickly and easily. We have added information to this report to better portray the differences between the market-based analysis framework and Amtrak’s previous approach. We also made a number of other revisions throughout this report to better portray the extent of Amtrak’s interactions with freight railroads and where limits to the interaction led to implementation problems. We also made changes, where appropriate, to this report based on our meeting with Amtrak.

The associate administrator for railroad development at the Federal Railroad Administration within the Department of Transportation stated that the department agreed that Amtrak needs better information on which to base its route and service actions. In particular, the department agreed with our fundamental conclusions that (1) Amtrak needs to undertake earlier negotiation over access-related issues for new services and (2) until recently, Amtrak senior management incorrectly assumed that it had credible information on mail and express revenues and, in particular, costs.

Scope and Methodology

Our work focused on route and service actions that Amtrak considered under its market-based approach and Network Growth Strategy. To understand the market-based approach and the Network Growth Strategy, including its approach to estimating mail and express revenues and collaborating with freight railroads, we reviewed documents describing the market-based approach, how it works, and the models used for financial evaluation. We also reviewed studies done by others to identify potential limitations to the market-based approach and discussed these limitations with Amtrak and Department of Transportation officials. We did not independently evaluate the market-based approach or its models. As part of our work, we identified route and service actions Amtrak has taken since 1995 and the current status of the Network Growth Strategy. Finally, we discussed Network Growth Strategy route and service actions with officials from Amtrak, four major railroads that would have been affected had the Network Growth Strategy been fully implemented (the Burlington Northern and Santa Fe Railway Company; CSX Transportation, Inc.; the Norfolk Southern Corporation; and the Union Pacific Railroad Company), and the state of Florida. We conducted our work from July 2001 to April 2002 in accordance with generally accepted government auditing standards.

As arranged with your office, unless you publicly announce its comments earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to congressional committees with responsibilities for intercity passenger rail issues; the acting president of Amtrak; the secretary of transportation; the administrator, Federal Railroad Administration; and the director, Office of Management and Budget. We will also make copies available to others upon request. This report will also be available on our home page at http://www.gao.gov.

If you or your staff have any questions about this report, please contact either James Ratzenberger at ratzenbergerj@gao.gov or me at heckerj@gao.gov. Alternatively, we may be reached at (202) 512-2834. Key contributors to this report were Helen Desaulniers, Richard Jorgenson, Sara Moessbauer, James Ratzenberger, and Edward Warner.

Appendix I: Financial Performance of Amtrak’s Routes, Fiscal Year 2001

The financial performance of Amtrak routes ranged from an operating profit of $51.3 million on the Metroliner/Acela Express to an operating loss of $71.5 million on the Northeast Direct.

Appendix II: Amtrak Route Actions, January 1995 Through December 2001

Now part of Acela regional service.

Now part of Cascades service.

This service is shown separately so as to not distort route and service actions affecting the Boston- Washington, D.C., spine of the Northeast Direct route.

Appendix III: Planned Route and Service Actions Included in the Network Growth Strategy

The following are the planned route and service actions included in the Network Growth Strategy announced by Amtrak in February 2000.

Appendix IV: Amtrak’s Process for Evaluating Route and Service Proposals

Amtrak officials told us that route and service decisions primarily focus on whether the increased operating revenues from an action are expected to exceed the direct costs. Increased revenues can arise from adding passengers on the route, adding passengers on the route who can then transfer to other routes and vice versa (called interconnectivity) and from hauling mail and express. While Amtrak recognizes early in its planning process that it will incur costs for capital expenditures (e.g., to acquire equipment and facilities and to finance needed track and signal improvements) and, to a lesser extent, state financial support, it typically does not address these needs until after it has decided to implement a route or service action.

Amtrak’s Consideration of Operating Revenue and Direct Costs

Ideas for route and service actions are either generated internally or from those outside Amtrak seeking additional service. To provide a quick assessment of an idea’s reasonability, Amtrak informally examines issues such as the number and type of equipment (e.g., cars and locomotives) that might be needed, where the train might stop, and possible train schedules. If a proposal appears promising, Amtrak begins a more formal evaluation process. First, it estimates potential ridership, from which it derives passenger-related revenue estimates. To do so, Amtrak uses one of two models, depending on whether the action involves a long-distance route or a shorter-distance route serving a transportation corridor (such as that between Washington, D.C., and New York City). Of the two models, only the model for transportation corridors can assess the potential market share that a proposed route action will attract from among a corridor’s various transportation modes. For example, this model can estimate the impact of a shift from rail ridership to automobile usage prompted by a decline in gas prices. The ridership projections are, in turn, used to estimate a route’s passenger-related unit costs and operating costs. An Amtrak official said that cost estimates often increase later in the evaluation process as more amenities are added to a proposed service as a means to attract more riders.

After it completes its initial assessments, Amtrak uses its market-based approach to model the expected financial impact of the route or service action. It models the proposed route and service action individually and as part of the whole route network. In some cases, Amtrak will model several variations of a proposed route action to see if one is more financially viable than others.

Amtrak also estimates potential mail and express revenues associated with proposed route actions. Mail revenue estimates are largely based on contracts Amtrak has with the U.S. Postal Service, discussions with U.S. Postal Service officials, and U.S. Postal Service projections. Estimating express revenue is somewhat more difficult. According to Amtrak, until recently, it estimated express revenue largely on the basis of an analysis of a database of commodities being shipped nationally. Amtrak estimated the portion of this business that it thought it could obtain. An Amtrak official said that it now focuses more on determining existing customers’ shipping needs, assessing these needs in light of current economic trends, and evaluating Amtrak’s ability to meet these needs given existing train capacity. Amtrak relies on its mail and express unit to estimate mail and express costs. However, Amtrak officials told us identifying these costs has been difficult since Amtrak did not formerly identify these costs separately but rather incorporated them into other business units. Amtrak currently has a project under way to identify the specific costs of its mail and express business.

When Amtrak management wants to proceed with a route action, it either seeks the approval of its board of directors or directs the affected business unit to implement the action. Amtrak policy requires board approval to initiate service on new routes or to discontinue service on routes. Amtrak said its strategic business units have the authority to make minor changes in the schedules and frequencies of their train service.

Consideration of Capital Costs and Other Financial Issues

Amtrak officials told us that the company also considers the cost of capital improvements that may be associated with route actions, the fees that freight railroads will charge for access to their tracks, and the likelihood states might be interested in financially supporting the routes. While Amtrak told us that it recognizes early in its planning process that capital costs may be incurred for routes other than its Northeast Corridor, it does not formally consider these costs under the market-based approach until after it decides to implement a route or service change. Amtrak officials said that they do not consider these costs earlier because Amtrak’s lack of investment capital would preclude further consideration of such proposals. Amtrak’s capital funds most often come from federal assistance and from freight railroads and states that might agree to contribute funds.

Amtrak estimates track access payments based on operating agreements with freight railroads, or in the case of railroads it has not dealt with before, it is assumed access fees will not vary significantly from national averages. Obtaining state financial support for routes generally varies depending on the length of the route. An Amtrak official said the corporation aggressively pursues state support on short-distance, commuter-like routes. In fact, he said states often approach Amtrak about initiating or expanding this type of service on their own. However, on longer distance routes that go through many states, most states are not interested in providing financial support and Amtrak must assume the financial responsibility itself. In 2001, states provided financial support for 18 of Amtrak’s 43 routes. This support ranged from about $200,000 on the Ethan Allen Express route (service between New York and Vermont) to about $21 million on the Pacific Surfliner (service within California).

Appendix V: Market-Based Network Analysis Models Used to Estimate Ridership, Revenues, and Costs

The market-based framework includes a set of models used to predict changes in ridership, revenues, and costs likely to result from a planned restructuring of Amtrak’s route system or a variation in service levels on existing routes. A series of demand models estimate ridership and passenger-related revenues in response to variation in the stations served by each route, train departure frequencies or schedules, travel times, and fare structures. Then a series of financial models translate operating statistics that are based on the type of equipment and level of operations (e.g., level of onboard staffing) required into operating expenses. For high- speed rail scenarios, a capital cost model estimates the capital that is likely to be required (e.g., upgrade to track and additional rolling stock) to make changes in service.

Models Used to Estimate Ridership and Revenue

Amtrak uses separate models to estimate ridership and revenue for short- distance intercity routes (regional networks where frequent, higher-speed services are planned, called “corridors”) and long-distance intercity routes (typically at least 500 miles long). For short-distance intercity routes, the market-based approach includes a model specifically for the Northeast Corridor (Boston-Washington), as well as a generic model to predict ridership and revenue in corridors located in other regions. Each of the corridor models is designed to be a mode-split model. That is, these models predict the share of travel likely to take place by automobile, air, and rail, based on the projected level of total traffic for each market. Amtrak typically estimates total traffic between two areas on the basis of expected demographic and economic growth in the areas making up the corridor. Then it estimates the market shares for each mode on the basis of the costs of travelling by each mode and the level of service it provides in the corridor (departure frequency and total travel time). Finally, it uses the estimated ridership with the assumed fare structures to estimate the passenger-related revenue that would result from a proposed route.

The long-distance demand model consists of two components. The first component predicts the total number of rail passengers traveling between each station-pair and the second component predicts the class of service (mainly sleeper versus coach). The ridership estimate is based on such factors as population and employment in the surrounding areas. Unlike the corridor demand models, this is not a mode-split model, but rather a direct rail model. As such, the model does not directly assess the amount of total traffic in the market or the amount of traffic that may be captured by alternative modes. Instead, it employs historic data from a sample of markets to assess the relationships between rail ridership levels and such factors as population, employment, travel time, and level of rail service. Amtrak then uses these estimated associations to estimate the level of rail traffic in a new market. After projecting the rail ridership, Amtrak uses the second component to estimate what fraction of passengers will choose each of four classes of service, based on such factors as frequency and timing of trains and the fares charged for each service level. Finally, Amtrak uses the projected levels of ridership and class of service to estimate the passenger-related revenue that would result from a proposed route.

Models Used to Estimate Costs

The market-based approach includes operating and, in the case of high- speed rail scenarios, capital cost models, to estimate the likely impact on Amtrak’s expenses from planned changes to its network. These models translate operating statistics into operating or “direct” expenses. The operating statistics are developed based on ridership patterns, schedule, train makeup, and staffing data for an individual route into estimates of the equipment fleet and train crew requirements, as well as the number of monthly train-miles. The operating model applies detailed unit cost to predict the changes in operating expenses for the route.

The capital cost model estimates the capital investments necessary to upgrade existing track or construct new rights-of-way for routes in which Amtrak is considering improving travel times, increasing frequency, or introducing new services. The model also estimates costs for acquiring new rolling stock and other equipment as necessary. The requirements for alternative levels of service were developed from engineering studies of facility and equipment requirements necessary to upgrade a sample of route segments. The model also makes use of data on unit cost factors required for upgrading facilities and equipment. These data are based on past experience with upgrades in several markets. Using the estimated facility and/or equipment needs and the data on unit costs, the model calculates an estimate of required capital. According to Amtrak, this model is currently applied only to high-speed rail corridors. It is not used to determine potential capital costs on non-high-speed rail corridors.

Appendix VI: Comments from the National Railroad Passenger Corporation

The following is our evaluation of aspects of Amtrak’s comments on our draft report.

GAO’s Evaluation

1. We agree with Amtrak’s statement that a Senate committee report directed it to report on its conclusions regarding route and service changes before Amtrak issued its fiscal year 2000 strategic business plan. However, nothing in the Senate report required Amtrak to issue its strategic business plan by a certain date or earlier than it would have done otherwise. As such, the Senate report language did not create the sense of urgency that Amtrak implies. 2. Amtrak questioned our including a list of route profits and losses in appendix I of the draft report because the route profitability system used to generate these results does not produce accurate information for making route decisions. We are not suggesting that the route profitability statistics should have been used in making Network Growth Strategy decisions. We are also not suggesting that they should be used, by themselves, in making future route decisions. Other metrics should also be employed. However, the fact that Amtrak loses money on nearly every single route that it operates (for example, 20 of Amtrak’s 43 routes lost more than $20 million in 2001, even after including state support) was the basis for Amtrak deciding to contract routes in 1995 and expand them in 1998. As such, this route profitability information is contextually important in Amtrak’s quest to improve its financial condition. 3. Amtrak interpreted our conclusion on the need for early consultation with freight railroads before it announced its Network Growth Strategy to mean that we were advocating that it should have “engaged in lengthy ‘consultations’ with each of the affected 16 freight railroads” and conducted “expensive and time consuming studies of the physical characteristics of each line, and of the number, type, and schedules of the trains that operate over it.” We did not intend such an interpretation. We agree with Amtrak that some proposed route and service changes might be expected to be easier to implement than others—such as ones that could be expected to have little effect on freight railroads. We also agree with Amtrak that there is no model for how and on what timetable such issues should be resolved. We do not prescribe a level of specificity for these discussions, specific expected outcomes, or uniformity. We believe that discussions with freight railroads should be tailored to the complexity, expected difficulty, and risk associated with each proposed action. As discussed previously, we revised our recommendation to make it more useful to Amtrak. 4. Amtrak stated that “in many cases was able to implement significant route and service changes fairly quickly” and cited two examples. In reality, Amtrak has implemented only 3 of the 15 planned route and service actions. 5. Amtrak states that our draft report implied that it had no reason to expect Norfolk Southern would agree to the operation of the Skyline service. Amtrak disagreed with our draft report because it had implemented a similar service (an extension of the Pennsylvanian) over the same route about a year before the Network Growth Strategy was issued. Any implication about the potential success or failure in implementing the Skyline service was inadvertent. We have revised our report to state that Norfolk Southern was willing to work with Amtrak to establish this service and had reached agreement on how the train was to be handled. The report states that Amtrak largely cancelled this proposal because it and Norfolk Southern could not agree on compensation for Amtrak’s use of Norfolk Southern’s tracks. 6. Amtrak disagreed with the example we used to illustrate what occurs when early discussions with freight railroads do not occur. Amtrak stated that its Network Growth Strategy contemplated using either Union Pacific or Kansas City Southern tracks and Amtrak approached both railroads and that its decision to re-route the Crescent Star from Union Pacific Railroad to Kansas City Southern tracks represents a prudent business decision rather than a flaw in its decisionmaking. We agree that the Network Growth Strategy provided flexibility in routing and that deciding to re-route the Crescent Star might have been a prudent business decision. However, Amtrak did not learn until spring 2000 that (1) significant capital improvements were required to implement the service, (2) Union Pacific was not willing to share the capital investment costs needed to use this line, and (3) an alternative routing would be required. Since Amtrak planned to implement the Crescent Star in summer 2000, just a few months after it announced the Network Growth Strategy, having early knowledge of significant potential roadblocks would have been useful to Amtrak—for example, either in attempting to ameliorate the roadblocks or deciding earlier to concentrate on the alternative Kansas City Southern route. As Amtrak stated in its comments, it needed to implement the Network Growth Strategy quickly to help reduce its need for operating subsidies. 7. Amtrak commented that (1) the infrastructure investment required to add one or two train frequencies to a rail line is not easily quantifiable and (2) there are other ways to reach agreements to undertake capital projects other than by allocating costs between parties (e.g., the freight railroad might agree to bear the cost of the project if Amtrak agrees to something else). We agree with Amtrak’s statement. However, a recurring theme for Amtrak has been its dearth of capital to improve its service. We believe that it would have been prudent for Amtrak to factor into its decisionmaking the fact that capital issues, for some proposed routes, were crucial to Amtrak’s being able to implement the Network Growth Strategy, particularly as it recognized in its comments that “…freight railroads can, not infrequently, demand large infusions of capital from passenger train operators to accommodate additional trains.” 8. Amtrak states that our discussion of capital funding is out of context because the purpose of the Network Growth Strategy was to identify routes for which revenues would exceed operating costs. Amtrak stated that if a potential route or service change met this test then it made sense to pursue it, even if it was likely to require capital support. We agree with Amtrak that it made sense to pursue routes that were contemplated to make an operating profit even if capital investment would be needed to implement them. We did not intend to suggest that Amtrak should have pursued only route and service expansions that were likely to cover both operating and capital costs. Rather, we believe that, for some routes, capital investment was an important prerequisite to Amtrak being able to implement the routes quickly so that it could obtain the operating profits. 9. Amtrak commented that some Network Growth Strategy negotiations with freight railroads were stalemated not on the issue of implementation, but on price. We have revised our report to recognize this. 10. Amtrak criticized our suggestion that it should have had preliminary discussions with freight railroads over capital funding issues, saying that it is a poor negotiating technique to approach a freight railroad by telling it how much capital Amtrak is willing to contribute, because this figure sets a floor for Amtrak’s contribution. We agree that there are delicate business issues arising from Amtrak’s attempts to get freight railroads to allow it to expand operations over freight railroad- owned tracks and that different route and service proposals can raise different and sometimes complex issues. We are not suggesting that Amtrak “give away the store” in these discussions by disclosing in advance how much capital support it might be willing to contribute to the freight railroads. However, as discussed in the report, we believe that it would have been prudent to determine freight railroads’ expectations before deciding to implement the plan because freight railroads’ cooperation was imperative to the success of the Network Growth Strategy. Without an understanding of whether freight railroads’ expectations were similar to Amtrak’s—and the expected ease or difficulty in meshing these expectations—Amtrak had little basis to expect that the route and service proposals it made could actually be implemented expeditiously so that they could help reduce Amtrak’s operating losses. 11. On several bases Amtrak disagreed with our discussion of gaining an early understanding of whether states, such as Florida, might or might not be willing to provide the capital funds that Amtrak expected them to contribute. Because the focus of our work was Amtrak’s interaction with freight railroads, we have deleted references to the capital support that Amtrak expected from states such as Florida. 12. Amtrak stated that the Network Growth Strategy was not just “…an action plan based on rigorous financial analysis. It was a vision of how Amtrak’s national network could be reshaped so as to extend its reach and reduce operating losses…” . Amtrak suggested that we faulted it for pursuing an innovative approach and because it did not achieve “all its vision.” We are not criticizing Amtrak for pursuing a route expansion strategy. Rather, our report focuses on the aspects that might have made the vision more successful than it was, although perhaps at a more modest level than Amtrak originally envisioned. Amtrak’s Network Growth Strategy ultimately failed because the route system expanded marginally and Amtrak was not able to reduce its operating losses to the extent planned. In our opinion, an important contributor to this failure was Amtrak’s inattention to potential implementation problems before it announced a strategy. Attention to potential implementation problems was crucial because, as Amtrak stated, it needed to have the routes implemented quickly so as to reap the financial benefits that would result in a reduction of operating losses. We believe that the recommendation we offer, if adequately implemented, could help Amtrak be more successful in any future route expansion efforts.