Passenger trains, at one time the nation’s primary means of intercity transportation, began losing riders to automobiles in the 1920s and to airplanes in the 1950s and 1960s. Revenue losses on passenger services mounted, and in 1970, the final year in which these services were operated by private railroads, over $1.7 billion (in 1994 dollars) was lost on these services. Railroads had stopped investing in new passenger cars and facilities, and service declined, leading to the near demise of passenger rail service. To revitalize intercity passenger rail service, in 1970 the Congress created the National Railroad Passenger Corporation, commonly called Amtrak. Amtrak began operations on May 1, 1971, with the task of reversing the decline in intercity rail ridership and making up for years during which the railroads had neglected passenger operations. Until World War I, intercity travel generally meant train travel, and the railroads operated up to 20,000 passenger trains daily. After World War II, however, ridership declined dramatically, and by 1970 only about 300 intercity passenger trains were operated daily, providing only about 0.5 percent of intercity travel. In response to declining revenues, most railroads did not invest in new passenger equipment and allowed the service to deteriorate. Trains frequently failed to run on time, speeds were slow because of poor track and roadbeds, and equipment was old and prone to breakdowns. Intercity train travel was rapidly becoming extinct in the United States. The nation’s railroads, which focused primarily on freight service, had to obtain permission from federal or state regulators to abandon unprofitable passenger train services. Before passage of the Transportation Act of 1958, state regulatory commissions had the authority to discontinue passenger trains. Some state agencies allowed the railroads to discontinue unprofitable passenger operations, and between 1920 and 1958, service was discontinued for more than one-half of the railroads’ passenger miles.Because of the large decline in the number of trains, state commissions became more reluctant to allow the railroads to discontinue more services. The 1958 act transferred effective control over decisions to discontinue passenger services to the Interstate Commerce Commission (ICC). The ICC was concerned that continuing losses from passenger train operations could threaten the financial health of the entire railroad industry. It therefore allowed railroads to eliminate passenger operations that generated serious deficits. a for-profit corporation to provide intercity and commuter rail passenger service, employing innovative operating and marketing concepts so as to fully develop the potential of modern rail service in meeting the Nation’s intercity and commuter passenger transportation requirements. The Corporation will not be an agency or establishment of the U.S. Government. The Congress gave Amtrak specific goals to (1) provide modern, efficient intercity railroad passenger service; (2) help alleviate the overcrowding of airports, airways, and highways; and (3) give Americans an alternative to private automobiles and airplanes to meet their transportation needs. The act required Amtrak to operate a basic passenger rail system that considered the passenger service that existed at the time the act was passed as well as opportunities to provide additional rail service that would be faster, be more convenient, and serve more population centers at a lower cost. Fig. 1.1 shows Amtrak’s route network. Amtrak’s first full year of operation was 1972. Although the route system today is not much larger than the one operated in 1973, it now carries about 30 percent more passengers, serves 22 percent more stations, and operates about 29 percent more train miles. (See table 1.1.) In 1971, Amtrak took over routes from all but three of the railroads that were providing passenger service at the time. In return for relief from their obligation as common carriers to provide passenger service, the railroads turned over their passenger cars and locomotives to Amtrak. The original fleet of over 1,500 cars averaged more than 22 years in age. In 1994, Amtrak’s fleet of 1,900 cars still included about 435 of the original passenger cars. Amtrak eventually took over control of yards, stations, train service employees, and reservation offices. By 1976, most of Amtrak’s services, other than those provided by train and engine crews, were provided by Amtrak’s own employees. Using $120 million provided by the Congress, Amtrak purchased 103 miles of track between Philadelphia and Harrisburg, Pennsylvania; 83 miles joining Kalamazoo with Michigan City; 62 miles linking New Haven, Connecticut, and Springfield, Massachusetts; and 12 miles near Albany, New York. In addition, Amtrak acquired about 400 miles of the Northeast Corridor—between Washington, D.C., and Boston—from the estate of the bankrupt Penn Central railroad. The freight railroads, however, own the rest of the track over which Amtrak operates. The Rail Passenger Service Act grants Amtrak the right to use freight railroads’ tracks, and Amtrak is expected to pay the incremental costs that the freight railroads incur to maintain the tracks for passenger service.The freight railroads also provide dispatching and emergency services for Amtrak trains operating on their systems. In recent years, Amtrak has paid about $90 million annually for these services. Amtrak compensates the freight railroads according to individual agreements established in 1971.These agreements expire April 30, 1996. Amtrak’s primary function is operating the 25,000-mile intercity passenger rail route system that serves 44 states. Amtrak operates about 350 trains to serve 6 routes in the Northeast Corridor, 17 short-distance routes (under 500 miles), and 20 long-distance routes. Thirteen of these routes are partially funded by eight states under section 403(b) of the Rail Passenger Service Act; three of these routes are fully funded by two states under section 403(d) of the act. Amtrak generated $1.4 billion in revenues in fiscal year 1994 and had $2.4 billion in expenses. Its federal subsidy was $909 million. Passenger-related services generated 65 percent of Amtrak’s revenues in fiscal year 1994 (see fig. 1.2) but covered only about 38 percent of the expenses. Another 19 percent of Amtrak’s revenues came from commuter rail service, which Amtrak operates in seven metropolitan areas under contract to state or local transportation authorities. Finally, Amtrak earns revenues from other activities, such as real estate development (including 30th Street Station in Philadelphia). Other revenues come from handling specialized freight, including U.S. mail and certain express deliveries, and leasing rights-of-way along the Northeast Corridor to telecommunications firms for data transmission lines, among other things. Over half of Amtrak’s operating expenses in fiscal year 1994 were for salaries, wages, and benefits to employees. (See fig. 1.3.) Passenger-Related Services ($912.8 million) Commuter Services ($271.8 million) 7% Financial ($184.7 million) 6% Facility and Office Related ($153.0 million) 4% Advertising and Sales ($90.8 million) 6% Other ($152.7 million) Salaries and Wages ($855.8 million) Benefits ($449.7 million) Train Operations ($358.4 million) 10% Depreciation ($245.1 million) Since 1971, the federal government has provided Amtrak with over $13 billion to support intercity passenger rail service. Figure 1.4 shows the amounts appropriated to Amtrak over the past 8 years. In fiscal year 1994, Amtrak received federal funds through an operating and capital grant, a grant for the Northeast Corridor Improvement Program (NECIP), and a mandatory payment by the Federal Railroad Administration (FRA) to fund certain retirement and unemployment benefits. The capital grant pays for purchasing cars and locomotives; overhauling fully depreciated equipment (when the overhaul increases the value of the equipment); modifying equipment as required by law; upgrading facilities for maintenance, overhauls, and other work; and servicing debt. NECIP is a long-term capital improvement project that includes electrification of track between New Haven and Boston so that trains will be able to travel at speeds up to 150 miles per hour by the end of the century. NECIP is an ongoing project established in 1976 for the construction and upgrading of tracks, bridges, communications and signals, and electric traction between Washington, D.C., and Boston. Amtrak is required to participate in the railroad retirement and unemployment systems. Each participating railroad pays a portion of the costs for all retirement and unemployment benefits in the industry. Since Amtrak’s payments exceed the corporation’s specific retirement and unemployment costs, FRA has agreed to pay the excess costs for Amtrak. provided funding, but Amtrak’s management knew it was under pressure to reduce operating losses. Amtrak combined an aggressive cost-cutting strategy with new efforts at revenue enhancement to try to improve its revenue-to-expense ratio. This report’s objectives were to assess (1) Amtrak’s financial and operating conditions, (2) the likelihood that Amtrak can overcome its financial and operating problems, and (3) alternative actions that could be considered in deciding on Amtrak’s future mission and on commitments to fund the railroad. In this report, • chapter 2 describes the extent to which Amtrak’s financial condition has • chapter 3 describes the increased costs facing Amtrak over the next several years that will make recovery from the financial and operating problems difficult; • chapter 4 assesses the extent to which revenues are likely to increase, pay for these increased costs, and improve Amtrak’s financial condition; and • chapter 5 assesses the likelihood that Amtrak will be able to continue to provide nationwide service at the current federal subsidy level. It evaluates alternative levels of service and funding and the potential long-term results of these alternatives. We performed this work as part of our legislative responsibilities under the Rail Passenger Service Act to conduct performance audits of Amtrak’s activities and transactions. In addition, five congressional committees expressed interest in this work. The issues raised by the committees, along with our objectives, scope, and methodology, are discussed in detail in appendix I. The organizations that we contacted in the course of our review are listed in appendix II. We report dollars as constant 1994 dollars unless otherwise noted. We provided Amtrak with a draft of our report for comment. Amtrak’s principal observations and our responses to these observations are provided in chapter 5, and its written comments appear in full in appendix IV. We performed our work between August 1993 and December 1994 in accordance with generally accepted government auditing standards. We testified in early 1994 that Amtrak’s financial condition had deteriorated steadily since 1990, causing a decline in the quality of service. Since our testimony, Amtrak’s condition has worsened. As service quality has deteriorated, Amtrak has had more difficulty attracting and retaining riders, resulting in further revenue losses and exacerbating the problem. All of Amtrak’s intercity train service loses money—no route or portion of a route comes close to breaking even when capital costs are considered. For several years, revenues have been substantially less than forecast, resulting in larger operating deficits than budgeted. The operating deficits have exceeded federal operating subsidies by a total of about $175 million since 1990. Amtrak’s actions to reduce operating expenses have not been sufficient to offset the shortfall in revenues. To cover the gap between the operating deficits and federal operating subsidy, Amtrak has drawn down its cash resources. In 1987, its working capital had a positive $113 million balance; by the end of fiscal year 1994, the balance was a negative $227 million. Nevertheless, while its financial condition was deteriorating, Amtrak reported that its revenue-to-expense ratio was improving. This reported ratio was a misleading indicator of Amtrak’s financial condition because it omitted many important expenses and showed an improving trend when Amtrak’s financial condition was deteriorating. Amtrak’s management believes that the railroad’s financial condition will continue to deteriorate and estimated a cash shortfall of about $200 million by September 30, 1995. The situation had become so alarming by December 1994 that Amtrak’s Board of Directors approved large reductions in service and staffing. These actions, along with anticipated increases in productivity, are expected to eliminate the 1995 cash shortfall. However, even if these proposed actions are successful in bringing costs in line with revenues and grants for 1995, they will not solve Amtrak’s longer-term problems, such as the need for significant capital investment, which we discuss in chapter 3. Finally, without increased funding, Amtrak expects the gap between its deficit and the operating subsidy to reappear in 1996 and to produce a $1.3 billion shortfall through the year 2000. Over the last several years, the revenues that Amtrak projected have not materialized. As a result, the operating deficits have been larger than the federal operating subsidies. Although Amtrak cut planned spending and developed strategies to conserve cash, these actions have not compensated for the shortfall in revenues. Moreover, Amtrak has not specifically budgeted for operating contingencies that interrupt service, such as accidents and the flood in the Midwest in 1993. As a result of shortfalls in revenues and losses stemming from these events, Amtrak has had to draw down cash resources and take on additional short-term debt. Each year Amtrak forecasts ridership and revenues to develop its request for federal operating grants and to set planned spending levels. From fiscal year 1991 through fiscal year 1994, Amtrak overestimated passenger revenues by a total of $600 million. (See fig. 2.1.) In fiscal year 1994, actual passenger revenues were about 7 percent below those for fiscal year 1993 and about 22 percent less than forecast. Over the past 4 years, Amtrak has consistently overestimated its passenger revenues in terms of both ridership and yield (revenues per passenger mile). For its 1993 grant request, for example, Amtrak estimated $1.092 billion in passenger revenues—overestimating actual passenger revenues by $149 million. For 1990-94, Amtrak estimated that yield would increase with inflation. In fact, yield declined after adjusting for inflation. Management also contributed to overestimates of revenues by adjusting upward the results of a ridership forecasting model because of a belief that the nation’s general economic improvement would lead to increased ridership. Finally, in adjusting the model results, Amtrak did not consider the extent to which events—such as floods and accidents—might occur in the upcoming year, depressing revenues. In fact, during 1993 and 1994, Amtrak was involved in several major accidents and sometimes had to cancel trains because of severe weather, which caused revenues to decline. In preparing its budget for fiscal year 1995, Amtrak did not rely on its ridership forecasting model. Because it overestimated revenues, Amtrak underestimated its operating deficits and therefore requested smaller federal operating subsidies than it needed. In fiscal years 1990 through 1994, Amtrak’s operating deficit exceeded the railroad’s federal operating subsidy by an average of about $36 million per year. (See fig. 2.2.) This gap has forced Amtrak to reduce operations. These reductions have contributed to poorer service quality (fewer on-board service personnel) and delayed or deferred maintenance of equipment. Ultimately, such actions threaten Amtrak’s ability to provide high quality rail service and to compete effectively for customers. As a result of the shortfall in revenues and increased expenses, Amtrak’s net loss in fiscal year 1994 grew to over $l billion, while the railroad’s operating deficit exceeded the operating subsidy by $76 million. These operating losses, combined with capital expenditures, caused a cash shortfall of about $50 million as of September 30, 1994. For fiscal year 1995, Amtrak projects that the gap between its operating subsidy and operating deficit will grow to $193 million. Amtrak officials believe this situation will result from a 5-percent decrease in passenger revenues in 1995 and an $145 million increase in expenses. As a result of the gap between the operating subsidy and operating deficit along with planned capital expenditures, in the fall of 1994 Amtrak estimated a cash shortfall of about $200 million by September 30, 1995. In addition, Amtrak does not specifically budget for accidents and weather-related emergencies. The added costs of these problems exacerbate Amtrak’s deteriorating financial condition. For example, in September 1993 the Sunset Limited derailed in Saraland, Alabama, and Amtrak incurred (1) additional costs to repair equipment and pay liability judgments and (2) a shortfall in revenues as a result of equipment shortages. In addition, whenever service is disrupted because of weather or accidents, Amtrak pays the costs its passengers incur to get to their destinations by another mode of transportation. Amtrak has estimated that in 1993 and 1994, such problems cost about a total of $95 million in lost revenues and $11 million in additional expenses. To address the shortfall in revenues, Amtrak cut back budgeted expenses by reducing the number of management staff by 10 percent in 1991, by reducing train and station staffing levels in 1992, and by decreasing heavy maintenance programs for cars and locomotives in 1993. According to Amtrak, these cutbacks were expected to save about $77 million in fiscal years 1991-93. In 1993, Amtrak took steps to conserve cash by reducing inventory, requiring advance payment for work that Amtrak performed for others, and delaying payments made to others by 15 days. From the beginning of 1993 to the end of 1994, Amtrak’s investment in inventory declined from $147 million to $135 million. Finally, Amtrak requested and received a supplemental federal grant of $45 million ($20 million for operating expenses and $25 million for capital expenses) in fiscal year 1993. To offset the continuing shortfall in passenger revenues in fiscal year 1994, Amtrak again initiated actions to reduce budgeted expenses by about $90 million. These actions included reducing (1) the frequency of service on some routes, (2) the number of passenger support staff, and (3) general overhead costs. However, Amtrak’s actual expenses in 1994 exceeded budgeted expenses by over $100 million. By September 30, 1994, Amtrak had increased its short-term lines of credit to $120 million and borrowed $60 million. In addition, by that date Amtrak’s long-term debt for capital projects exceeded $650 million. Despite Amtrak’s actions, the gap between operating deficits and federal operating subsidies continued to grow. As a result, Amtrak drew down its working capital, which fell from $113 million in fiscal year 1987 to a $227 million deficit at the end of fiscal year 1994 (see fig. 2.3), a decline of $371 million in 1994 dollars. Continued reductions in working capital will jeopardize Amtrak’s ability to pay immediate expenses. Amtrak’s financial situation became so alarming that on December 14, 1994, Amtrak announced an aggressive plan to eliminate cash deficits in fiscal year 1995 and attempt to put the corporation on a sound financial footing. Amtrak’s management saw only two options—to abandon the nationwide intercity rail system or to minimize losses through improvements in productivity and reduction in routes and service. The Board of Directors directed that Amtrak eliminate 3 routes and segments of 10 others and reduce service frequencies (the number of trains per week on a given route). As a result, about 20 percent of Amtrak’s nationwide service (in train miles) is to be eliminated. Amtrak plans to negotiate with the affected states and could retain service where the states are willing to subsidize the losses on the routes. These reductions should allow Amtrak to eliminate about 5,000 jobs and remove most of its oldest cars from service. Amtrak expects that these actions will improve the on-time performance of its remaining trains and lower its operating costs. The plan also calls for generating additional revenues through adjusting ticket prices, developing commuter operations and other businesses, and selling or refinancing assets. These and other actions to enhance productivity are expected to produce an annualized net savings to Amtrak of $364 million, by reducing costs by about $430 million annually while forfeiting only $66 million in revenues. Amtrak expects these actions to result in savings of about $200 million in 1995, eliminating the expected cash deficit for 1995. These actions, however, will not eliminate Amtrak’s need for federal operating and capital grants now or in the future. Revenues will continue to fall short of expenses on most routes. Furthermore, collective bargaining and/or legislative changes might be required before approximately 26 percent of the anticipated savings can be achieved, according to Amtrak. In addition, the plan does not account for implementation costs, such as pay protection for employees whose jobs are eliminated as a result of route closures and capital investment needs that continue to grow. Finally, Amtrak projects that after 1995, if federal grants remain at current levels, the deficit will exceed operating grants by $1.3 billion through the year 2000. These issues are also discussed in chapters 3, 4, and 5. Amtrak has calculated and reported a revenue-to-expense ratio to demonstrate that its operating revenues were covering a larger share of its operating expenses from year to year. As figure 2.4 shows, this ratio improved from fiscal year 1982 to fiscal year 1991 but has since leveled off. Amtrak reported that revenues covered about 53 percent of expenses in fiscal year 1982 and about 80 percent in fiscal year 1993. However, in calculating this ratio, Amtrak did not include all relevant expenses. Because Amtrak deferred certain costs, including some maintenance expenses, the ratio gave a misleading picture of Amtrak’s financial health. Amtrak officials agreed with our assessment that this ratio should not be used and stopped reporting it in fiscal year 1994. In calculating the revenue-to-expense ratio, Amtrak has excluded certain expenses, including (1) depreciation, (2) mandatory payments for railroad retirement and unemployment insurance made by FRA on Amtrak’s behalf, (3) various federal and state taxes, (4) user fees paid to FRA for track inspections and other activities, (5) miscellaneous expenses relating to accident claims, (6) losses incurred in providing 403(b) service to the states, and (7) disbursements for labor protection. Amtrak is required by statute to exclude losses under section 403(b). It excluded other expenses for various reasons, including a belief that some items (such as labor protection payments) do not represent operating costs. If all these excluded expenses had been included, the ratio in 1993 would have been 66 percent—14 percentage points less than Amtrak reported. The revenue-to-expense ratio is a misleading indicator of a firm’s financial condition when the firm defers or forgoes expenses to show improved performance. Amtrak has deferred maintenance on rolling stock and equipment and reduced other expenses. While these actions have resulted in short-term improvements to the revenue-to-expense ratio, they have long-term implications for Amtrak’s viability. This ratio was also misleading because it showed an improving trend when Amtrak’s financial condition was deteriorating. Furthermore, as figure 2.5 illustrates, the overall gap between revenues and expenses has been widening since 1988. Amtrak’s financial condition has deteriorated over the last several years, and the problems accelerated in 1994. Actual revenues have been less than Amtrak projected and expenses have been higher than expected. As a result, federal subsidies have not fully covered Amtrak’s operating deficits. This condition has adversely affected Amtrak’s supply of cash, which is needed to pay bills and provide high quality service. Amtrak’s financial deterioration worsened in 1994 in the wake of accidents and lower-than-expected revenues. Amtrak had expected that the general economic recovery would improve its financial situation, but this did not occur. Although Amtrak reduced its budgeted expenses, continued declines in revenues, cash, and working capital threaten Amtrak’s ability to provide high quality intercity passenger rail service and compete effectively for customers. The service reductions and other actions that Amtrak plans to take in 1995, if implemented, will bring Amtrak’s costs in line with revenues and grants for that year. However, these planned actions will not solve the corporation’s longer-term problems, which we discuss in chapter 3. The Congress needs better information on how Amtrak estimates revenues from passenger service, not only to determine the amount of federal subsidy, if any, to provide but also to make decisions about Amtrak’s future. In chapter 5 we make recommendations to the President of Amtrak to improve the information provided to the Congress. The depletion of Amtrak’s physical assets poses an even greater threat to the railroad’s financial well-being than the current shortfalls in operating funds. Operating a passenger railroad is an inherently costly undertaking. The advanced age and poor condition of Amtrak’s rolling stock (locomotives and cars) and overhaul facilities make it expensive to maintain the fleet. While purchases of new equipment will ease the burden of maintenance and overhauls, the funds to pay for this equipment must come from already-strained capital budgets. Amtrak may also face substantial additional costs to comply with environmental laws and to pay freight railroads for the use of their track. Amtrak is unlikely to be able to address these challenges under the current operating environment and at the current funding level. Reductions in routes announced in December 1994 should allow Amtrak to retire most of its oldest passenger cars. But, according to new estimates, the investments needed in infrastructure will more than offset any savings. Today, Amtrak’s fleet is about as old as the aged fleet the corporation inherited from the freight railroads over two decades ago. (See fig. 3.1.) Aging equipment requires more extensive repairs, and Amtrak spends over $400 million annually to repair, maintain, and overhaul this equipment. Nevertheless, that amount understates Amtrak’s true costs for maintaining the equipment because Amtrak has routinely deferred equipment overhauls to cope with funding shortages and performed less comprehensive work when overhauling some cars. Amtrak introduced a new maintenance/overhaul program in 1994 to reduce this backlog and improve the fleet’s operating condition. However, this program is already underfunded, and new backlogs will inevitably result. A significant portion of Amtrak’s equipment—31 percent of the cars and 54 percent of the locomotives—is beyond its useful life. About 23 percent of Amtrak’s 1,900-car fleet consists of Heritage passenger cars that Amtrak obtained in 1971 from other railroads. These cars now average over 40 years old—much older than the 25-to 30-year average expected useful life estimated by Amtrak’s Chief Mechanical Officer. The remaining passenger cars (Amfleets, Horizons, Superliners, Turboliners, and Viewliners) in total average 14.2 years—about half-way through their useful life span. (See fig. 3.2.) 8% Amfleet II (12.0 years) 1% Capitoliner (27.0 years) 5% Horizon (5.0 years) Superliner I (14.0 years) 3% Superliner II (0.4 years) 2% Turboliner Coach (18.6 years) Baggage/Autocarrier (22.9 years) As equipment ages, it breaks down more often and requires more extensive repairs. In an August 1994 study, Amtrak found that failures of Heritage cars cause more train cancellations and longer delays than failures of any other type of car. Heritage cars that fail are out of service awaiting parts about three times longer on average than newer cars. Needed parts for Heritage cars must often be manufactured because they can no longer be purchased off the shelf. Moreover, because there are 27 different Heritage models, Amtrak cannot produce replacement parts in economical quantities. As a result, the cost per seat to perform a limited “intermediate” overhaul on a Heritage car can be 25 to 50 percent higher than the cost to undertake a complete heavy overhaul on a Superliner. Before December 1994, Amtrak planned to replace some Heritage cars as 245 new Superliner and Viewliner cars were delivered by 1997. About 200 Heritage cars would have remained in service. Now, however, Amtrak expects to retire all but a few “specialty” Heritage cars (diners, cab cars) as it reduces service frequencies and eliminates routes in fiscal year 1995. According to Amtrak, this will have a significant impact on the costs to maintain equipment and out-of-service rates. Before fiscal year 1994, Amtrak’s goal was to maintain all its cars through a program of periodic preventive maintenance and regular heavy overhauls (every 3 to 4 years). These overhauls can cost about $300,000 for each car. In comparison, a new car costs about $2 million. However, to cope with its deteriorating financial condition, Amtrak began deferring maintenance in the late 1980s. Amtrak also began using capital funds in 1992 to overhaul many older cars (Heritage and Amfleet I models) and locomotives. Even with the infusion of capital funds to overhaul these cars, overhauls were past due for nearly 40 percent of the fleet by September 1993. (See fig. 3.3.) As the backlog grew, Amtrak officials recognized that the railroad’s preventive maintenance/overhaul program was not adequate. Cars looked shabby and were breaking down with increasing regularity. When the fiscal year 1994 budget provided no increase in funding, the Mechanical Department began to implement a new “progressive maintenance” program in October 1993. Under this program, Amtrak performs heavy maintenance when a car breaks down and also a limited overhaul each year on every car. Every third year, the annual overhaul will be more comprehensive but still less extensive than the heavy overhaul performed before. Only Amtrak’s newer passenger cars will be maintained under this program. The remaining Heritage cars and Turboliner coaches will continue to receive preventive maintenance and/or limited overhauls as before. The progressive program is intended to keep more cars in service—thereby generating more revenues—but is not expected to reduce overall maintenance costs. By the end of fiscal year 1994, all Amfleet, Horizon, Superliner, and Viewliner cars were eligible for inclusion in the progressive program. However, Amtrak is already falling short of reaching its goals under this program. While 1994 was a transition year, fewer cars than required received annual overhauls because of budget reductions. Also, maintenance officials have found that the program is not appropriate for all these cars. For example, increased customer complaints about the condition of Amfleet cars in the Northeast Corridor have prompted Amtrak to return these cars to a scheduled maintenance program in fiscal year 1995, although they will continue to receive overhauls under the progressive program. Furthermore, the progressive program was intended to use only operating funds, but Amtrak has already found it necessary to allocate 1995 capital funds for the heavier 3-year overhauls of the Amfleet I cars. As Amtrak implements the progressive program, two of its three overhaul facilities—located at Bear, Delaware, and Beech Grove, Indiana—will need to handle significantly more cars than they did under the previous heavy overhaul program. Both facilities fell behind in performing overhauls in the past because funds were not available. The Bear facility is responsible for annual progressive overhauls on Amtrak’s 629 active Amfleet cars, which provide service primarily in the Northeast Corridor. In fiscal year 1993 (the last full year of heavy overhauls), the facility overhauled 59 cars, but it had overhauled as many as 152 cars per year in earlier years. Officials said that this facility has the physical capacity to perform the 629 overhauls required under the progressive program, but only if its production staff is increased by 90 from its current level of 183. The Beech Grove facility is responsible for overhauling nearly 1,200 cars and 265 locomotives that operate outside the Northeast Corridor. In fiscal year 1993, this facility performed heavy overhauls of 117 cars and 50 locomotives—about 47 percent less than the number required to meet the established overhaul cycles. During 1995, it would need to perform at least 166 heavy overhauls and 350 progressive overhauls of the cars while continuing to overhaul an average of 66 locomotives to keep up with the established schedule. However, the current budget for Beech Grove will fund only about 63 percent of these overhauls. Furthermore, Amtrak’s new Superliners and Viewliners will add to Beech Grove’s workload as they become eligible for annual overhauls starting in 1996 and 1997, respectively. While the per-unit cost of a progressive overhaul is substantially less than the cost of a heavy overhaul, the total cost to Amtrak to fully implement the new program will be greater because so many more cars will be overhauled each year. For fiscal year 1995, Amtrak needs an additional $31.2 million to do this work. The depletion of Amtrak’s physical assets—maintenance and overhaul facilities, rolling stock, rights-of-way in the Northeast Corridor, and other support assets—is perhaps a greater threat to the railroad’s financial well-being than the current shortfall in operating funds. Over the past 10 years, Amtrak’s equipment and facilities depreciated at the rate of $200 million per year, while investment averaged only $140 million annually. Amtrak currently estimates that even with the reduced route system announced in December 1994, it needs capital investment of over $4 billion to purchase rolling stock and to bring the infrastructure into a state of good repair. (See fig. 3.4.) This amount does not include money needed for equipment and facilities for high-speed service in the Northeast Corridor. Maintenance of way ($2.4 billion) 5% Maintenance of facilities ($200 million) Maintenance of way costs include repairs needed on the Northeast Corridor right-of-way but exclude funds needed for new facilities and for completion of the electrification project to allow high-speed service on the north end of the corridor. Payments on equipment purchased in 1991-93 reflect the amount needed for principal and capital interest from 1995 to 2004. Regular interest (paid out of Amtrak’s operating funds) is not included. Amtrak will need an additional $615 million for principal payments on this equipment between 2005 and 2017 to retire the debt. These capital needs total $4.3 billion. Amtrak’s capital subsidies have not been sufficient for the railroad to attempt this level of investment. Amtrak borrowed much of the capital needed to replace some of its oldest cars and locomotives with new equipment ordered in the early 1990s, and a significant portion of its annual capital subsidy must be used to pay this debt. The limited remaining capital funds are generally committed to short-term projects that enable Amtrak simply to keep its equipment operating and complying with federal laws. Very little is left over to invest in projects that might increase revenues, improve the efficiency of operations, or increase the capacity and productivity of overhaul facilities. The ability of Amtrak to improve its facilities, overhaul its oldest cars and most of its locomotives, and purchase new equipment depends wholly on its federal capital grant. The demands on these funds far exceed the grants provided over the past few years. Amtrak received $560 million in capital funding from 1992 to 1994. According to Amtrak, it must now set aside a sizable portion of the subsidy to pay for the rail equipment and computers it purchased and facility improvements it made with borrowed funds in the past, as well as for legally mandated equipment modifications and environmental cleanup efforts. Additionally, Amtrak uses an increasing amount of its capital funds to overhaul cars and locomotives, leaving only a small amount for all other capital replacement needs. (See fig. 3.5.) Amtrak allocated $14.6 million of its capital funding to overhauls in fiscal year 1992, $55.7 million in fiscal year 1993, and $70 million in fiscal year 1994. As a result, less money was available for capital investment in new equipment or new infrastructure. In its capital subsidy request for fiscal year 1995, Amtrak identified more than $800 million in needed capital spending, of which $195 million will be used to pay off debt, comply with federal laws on equipment modifications, or fund capital overhauls. However, only $230 million in capital funds was appropriated. In fiscal year 1995, Amtrak will have only $35 million to invest in new capital projects like facility renovations and major repairs to track and rights-of-way—down from more than $100 million in 1993. Furthermore, Amtrak recently recognized that the need to reinvest in the Northeast Corridor right-of-way (track, signals, and auxiliary structures) is becoming critical. It now estimates that at least $2.5 billion will be needed to bring this infrastructure into a state of good repair. Much of this investment is needed on the south end of the corridor, from Washington, D.C., to New York, where Amtrak operates high-speed trains and has captured the largest share of the transportation market. Amtrak will use $115 million of its $200 million NECIP appropriation for fiscal year 1995 to improve track, signals, structures (e.g., bridges), electric traction (catenary and related power structures), maintenance-of-way equipment, and tunnels in this part of the corridor. According to Amtrak’s Chief Engineer, however, these improvements are only a small fraction of what needs to be done. The remaining $85 million of the NECIP appropriation will be used for electrification and improving track and facilities on the north end of the corridor, as well as for purchasing high-speed train sets (see ch. 4). Amtrak owns and/or operates 18 facilities where cars and locomotives are maintained and overhauled. Amtrak has developed a 10-year master plan for improving these facilities so they can accommodate future requirements, including the new progressive maintenance/overhaul program. The plan is estimated to cost $326 million. Five facilities need substantial renovation and/or modernization—the three overhaul facilities at Beech Grove, Indiana, and Wilmington and Bear, Delaware, and two divisional repair facilities in Los Angeles and New York. Together, these facilities will require $262 million to renovate or replace structures, improve efficiencies in operation, repair damage caused by earthquakes, and build new structures. The facility at Beech Grove needs not only the increased funds to perform the progressive overhauls discussed above but also upgrades to its physical plant if it is to meet Amtrak’s future overhaul requirements. Beech Grove is responsible for overhauls of and repairs to 61 percent of Amtrak’s total fleet. The facility is nearly 100 years old and is in very poor condition. Much of the on-site track was installed in the early 1900s and has deteriorated, resulting in frequent derailments. The facility was not designed for production-line overhauls of cars. The buildings are run-down, and some cannot accommodate the work for which they are used. For example, Amtrak’s newest diesel locomotives are too large to fit inside the locomotive shop building, and the shop’s cranes are not large enough to lift the locomotives so that wheel sets can be removed. In 1990, Amtrak initiated a five-phase modernization plan to correct some of Beech Grove’s problems. By September 1993, about $12 million of the total cost of $47 million had been spent on such projects as combining the truck and forge shops, improving a coach production line, constructing employee welfare facilities (lunchrooms, rest rooms, and locker rooms), replacing roofs, and replacing or rehabilitating overhead cranes. In August 1994, Amtrak committed an additional $1.9 million to repair Beech Grove’s transfer table and repair or replace some of the track most critical to the facility’s operation. These projects will help Beech Grove perform its required overhauls and reduce derailments at the facility. (See fig. 3.6.) However, many renovations and modernization projects remain unfunded, including a new warehouse and distribution system for material, modifications to the locomotive shop, additional replacement and rehabilitation of track, and a new wheel shop. With the introduction of the progressive overhaul program, which presents even greater challenges to the facility’s operations, Beech Grove officials have drafted a new modernization plan to accomplish these projects and other work. First-year costs of $9.8 million have been budgeted for fiscal year 1995, but $28.4 million more is needed to complete the work. Of all Amtrak’s repair facilities, Sunnyside Yard in New York City is most in need of improvement. This facility has almost no maintenance structures. Virtually all work is performed outside, so that equipment and personnel are exposed to the elements. The single service building for performing minor maintenance (called “running repairs”) can accommodate only 8 cars at a time and is thus barely adequate for the 12 to 15 cars needing repair each day. The only locomotive repair building at Sunnyside was recently condemned because of chemical contamination; it will cost $550,000 to remove this building and the related contamination. In addition, because Sunnyside lacked auxiliary power hook-ups to allow car heaters to operate while the cars were being serviced in the yard, the plumbing systems on over 50 cars froze and broke during the winter of 1993-94. Repairs to these cars cost about $1.8 million. Amtrak estimates costs of more than $100 million for improvements at Sunnyside, including (1) constructing a new service and inspection building and a car-cleaning facility, (2) realigning track and constructing new storage track, and (3) completing necessary environmental cleanup. As stated previously, maintenance and repair costs remain high because of the large number of aging Heritage cars. Between 1991 and 1993, Amtrak purchased 245 Superliner and Viewliner cars and 72 locomotives for $743 million and $181 million, respectively. These cars should be cheaper to maintain than the Heritage cars they will replace because they have standardized parts and modular components to allow for easier repair. Amtrak estimates that it will save $341 annually in maintenance costs for every seat in a Heritage car replaced by a seat in a Superliner. Also, most of the cars are designed with many more seats per car than the cars they are replacing, potentially adding passenger revenues without adding more cars to the train. Amtrak believes that passengers will be more likely to travel by rail if they can ride in newer, more modern Amtrak cars. The new locomotives will provide greater power, will increase fuel efficiency, and should contribute to better on-time performance. However, in addition to the new equipment that is now being delivered, Amtrak has estimated it will need over 700 more new cars and locomotives in the future. Its current long-term equipment acquisition plan, approved in November 1992, includes estimates for replacing all remaining Heritage cars with Viewliners and replacing some of the nonpassenger cars and locomotives that are in poor condition or are nearing the end of their useful lives. Amtrak estimates that it will need to purchase 299 locomotives and 416 cars at a cost of about $1.5 billion from 1994 to 2002. While these needs will be reassessed following the service reductions in 1995, Amtrak officials believe that a large portion of the locomotive fleet will still need to be replaced within the next 5 years. According to Amtrak’s President, it is very difficult to commit to long-term capital projects because of uncertainty about future funding. As a result, Amtrak tends to focus on short-term operations and is less able to invest in projects that would create long-term operating efficiencies. Capital grants are appropriated annually and often fluctuate from year to year. (See fig. 3.7.) As stated above, a significant amount of money is needed just to repay debt and pay for capital overhauls and equipment modifications. Also, the Committees on Appropriations have, in recent years, placed restrictions on when Amtrak is allowed to withdraw its money from the Treasury, usually mandating that all withdrawals be delayed until the fourth quarter of the fiscal year. Labor costs could increase as Amtrak begins to renegotiate contracts in 1995 with the 14 labor unions that represent about 90 percent of Amtrak’s 25,000 employees. Amtrak estimated that wages increased between $120 and $140 million from 1991 to 1995 as a result of the last round of collective bargaining. Similar increases may result from the upcoming negotiations. For example, if wages and benefits increase by 4 percent per year to keep pace with inflation, Amtrak’s costs could increase by about $40 million per year, or about $200 million (in current-year dollars) over a 5-year period. The current contracts provide for most union employees to receive annual wage increases of about 4 percent between 1991 and 1995. Amtrak has reduced labor costs and increased productivity when possible. Its employees receive less compensation on average than freight railroad employees performing comparable jobs. For example, in 1992 Amtrak compensated train and engine crews about $42,900 per employee, while other Class I freight railroads compensated similar employees about $54,800 per employee. Also, since 1983 Amtrak has increased productivity by (1) adopting an 8-hour basis of pay for train and engine crews (before this change, crews earned a full day’s pay on the basis of the number of miles traveled), (2) eliminating the requirement for a fireman on trips of less than 4 hours, and (3) establishing a 5-year graduated entry wage for certain newly hired employees. Amtrak estimates that these changes have saved about $50 million per year. Amtrak’s costs in 1994 for salaries, wages, and benefits accounted for about 52 percent ($1.3 billion) of the railroad’s total operating expenses. Federal laws unique to the rail industry keep Amtrak’s labor costs higher than they would be otherwise. For example, in 1992 Amtrak paid about 26 percent of its payroll in retirement taxes to meet requirements of the Railroad Retirement Act of 1937; this percentage is similar to the rate paid by other railroads. In comparison, other industries paid only about 6 percent of their payroll in retirement costs and retirement-related savings plans. Also, in 1992 Amtrak paid about $0.67 per employee-hour worked for accident and injury claims under the Federal Employers Liability Act. This amount compares with about $0.36 per hour worked paid by private industry under state workers compensation systems. Labor costs could also increase if Amtrak eliminates entire routes or reduces service below three round-trips per week. Amtrak and freight railroad employees are covered by the Rail Passenger Service Act, which requires adoption of a labor protection agreement for employees affected when intercity rail passenger service is discontinued. Under the agreement, known as Appendix C-2 and adopted in 1973, employees who are dismissed may be eligible for payment of their average monthly compensation for up to 6 years or, at their option, may receive a separation allowance of up to 12 months’ pay. According to Amtrak, if the entire route system were shut down, the railroad would incur labor protection expenses of between $2.1 billion and $5.2 billion. Freight railroads own about 97 percent of the track over which Amtrak operates and provide such essential services as dispatching trains, making emergency repairs to Amtrak trains, and maintaining stations. These services are provided under operating agreements that Amtrak maintains with 18 railroads. On April 30, 1996, most of Amtrak’s initial 25-year operating agreements with freight railroads will expire, and new agreements must be negotiated. On the basis of our discussions with freight railroad officials, it is likely that Amtrak’s costs under the new agreements will increase substantially. Amtrak currently pays about $90 million per year in both base payments and incentive payments to freight railroads. (Incentive payments are additional amounts that railroads can earn when Amtrak trains operate on time.) (See fig. 3.8.) Freight railroad officials told us that compensation will be a key issue in negotiations with Amtrak. They believe that their companies are not adequately compensated for the services they currently provide to Amtrak. They offered several reasons. First, the methodology used to determine reimbursements for the incremental costs of maintaining track—that is, the extra costs of wear and tear on the track—does not adequately measure the costs resulting from Amtrak’s use of the track. Of the $90 million that Amtrak pays annually to freight railroads, about $20 million is for the incremental cost of maintaining the track, and Amtrak estimates that its costs for track maintenance could double if another methodology is used. Second, incentive payments do not consider delays caused by Amtrak’s trains—when an Amtrak locomotive fails, for example—in calculating on-time performance. Rather, these delays are held against the freight railroads and consequently limit the amount of incentives that they earn. Freight railroads may also seek higher compensation for “level-of-utility” requirements that expire with the operating agreements. Amtrak trains generally travel at higher speeds than freight trains. As a result, the track must be maintained to higher safety standards. This increased standard is referred to as a higher level of utility. In addition, according to freight railroad officials, Amtrak does not fully reimburse railroads for clearing freight traffic and interrupting maintenance-of-way work to allow Amtrak’s trains to proceed on time. Freight railroad officials also said that liability arrangements would be a key issue in negotiations. They are concerned about their liability in settling high-cost claims that result from passenger-train accidents occurring on their track. This concern arose after a Conrail train collided with an Amtrak train near Chase, Maryland, in January 1987; 16 people died and more than 350 people filed injury claims. In this case, Conrail paid about $94 million in personal injury and death claims. Freight railroad officials fear that similar situations could develop on their property. Under current operating agreements, Amtrak and the freight railroads use a “no-fault” liability arrangement, in which each party is responsible for paying for its own equipment and personnel. In addition, Amtrak pays freight railroads between $0.0367 and $0.0734 per train mile for the liability coverage that they must maintain in connection with providing Amtrak service. In fiscal year 1993, Amtrak paid about $2.8 million for purchased insurance. Freight railroad officials told us that they would like to see this arrangement changed. They suggested that either Amtrak assume full responsibility for accidents in which it is involved, regardless of who is at fault, and/or liability claims be capped and handled through a pooled insurance fund. In either case, Amtrak’s costs for liability protection could increase substantially. Although health care and postretirement benefits are currently a small part of Amtrak’s budget, they could become more significant in the near future. In January 1995, the health care premiums that Amtrak pays for its union employees are projected to increase by about $61 per employee per month. Amtrak estimates that this increase could boost operating expenses by about $25 million per year. In addition, Amtrak provides postretirement health care and life insurance benefits to salaried employees. For fiscal years 1992 and 1993, Amtrak paid postretirement benefits of $1.4 and $1.5 million, respectively. Amtrak estimates that cash outlays for these benefits will grow from $3 million in fiscal year 1994 to around $20 million by the year 2010. Amtrak can also expect higher costs associated with environmental cleanup. Amtrak’s current expenditures for environmental cleanup projects have ranged between $2 million and $8 million per year. However, according to Amtrak, this amount represents only a fraction of its known environmental problems. For example, Amtrak may have to spend between $17 and $69 million to bring the 69 fueling sites along its routes into compliance with the Clean Water Act, according to Amtrak officials. Amtrak also estimated that an additional $1 million per year over a 5-year period will be needed to eliminate asbestos at its stations and facilities. Other environmental projects are likely to increase costs further. Amtrak’s policy is to limit spending for environmental cleanup to high-priority projects that pose immediate dangers to the environment. At the end of fiscal year 1994, Amtrak recognized a $33 million liability for future costs for environmental cleanup. Amtrak acknowledged that costs would increase if it fully complied with environmental standards and requirements and implemented prevention and control measures. In the coming years, Amtrak faces increased costs that it can no longer defer or avoid. These costs include keeping its equipment in operating condition, purchasing new equipment, meeting its debt obligations, negotiating and paying for new labor agreements, paying reasonable fees to use other railroads’ track, and paying for increased employee benefits and environmental cleanup at Amtrak sites. Its past efforts to reduce costs, while necessary, have resulted in deterioration of equipment and some facilities. The need for improvements is becoming critical, and these improvements will not come cheaply. The new progressive maintenance/overhaul program, designed to keep more cars in service at a lower unit cost, will still cost over $30 million more to implement in fiscal year 1995 than was spent in 1994 and will eventually cost nearly $60 million more as new equipment enters the program. However, without this commitment, Amtrak risks growing backlogs of equipment in need of overhaul, depleting the number of cars available for service. The new cars and locomotives currently being delivered should ease the pressures, in both the short and long term, as older cars that are costly to maintain are replaced and more revenues per car are generated. By the turn of the century, however, this equipment will need to be overhauled each year, increasing the burden on Amtrak’s aging overhaul facilities. We believe that capital investment is important and will lower operating expenses in the long term by increasing productivity and improving efficiency. The Beech Grove overhaul facility could be made much more economical by replacing, repairing, and modernizing the track and structures that now impede efficient work there. Such investments could enable Amtrak to increase efficiencies and provide comfortable, modern, on-time service to its passengers. If the problems that have been driving customers away from Amtrak are reduced, demand for service may well increase. In chapter 4, we discuss the prospect that Amtrak can generate sufficient additional revenues to offset these increased costs. Amtrak’s revenues have never covered all the costs for providing intercity rail passenger service on any route. This gap, after narrowing during the 1980s, has again widened. Even as the economy has recovered, Amtrak’s ridership and revenues have not improved correspondingly. There are several opportunities for Amtrak to earn additional revenues, including completing a computerized system to maximize its revenues per seat, increasing the amount of compensation the states pay Amtrak for losses on services it provides in the states under section 403(b) of the Rail Passenger Service Act, introducing high-speed rail in selected corridors, and expanding commuter rail operations. However, none of these actions is likely to eliminate Amtrak’s operating deficit. Since 1990, Amtrak’s passenger revenues have fallen about 14 percent in real terms (see fig. 4.1)—from over $1 billion in 1990 to about $880 million in 1994—and riders have been experiencing more problems on their trips as Amtrak continues to operate aged equipment and to defer maintenance. Amtrak has cited a weak economy and intense price competition from the airlines as some of the key reasons for its poor performance. But deteriorating service quality and a spate of recent accidents have also contributed to declining revenues. Although Amtrak’s ridership generally increased during the 1970s, financial losses persisted, and in recent years Amtrak’s annual deficit has risen steadily. Since the 1980s, Amtrak’s ridership has remained relatively steady, fluctuating between 19 million and 22 million passengers annually. (See fig. 4.2.) To deal with the widening gap between revenues and expenses, Amtrak has had to rely heavily on cost reductions, because substantial revenue increases could not be expected with ridership stagnant and fares constrained by falling air fares and gasoline prices (when adjusted for inflation). As Amtrak cut expenses, the quality of service deteriorated, making increases in ridership even less likely. According to a June 1994 survey of Amtrak’s passengers, about 61 percent had experienced at least one problem during their trip. Both the proportion of passengers experiencing problems and the number of problems per passenger increased with the distance traveled. About 74 percent of passengers on western long-distance trains and about 67 percent of those on eastern long-distance trains experienced problems.However, even riders on Amtrak’s high-speed Metroliners encountered problems—roughly 44 percent of passengers reported problems. The most common problems cited in the customer survey concerned on-time performance. Late arrivals and departures accounted for about 21 percent of the problems that passengers cited. Dissatisfaction with the cleanliness of facilities was also common, accounting for about 10 percent of the problems mentioned. Between 1989 and 1992, overall on-time performance improved from 75 to 77 percent; performance on certain routes and for certain trains, however, remains poor. In 1993, Amtrak’s systemwide on-time performance declined to 72 percent. On one route—the Empire Builder, which runs between Chicago and Seattle—trains arrived on time only 4 percent of the time, according to Amtrak. Amtrak estimates that late arrivals and departures alone result in about $80 million in lost revenues annually. Altogether, Amtrak believes that it is losing over $300 million annually because of problems affecting customer satisfaction. The series of accidents involving Amtrak trains—one near Mobile, Alabama, in September 1993; others in Boise, Idaho; Kissimmee, Florida; and Gary, Indiana, during November and December 1993; a derailment at Selma, North Carolina, in May 1994; and an accident near Batavia, New York, in August 1994—appear to have resulted in temporary declines in ridership and thus revenue losses. After the September 1993 accident, Amtrak’s ridership nationwide fell by about 4 percent, affecting revenues for about 2 months. After the subsequent accidents, revenues dropped by as much as 15 percent. Revenue recovery took increasingly longer and occurred only after aggressive marketing campaigns. Competitive pressures have limited Amtrak’s ability to increase revenues by raising fares. From 1990 to 1993, Amtrak’s overall yield—revenue per passenger mile—fell by about 10 percent, after adjusting for inflation. The declines were larger, about 12 percent, for routes outside the Northeast Corridor. Yields on traffic in the Northeast Corridor—where Amtrak derives about one-half of its ridership—fell by about 6 percent. These falling yields represent fare reductions made in response to, among other things, lower fares on airlines and buses. Meanwhile, passenger yields on domestic airlines fell by about 12 percent from 1989 to 1993 and are now below Amtrak’s. Yields on intercity buses fell about 10 percent from 1989 to 1992 and are well below the yields of Amtrak and the airlines. Most intercity trips are made by private vehicles. Automobiles and other private vehicles account for about 80 percent of total passengers miles of intercity travel, while Amtrak represents only about 0.3 percent. Falling real gasoline prices continue to encourage people to drive. Since 1990, the real price of regular unleaded gasoline has declined by about 10 percent. This price decrease, combined with a general increase in the average fuel efficiency of new cars, continues to make driving a relatively inexpensive option, especially for leisure travel by families. Many people make the decision to drive on the basis of only the out-of-pocket cost of their trip. Many related costs, such as insurance and depreciation, are perceived as largely fixed and do not enter into the traveler’s choice of mode. Thus, lower fares for air and bus travel and lower gasoline prices combined to improve the relative attractiveness of the alternatives to taking the train, while the quality of train service declined. These trends have continued for some time, and Amtrak will find it difficult to overcome them. To increase revenues and improve yields, Amtrak is computerizing its yield management system, which allocates seats among several service classes. This system is similar to those used by the airlines to control seat inventories and maximize revenues. Amtrak does not want to sell a seat to a passenger traveling only a short distance on a long-distance train if by doing so it is unable to sell the seat to a long-distance passenger. Still, because most Amtrak passengers travel only on a portion of a route, Amtrak cannot reserve all the seats for long-distance travelers and must optimally manage its seat inventory. Moreover, because of the number of stops a train makes and the number of passengers boarding and deboarding at each stop, programming a yield management system for passenger trains is much more complicated than computerizing a system for airlines. As of July 1994, 100 long-distance trains were included in the computerized system, and Amtrak plans eventually to have 220 of its reserved-seat trains in the system. Because of budget constraints, the system is being implemented in phases. It was introduced in 1991 and is not expected to be completed until the end of fiscal year 1995. This system should help Amtrak maximize revenues, especially on heavily patronized long-distance trains during the peak travel seasons. However, it is not likely that the added revenues resulting from better yield management will make a substantial impact on Amtrak’s deficit because most trains are far from overbooked, and Amtrak has used a manual yield management system for some time. Amtrak as a whole loses money. However, to judge the financial performance of individual Amtrak routes, it is necessary to determine the revenues and costs associated with each route. Doing so can be difficult. When all costs, including administrative and capital costs, are fully allocated, all Amtrak routes—even the heavily traveled Northeast Corridor—generate sizable deficits. Amtrak also operates intercity passenger rail services that receive financial assistance from the states where they operate. The support from the states does not fully compensate Amtrak for the cost of operating these trains. Under its December 1994 business strategy, Amtrak will seek reimbursement from the states for all the losses incurred by these trains. As noted above, none of Amtrak’s routes are profitable if the costs are fully allocated, and only services in the Northeast Corridor and on a few special trains generate revenues that exceed avoidable costs. Some costs would cease if a route were discontinued or, conversely, start if a new service were introduced. These costs include short-term avoidable costs, such as those for train and engine crews and fuel. Other costs would not end immediately if a route were eliminated. These include not only long-term avoidable costs, such as expenses for heavy equipment maintenance and training, but also the short-term costs directly attributable to a route. Losses on individual routes vary depending on what costs Amtrak considers in the calculation. If costs are fully allocated, passenger revenues covered only about 54 percent of the costs in fiscal year 1993. In calculating fully allocated costs, Amtrak excludes certain expenses, including general and administrative overhead, interest, non-intercity passenger operations, and adjustments from previous periods. For short routes—those less than 500 miles—revenues covered 83 percent of the long-term avoidable costs, while revenues from long-distance service covered 75 percent of such costs. The Northeast Corridor made a positive contribution on the basis of long-term avoidable costs. If only short-term avoidable costs are considered, then both short- and long-distance routes outside the Northeast Corridor come close to covering their costs. (See table 4.1.) Part of the reason that services in the Northeast Corridor appear more profitable than services in other parts of the system is that Amtrak treats a significant portion (60 percent) of the costs to maintain track in the Northeast Corridor as fixed costs and therefore excludes them from the measures of avoidable costs. Elsewhere, Amtrak considers track maintenance costs as avoidable costs because they represent a contractual obligation between Amtrak and the freight railroads that own the track. Furthermore, the Northeast Corridor includes both conventional trains and high-speed Metroliner trains. While the Metroliners recover 90 percent of their fully allocated costs, the conventional trains do not perform as well. The Metroliners skew the overall cost recovery ratio of the Northeast Corridor so that it performs much better than other routes. (See table 4.2.) The Rail Passenger Service Act allows Amtrak to initiate and/or operate intercity rail service, known as 403(b) service, that is financially supported by the states. In fiscal year 1994, Amtrak had contracts with eight states to operate such service over 13 routes. This service accounted for about 14 percent of Amtrak’s ridership. Under the provisions of the act, the states pay 45 percent of operating losses for such service in the first year of operation and 65 percent of losses in subsequent years. For service that began before 1989, states reimburse Amtrak for short-term avoidable losses, while for service that began after 1989, states reimburse Amtrak for long-term avoidable losses. In fiscal year 1994, three of the eight states—Missouri, New York, and Michigan—reimbursed Amtrak for short-term avoidable losses; three states—Alabama, North Carolina, and Wisconsin—reimbursed Amtrak for long-term avoidable losses; and two states—California and Illinois—reimbursed on both long- and short-term bases, depending on the route. States also pay 50 percent of the capital costs (a calculation based on depreciation and interest) associated with the equipment used for this service. Any losses (capital or operating) not paid by the states are absorbed by Amtrak. For the most part, Amtrak uses its own equipment to provide this service. In fiscal year 1993 (the last year for which financial data on 403(b) service are available), Amtrak absorbed about $82 million in losses on section 403(b) services. This amount included about $78 million in operating costs and $4 million in capital costs. Amtrak absorbed such costs as heavy maintenance and overhaul of cars and locomotives, repairs following accidents, and an allocated portion of fixed costs (e.g., expenses to operate yards and stations and various overhead costs). The states paid about $26 million. Amtrak absorbs other costs from the service as well. For example, Amtrak’s use of equipment for section 403(b) service precludes its use on other intercity routes where equipment shortages could occur. Amtrak is not reimbursed for these lost opportunity costs. In 1992, Amtrak adopted a policy whereby no new 403(b) service will be initiated unless a state purchases and provides the cars and locomotives. Few states have been willing to make this type of investment. As part of the new business strategy adopted in December 1994, Amtrak will seek to gradually eliminate the “deeply discounted” service provided to the states under section 403(b). To accomplish this goal, it plans to renegotiate the reimbursement terms of all 403(b) service over the next several years so that the participating states subsidize all costs not covered by revenues. Doing so may require changes to the Rail Passenger Service Act, according to Amtrak, but the corporation has not yet decided what legislative changes it may seek. Many supporters of intercity rail passenger service believe that more people would ride the trains and that routes could be more profitable if high-speed services were introduced. Amtrak continues to work on the Northeast Corridor Improvement Program (NECIP) and plans to extend high-speed service from New York to Boston. Amtrak still requires about $1.5 billion to complete this modernization. High-speed trains have been proposed for other corridors around the nation, but attempts to build them have encountered serious obstacles. Significant capital costs will be incurred for improvements to the infrastructure and for new equipment regardless of where these systems are built. The High-Speed Ground Transportation Development Act of 1994 authorizes $169 million to assist in planning these systems, but no funds have been appropriated. Moreover, other questions, such as who will operate these systems and who will pay for them, remain unanswered. Extending electrification from New Haven, Connecticut, to Boston under NECIP will allow train speeds of up to 150 miles per hour, will cut travel times between New York and Boston from 4 hours to under 3 hours, and should generate increases in both ridership and revenues. Amtrak estimates that annual revenues from this project will exceed long-term avoidable costs by about $36 million (in 1993 dollars) in the year 2010. Although this amount will not cover capital costs, any revenues received in excess of long-term avoidable costs will help reduce Amtrak’s need for federal operating subsidies. These increased revenues are predicated on Amtrak’s capturing about 45 percent of the rail/air travel market between New York and Boston, a share equal to that currently held by Amtrak between Washington, D.C., and New York, where trains achieve speeds of 125 miles per hour. As of September 30, 1994, Amtrak estimated that the major improvements in infrastructure required to provide 3-hour service between New York and Boston would be completed in 1999. Since 1976, about $3.3 billion (in current-year dollars) has been appropriated for NECIP. Amtrak estimates that about $1.5 billion more is needed to complete the project. FRA estimates that an additional $582 million (in constant 1993 dollars) will be needed to address problems with track capacity. Counting prior expenditures on the Washington-New York segment, the corridor will cost about $5 billion. The track between New York and Boston is currently shared by Amtrak and freight and commuter railroads—all of which plan to increase their use of the track in future years. The existing track cannot accommodate all of these plans. Therefore, either some train operations will have to be shifted to off-peak hours or additional capacity will have to be constructed to ensure that all parties’ needs are met. Since Amtrak does not own about 95 miles of the rights-of-way between New York and Boston, it may have difficulty negotiating shifts in train schedules and/or costs to gain additional capacity. Consequently, Amtrak may either have to absorb more of the additional costs than it expects or delay its planned increases in train schedules until capacity problems can be resolved. Either action could significantly affect Amtrak’s ability to achieve timely revenue gains as a result of NECIP. Providing high-speed rail service outside the Northeast Corridor will be influenced by the recently enacted High-Speed Ground Transportation Development Act of 1994. This legislation authorizes $169 million over a 3-year period through fiscal year 1997 for planning assistance for high-speed rail corridors. To date, no funds have been appropriated and no construction funds have been authorized. A number of important questions have yet to be answered, including who will be designated to operate future high-speed rail service. There is no guarantee that Amtrak will be selected to operate these services. Nor is it clear how much federal assistance might be provided to build high-speed rail systems. The responsibility for funding these projects is likely to fall on the states, localities, or private investors. The impact of high-speed rail systems on Amtrak’s need for federal subsidies is also unclear. If Amtrak’s role is limited to operating such systems under contract to others and federal operating subsidies are limited, Amtrak and the federal government could largely be shielded from losing money on these operations. If high-speed rail service is operated as part of Amtrak’s national intercity route system, then federal operating subsidies will rise or fall depending on whether revenues exceed long-term avoidable costs. Any federal capital assistance would presumably be provided through separate appropriations. Amtrak estimates that nine high-speed train sets, at a total cost of about $170 million, would be needed to provide nine daily round-trips on a 300-mile corridor. Amtrak also earns revenues by operating commuter rail services under contract to state and local governments and regional transit agencies, developing its real estate holdings, and providing mail and express service. Amtrak was unable to provide us with an accounting of the costs associated with these activities until December 1994; therefore, we have not assessed their profitability. In fiscal year 1993, these activities accounted for about $435 million—or about 30 percent—of Amtrak’s $1.4 billion in revenues. In general, ancillary activities have been a growth area for Amtrak and, overall, appear to have produced a modest profit. In particular, commuter rail services, which generated revenues of about $270 million in fiscal year 1994, were Amtrak’s second largest source of operating revenue. Amtrak operates eight commuter rail systems in five states under competitively awarded cost-plus contracts. Amtrak primarily operates these services and does not use its own equipment. Since 1983, when Amtrak entered into its first contract with the Maryland Rail Commuter System, its commuter revenues and ridership have grown as Amtrak has entered into new contracts. (See figs. 4.3 and 4.4.) Amtrak began operating two major new systems in 1993—the Virginia Railway Express in northern Virginia and Metrolink in Los Angeles—to boost its commuter ridership from 20 million in 1992 to 29 million in 1993. Amtrak now carries more passengers on its commuter services than on its intercity operations. The financial contribution from Amtrak’s ancillary activities is largely unknown. During our review, Amtrak had difficulties in identifying the costs of these activities and, for the most part, was unable to provide us with financial statements for them in a timely manner. This was particularly true for commuter rail activities. Data on revenues and ridership were available but data on expenses were not. We also had difficulty identifying general and administrative expenses for these activities and the way these costs are allocated to specific lines of business or specific contracts. According to Amtrak, these costs are not accounted for separately but are instead allocated according to standard corporatewide formulas. We did not audit these formulas. As a result, it is not clear what the financial contribution of Amtrak’s ancillary activities might be, nor whether costs are being allocated correctly. Since 1990, Amtrak’s ridership has been relatively stagnant, revenues have declined, and the quality of service has deteriorated. Amtrak’s problems can be attributed partly to uncertain economic conditions and to competition from the airlines and from buses. But they are also the result of continued reliance on old, unattractive equipment that is prone to breakdowns and delays. Lacking the resources to purchase the new equipment that would increase the quality of service and constrained to match operating costs with federal subsidies, Amtrak has been forced to cut costs, delay maintenance of equipment, and generally let the quality and attractiveness of train travel deteriorate further. The prospects for recovery of ridership and revenues are poor. Increasing the amount of compensation the states pay for services provided under section 403(b), contracting to provide more commuter rail operation, and introducing high-speed trains outside the Northeast Corridor could all enhance revenues, but none of these initiatives can be expected to close the current deficit. In chapter 5, we make recommendations to Amtrak to determine the profitability of its ancillary activities and to provide further information to the Congress on the corporation’s potential involvement in high-speed service outside the Northeast Corridor. Chapter 5 also discusses alternatives for matching the country’s needs for viable intercity rail passenger service with the realities of limited federal resources. Amtrak and the federal government need to make important decisions about the future of intercity passenger rail service and the government’s commitment to subsidize such operations. Amtrak’s condition will only get worse if it continues to operate the current system—even with the reductions in service planned for 1995—at the current level of state and federal funding. High quality nationwide passenger service of the present scope that might attract and retain passengers would require substantially higher levels of additional support, particularly for capital investment. The key question is whether the federal government or the individual state governments are willing to make the required investments, given the competing demands on their resources. A substantially reduced passenger rail system, while more feasible from a fiscal viewpoint, requires that difficult decisions be made on the type, quality, and location of the remaining services. We do not believe that the current situation—the present nationwide passenger rail system at the current subsidy level—represents a viable option. Amtrak’s financial condition will continue to deteriorate, and the railroad’s ability to provide nationwide service at the present level will be seriously threatened. To maintain the current nationwide system will require significantly increased resources if Amtrak is to offer quality service. Without additional funds from federal, state, and local governments, Amtrak will have to cut expenses significantly by eliminating some routes and reducing the frequency of service on others. In either case, ridership could fall as the level of service declines. In September 1994, Amtrak officials announced their decision to reduce Amtrak’s management force from 2,700 to 2,100 people by the end of 1994 through voluntary or forced separation. The staffing cut is part of a plan to shift control over pricing, marketing, and service to local offices and train crews by reducing headquarters staff in Washington, D.C., and transferring staff to three regional operating centers. Amtrak hopes to improve efficiency by establishing operating centers in Philadelphia for the Northeast Corridor, Los Angeles for West Coast service, and Chicago for the rest of the nation. These changes and reductions in staff, however, involve too few dollars to substantially affect Amtrak’s financial condition. After severance costs, Amtrak expects these cuts to save approximately $30 million in fiscal year 1995. Realizing that additional actions needed to be taken, in December 1994 Amtrak announced plans to cut expenses by reducing service, as we discussed in chapter 2. If implemented, these actions could bring Amtrak’s operating costs in line with the revenues and grants for 1995. Nonetheless, these planned actions will not solve the corporation’s longer-term problems. Revenues will continue to fall short of expenses on most routes, and Amtrak estimates that operating expenses will exceed operating revenues and the federal operating subsidy by $1.3 billion between 1996 and the year 2000. Furthermore, Amtrak will still need over $4 billion to replace worn-out equipment and infrastructure. Achieving about 26 percent of the $364 million in annual net savings that Amtrak anticipates from these actions might require collective bargaining and/or legislative change, according to Amtrak. Also, in eliminating routes, Amtrak will incur labor protection expenses to compensate workers who lose their jobs or are placed in lower-pay positions. Amtrak estimates that labor protection costs due to the proposed changes could be between $80 million and $158 million. Amtrak has identified additional legislative changes that it believes could improve the corporation’s long-term viability. These changes include including Amtrak in a federal transportation trust fund; limiting Amtrak’s provision of state-assisted rail passenger service to situations in which the state is willing to provide the actual cost of such service; • amending section 405 of the Rail Passenger Service Act to permit negotiations on labor protection issues without the statutory rigidity that currently limits those negotiations; further amending section 405 to remove constraints on contracting for work; • eliminating from Amtrak’s budget the mandatory payments for railroad retirement and unemployment benefits incurred by non-Amtrak employees; • eliminating Amtrak’s obligation to pay federal fuel taxes; • requiring that Amtrak’s federal operating grant be provided on the first day of the fiscal year to reduce overall cash flow costs and requirements; limiting punitive damages assessed against Amtrak through tort reform; • providing Amtrak with the authority to issue tax-exempt debt; • providing tax incentives to freight railroads for the revenues they earn from on-time performance payments from Amtrak; and • clarifying Amtrak’s exemption from local regulations on permits for work to improve the Northeast Corridor. At the time of our review, Amtrak officials had not determined the extent to which these proposed changes to legislation would reduce the corporation’s expenses, but they plan to do so. In addition, Amtrak has not identified the costs and benefits associated with these changes, including the impact of tax reductions or credits on the national debt and the impacts on other affected parties. Nor have we assessed the impact of these actions on Amtrak or other affected parties. Increased funding, especially capital investment, is essential if Amtrak is to continue its nationwide service at the present level. Over the longer term, increased funding offers Amtrak the potential to increase revenues and improve service quality on its existing routes, increase the efficiency and productivity of its operations, and, possibly, introduce high-speed service on some routes. To substantially improve its deteriorating financial condition, Amtrak must increase its passenger revenues, which have been declining in real terms since 1990, as noted in chapter 4. By investing in new passenger cars and locomotives, Amtrak could increase its seating capacity on the routes where the demand is greatest. As we discussed in chapter 3, Amtrak recently purchased 245 passenger cars and 72 locomotives for nearly $1 billion. If the Congress more than doubled Amtrak’s current capital subsidy to $500 million annually from fiscal years 1995 to 2000—which may be difficult within the current federal budget—Amtrak could improve its maintenance facilities, stations, and information systems, among other things. However, even with the gains in efficiency and ridership expected from these improvements, Amtrak would still need more than $400 million in annual operating subsidy from state or federal governments through the year 2000. (See table 5.1.) The Congress could redefine Amtrak’s role and mission by restructuring and realigning Amtrak’s route system to a smaller basic network that would continue to be eligible for federal funding. This basic network could be augmented by regional routes fully funded by states. This approach has the potential to improve Amtrak’s financial condition and service quality. Additionally, it may lead to reductions in federal funding over the longer term, although capital subsidies will continue to be needed. An analysis of Amtrak’s current market—the routes with the largest ridership and revenues—could be used as a starting point in determining a basic route network that would be eligible for federal funding. We believe that the specific routes included in this restructured system could be determined by Amtrak or by a temporary commission such as the one formed to evaluate military base closures. A basic route network could be defined by determining where Amtrak’s market is currently strongest. As a starting point, we identified the (1) routes with the largest ridership and (2) routes that generated the greatest revenues. We found that 12 of Amtrak’s 44 routes accounted for 70 percent of Amtrak’s 22 million riders in fiscal year 1993. The top five routes—all in the Northeast and southern California—each had over 1 million riders and accounted for 56 percent of all riders. (See fig. 5.1.) The routes with the most riders roughly coincided with the routes generating most of the passenger revenues. Eleven routes (each with revenues greater than $30 million in fiscal year 1993) earned 68 percent of Amtrak’s passenger revenues in fiscal year 1993 and accounted for 61 percent of the fully allocated costs. The top five routes generated 47 percent of the total train revenues and accounted for 38 percent of the costs. The other six routes extend service on the East Coast, provide a third route from Chicago to the West Coast, and serve the West Coast.(See fig. 5.2.) Coast-to-coast service could be maintained if the Chicago-New York City/Boston route—the next largest in revenues—is added to the network. Generally, however, the data on ridership and revenues indicate that there is not a strong demand for passenger rail service between the East Coast and Chicago, largely because rail service cannot compete in time with air travel. The daily train leaving Washington, D.C., at 4:40 p.m. arrives in Chicago at 9:10 a.m. the next day—a trip of over 16 hours. By comparison, a flight between Washington, D.C., and Chicago takes about 2 hours. The criteria for identifying the routes that could constitute a new basic system needs to balance the requirement that the routes be well-patronized with the costs associated with providing the service. Our analysis provides a preliminary look at a basic route network. Some of the routes with the most riders and revenues, however, also have the largest losses. Further analysis of the revenues and costs associated with routes is needed to determine (1) what revenues could potentially be lost as a result of losing passengers who are now connecting from routes that would be eliminated and (2) whether entire routes or only segments generate high revenues and ridership. In addition, the direct costs for each route, which are currently allocated using a formula, need to be measured more precisely and directly allocated. Amtrak compiles boarding and destination information on its passengers from tickets collected on the trains. These data could be analyzed to determine the potential effect on revenues and ridership of the loss of passengers now connecting from other routes. Such an analysis would reveal, for example, the number of passengers on the Chicago-San Francisco route who begin their trips at stations that could potentially be eliminated. Additional information would need to be gathered on transportation alternatives for interconnecting passengers and the number who may still ride Amtrak after taking a car or bus to the nearest alternative station. The data from tickets could also be analyzed to determine revenues and ridership on segments of routes. For example, most of the revenues and ridership on the Chicago-Seattle route might be commuter traffic between Chicago and Milwaukee and/or intrastate travel between Spokane and Seattle. Until mid-December 1994, Amtrak did not know precisely the direct costs associated with its individual routes. Even costs that could be directly measured, such as fuel and labor, are computed and allocated to routes on the basis of formulas developed by Amtrak. Such formulas are a reasonable way to account for expenses on a systemwide basis. However, this method may provide insufficient information to allow management to make judgments on the relative performance of individual routes. For example, this method does not consider operating conditions that may be specific to routes, such as the costs of turning a train around at the terminal stations. These costs are allocated to all routes, although turning trains around is not necessary on some routes. In addition, consideration must be given to the sensitivity of financial performance on a given route to the age and type of equipment assigned to it. Finally, Amtrak currently allocates costs to routes differently depending on whether the route is considered “basic” or “incremental” service. For example, Amtrak designates the route between Washington, D.C., and New York City as basic service and allocates a portion of all operating costs to the route. In contrast, the Philadelphia-New York City route is designated as incremental service, and only the costs of adding cars to trains on the basic Washington-New York City route are allocated to it. In addition, Amtrak does not allocate the cost of locomotives to incremental routes. Amtrak officials have recognized these problems with their cost information and acknowledge that this method of allocating costs may be making some routes appear much more unprofitable than they really are. During the fall of 1994, Amtrak undertook an in-depth analysis of the costs and revenues of individual routes in developing its December 1994 strategic business plan. As part of its new business plan, Amtrak intends to measure more direct costs and allocate them to routes rather than allocating all costs according to formulas. Specific, alternative route structures and expected levels of federal support could be developed and recommended to the Congress by Amtrak or a temporary commission established by the Congress for that purpose. The commission or Amtrak could identify several alternative networks, depending on the level of funding available. A commission to restructure passenger rail could operate in a manner similar to the Department of Defense’s (DOD) Base Realignment and Closure Commission. After the Congress identifies specific future goals and objectives, the commission could obtain route-specific data from Amtrak on ridership, revenues, and costs and define basic route networks commensurate with the different funding levels. After identifying a potential basic network, specific route structures could be assessed by considering (1) all the fixed costs that could be reduced or increased if a large number of routes were eliminated and (2) the increased revenues that could be gained by redeploying equipment to routes where the demand would support increased service. Additional factors that the commission or Amtrak could assess include the availability of alternative intercity transportation and the impact of the proposed network on energy consumption, pollution, and traffic congestion. However, if these nonfinancial factors are used to determine the route structure, it will be difficult to make improvements in service quality and Amtrak’s financial condition without higher federal subsidies. After the Congress agrees on a basic rail service network that would be eligible for federal funding, individual states could be given the option of adding specific service to Amtrak’s basic network if they are willing to fully subsidize the added service. Some states have already entered into such agreements with Amtrak. For example, Washington State contracted with Amtrak to operate upgraded service between Seattle and Portland, Oregon. All seats on the train were reserved, the train included a dining car that served local specialties such as salmon, and the train featured on-board telephone service and video entertainment. By comparison, Amtrak’s regular service between Seattle and Portland offered only snack and beverage service. The Washington State Department of Transportation collected all revenues for this service and paid all costs. Nonetheless, a state’s flexibility in using federal funds for intercity passenger rail service is constrained under current law. Passenger rail service competes for limited transportation funds and, unlike aviation, highways, and mass transit, it does not have a federal trust fund. State and local governments have some flexibility to allocate their federal transportation funds among different modes, but not to intercity passenger rail operations. Even if it completes a major restructuring of its service, Amtrak will continue to need capital funds for equipment and infrastructure. In Europe and Japan, where competitive conditions are more conducive to rail travel, intercity passenger service requires substantial public support, including significant investments in the infrastructure. For example, France plans to invest nearly $25 billion in its railroad during the 1990s. This amount includes $6.8 billion for rolling stock, $5.3 billion for investments in infrastructure on high-speed lines, and $1.1 billion for other investments in infrastructure. Germany plans to invest over $70 billion in its main railway lines in the 1990s, including $28.8 billion for improvements in infrastructure, $18.5 billion in other upgrades, and $8.2 billion in equipment. Amtrak will continue to need federal grants to meet its capital needs. A 1991 study conducted for FRA evaluated four scenarios for Amtrak’s future—a system in the Northeast Corridor only, the Northeast Corridor plus a few routes connected to the corridor where losses are relatively small, Amtrak’s current route network, and the current network minus several routes where losses are the largest. All scenarios assumed that Amtrak would require a capital subsidy. This study further assumed that Amtrak would improve its efficiency in certain areas, such as its maintenance facilities. Even though some assumptions were overly optimistic in predicting improvements in Amtrak’s efficiency, this study estimated that by the year 2000, Amtrak would still require a federal operating subsidy under all scenarios. The smallest subsidy would be required for the current network minus the routes with the largest losses. The requirement to pay up to 6 years’ wages to employees who lose their position if a route is eliminated was a major factor in determining the cost under the alternative scenarios. If the Congress chooses to eliminate or greatly reduce federal subsidies for Amtrak, it could privatize the operation and make it subject to market forces. Amtrak’s route network would be reconfigured so that only those parts of the system that had the potential to cover their costs would continue to operate. While some rail passenger services conceivably could be taken over by the private sector, significant federal investment would be needed before any part of the current system could be privatized, and nationwide service as it exists today could not be offered. Privatizing Amtrak might be complicated by a number of factors. First, it is not clear what would be privatized. Amtrak owns very little track outside the Northeast Corridor. Also, most of the stations Amtrak serves are owned either by other railroads or by local governments. Even many of Amtrak’s passenger cars and locomotives are leased. Second, the term “privatize” is sometimes used to mean “defederalize”; that is, to shift the responsibility for subsidizing intercity train operations to state and local governments. Passenger train services might be inherently unprofitable. Therefore, private, for-profit firms are unlikely to be interested in such business without some government assistance. The private railroads in this country were unable to operate passenger service profitably, and throughout the world, intercity passenger trains are heavily subsidized. If the public benefits of intercity passenger train services are largely local or regional, these services might more appropriately be offered or supported by state or local governments. Third, even in the Northeast Corridor, where Amtrak controls significant assets, different degrees of privatization are possible. For example, programs to privatize freight rail service in the Netherlands envision privatizing the operations but not the infrastructure. The government will continue to provide capital to maintain and develop the track and other facilities. In addition, privatizing those parts of Amtrak that could potentially be profitable might still require substantial initial investment to create a saleable asset, similar to what occurred with Conrail. In that instance, many unprofitable routes were abandoned and, after substantial federal investment, a profitable core business was established. However, the analogy with Conrail may be limited because, on the basis of experience in the United States and throughout the world, we have found no evidence that intercity passenger rail operations can cover all costs and generate a return on investment. Therefore, even if privatized, Amtrak will continue to need federal or state funds to meet its capital needs. Even the Northeast Corridor would be difficult to sell to a private firm until the upgrade between New York and Boston is complete and significant repairs have been made to the segment between New York and Washington, D.C. Finally, privatizing Amtrak is not likely to result in successfully preserving a nationwide passenger rail system. Under this option, passenger rail service could be reduced to a few regional corridors because only a few well-traveled routes could ever generate sufficient revenues to cover the substantial operating costs. Amtrak and the federal government face a difficult set of choices. We believe that continuing the present course—the same funding level and basic route system, even with the proposed service cuts—is neither feasible nor realistic because Amtrak will continue to deteriorate. The Congress is confronted with numerous budget decisions that make substantial increases in Amtrak’s subsidy unlikely. If increases are not forthcoming from federal and state sources of funds, Amtrak’s viability may depend on restructuring operations to reduce the route network. Even so, Amtrak will continue to require government subsidies, especially to meet its capital needs. Amtrak and the federal, state, and local governments need to make important decisions about the quality and extent of intercity passenger rail service to be provided and the long-term funding of such an operation. First, the Congress needs to decide on the nation’s expectations for intercity passenger rail service and the scope of Amtrak’s mission to provide that service. These decisions require defining a national route network, along with determining the extent to which the federal government would fund operating losses and capital investments and the way any remaining deficits will be covered. We believe that Amtrak or a temporary commission could provide the Congress with specific options that would define a national route network consistent with the available funding. Finally, once the Congress decides on a national route network, Amtrak could develop and provide to the Congress a long-term financing and operating plan (5 to 10 years). This plan should provide realistic expectations for repairing and maintaining Amtrak’s fleet, replacing aging infrastructure, and meeting increases in expenses that can be reasonably anticipated. In light of Amtrak’s financial and operating problems, we recommend that the Congress consider whether Amtrak’s original mission of providing nationwide intercity passenger rail service at the present level is still appropriate. If the Congress decides to reassess the scope of Amtrak’s mission, it could direct Amtrak or a temporary commission, similar to the one established to close military bases, to make recommendations and offer options defining and realigning Amtrak’s basic route network so that efficient and quality service could be provided within the funding available from all sources. The Congress could then make the final decision on Amtrak’s future route network. To ensure that Amtrak accurately communicates its operating and financial conditions and its need for federal funds to the Congress, we recommend that the President of Amtrak • provide detailed information in federal grant requests on how revenues from intercity passenger service have been estimated; incorporate into federal grant requests dollar estimates of the costs of future accident and weather-related contingencies; • develop and present to the Congress a plan outlining the costs and benefits of participating in high-speed rail service outside the Northeast Corridor, including the impact on Amtrak’s annual grant request; • undertake a comprehensive review and/or audit of the costs associated with its commuter rail and other ancillary activities, identifying the costs associated with these activities, the way these costs are allocated to individual commuter rail contracts, and the overall profit or loss of each activity as well as assessing the appropriateness of any formulas used to allocate costs; and • provide the Congress with proposed legislative changes that could improve Amtrak’s long-term viability, along with estimates of the expected effect of each proposal on Amtrak’s finances and a discussion of the other parties that will likely be affected and to what extent. Amtrak said that our draft report accurately presented the railroad’s financial and operating status and correctly portrayed the corporation’s capital investment problems. However, Amtrak had four principal points. First, Amtrak stated that the draft report understated the impact of actions adopted by its Board of Directors in December 1994 and said the board had, in effect, implemented our recommendation to redefine and reduce the route system consistent with the funding available. We revised our report to specifically highlight Amtrak’s proposed operating changes, including plans to reduce staffing, reduce the frequency of service on some routes, and eliminate service on others. In addition, Amtrak acknowledges that even with the planned service reductions, its operating deficits will exceed operating subsidies by $1.3 billion through the end of the century. While we believe that the new business plan is an important first step, it does not implement our recommendation, nor does it resolve Amtrak’s financial, capital, and service quality problems. Unless sufficient funds are available to support Amtrak’s current operations and provide the necessary capital, we recommend that the Congress reassess Amtrak’s scope of operation and mission and direct either Amtrak or a temporary commission to provide the Congress with options for a route network that is consistent with the level of funding available. Not only do the service reductions announced in the board’s plan still leave a large gap between the deficit and the subsidies from the federal and state governments after 1996, but about a quarter of the planned savings will require negotiations with organized labor and/or legislative changes. Also, Amtrak’s plan does not resolve how the corporation will meet its capital needs, now totaling about $2.5 billion in the Northeast Corridor alone. Although the board set a goal that could ultimately eliminate the federal operating grant by 2002, this was made contingent on Amtrak’s receiving (1) “sufficient capital funding to achieve a good-state-of-repair,” (2) the current level of operating grants until 2002, and (3) increased funding from the states to cover operating deficits for service they receive. These are significant assumptions about funding that will require congressional endorsement as part of the process of defining options for Amtrak’s future route network. Second, Amtrak expressed concern about the timing of our recommendation for a commission because the board’s recent analysis showed that reducing service frequency was more economical than closing routes and because Amtrak is a commercially driven corporation, which should not act like the Department of Defense in making decisions about closures. Amtrak also states that little more can be done beyond the board’s recommendation, short of closing down the national system. Amtrak’s point on timing is well taken if the railroad’s requirements for capital and operating funds for the national system, as presently constituted, are met. If they are not, cutbacks in service frequency and routes beyond those announced by the board will be required. In addition, much of the expected savings comes from reductions in frequency on long-distance routes. Amtrak believes that revenue losses will be minimal because most long-distance train riders are discretionary travelers who are not time-sensitive and, therefore, will adjust their travel plans to accommodate Amtrak’s reduced service level. Unfortunately, Amtrak lacks experience on the effect on ridership of reducing the frequency of long-distance service. Amtrak’s estimates of significant net savings assume that ridership and revenue losses will be minimal. This is an important assumption. With respect to Amtrak’s view that the economics of intercity rail passenger service preclude cutbacks beyond those already planned unless the goal of providing a national system is abandoned, we believe that Amtrak must first define what it means by a national system. If it means a cross-country network of interconnected routes, then it may not be possible to support such a system with the available funds. However, there may be numerous routes, either densely traveled corridors or segments of existing long-distance routes, on which service could be continued with these funds. In addition, with appropriate congressional approval, Amtrak might enter into partnerships with individual states or groups of states to “reconnect” the federally supported parts of the system. As for Amtrak’s reservations about having a commission offer options to the Congress, we recognize that Amtrak could provide the Congress with options for realigning and closing routes, and we explicitly provide for that option in our recommendation. We recognize that Amtrak has superior knowledge of the economics of its operation, and Amtrak’s recent analytical efforts could provide the starting point for considerations about restructuring the system. However, we also realize the difficulties inherent in deciding which states and locations should receive service. Because the commission would be independent, it could help eliminate some of the problems normally associated with reducing service in different areas of the nation. In addition, if the Congress chooses, such a commission could take into account factors beyond revenues and costs, such as highway and airport congestion relief, in deciding how to realign the route network. Third, Amtrak believed that the role of the states in intercity rail passenger service and the need for access to federal transportation funds deserved emphasis in our report. We revised the report to reflect the fact that unlike aviation, highways, and mass transit, intercity passenger rail has no trust fund and that the ability of the states to use the trust funds that exist for other modes for rail is extremely limited. In 1991, the Intermodal Surface Transportation Efficiency Act provided the states with some flexibility to use highway dollars for mass transit, but it did not authorize the direct use of such funds for intercity passenger rail service. Although the states’ access to federal transportation trust funds is a key element of Amtrak’s plan to have the states cover significantly more of the railroad’s costs, it is a policy judgment for the Congress to make whether and to what extent such flexibility should be extended to intercity passenger rail. Amtrak also wanted assurance that we consider the federal funds for Amtrak’s capital needs as an investment and not a subsidy. Our report clearly notes that capital expenditures are an investment. Finally, Amtrak believes that if it is freed from certain legislative restraints, it could operate more as a competitive commercial entity. Amtrak envisions changes to labor laws to give it greater latitude to negotiate on such matters as severance pay, contracting, and work processes. Amtrak also wants (1) an exemption from requirements to pay federal fuel taxes, (2) authority to issue tax-exempt debt, (3) inclusion in a federal transportation trust fund, (4) relief from requirements under the Railroad Retirement Act, and (5) limits on its liability for punitive damages after accidents. We added a recommendation to our report that Amtrak provide its proposals to the Congress, along with the estimated effect of each proposal on Amtrak’s finances and on other affected parties. This information will provide a vehicle for congressional deliberation on the merits of each proposal and allow for consideration of opposing views. Amtrak also provided comments that clarified certain technical information or statements made in a draft of this report. We found Amtrak’s suggestions useful and incorporated these changes in the report where appropriate. Amtrak’s written comments and legislative proposals are presented in full in appendix IV.

Summary: Pursuant to a legislative requirement, GAO reviewed Amtrak's financial and operating condition, focusing on: (1) whether Amtrak can overcome its financial and operating problems; and (2) alternative actions Amtrak could take to meet its future funding requirements. GAO found that: (1) Amtrak's financial condition has declined steadily since 1990 and its ability to provide nationwide service is seriously threatened; (2) although Amtrak's funding has increased to almost $1 billion in 1995, the increase has not been sufficient to cover its operating deficiencies and capital investment, equipment, and facility improvement requirements; (3) although Amtrak has assumed debt, deferred maintenance, and reduced staffing to address its capital shortfall, these actions have diminished the quality and reliability of Amtrak's service; (4) it is unlikely that Amtrak can overcome its financing, capital investment, and service quality problems without significant increases in passenger revenues or funding; (5) Amtrak revenues have suffered from an unfavorable operating environment and intense fare competition from airlines; (6) Amtrak faces additional equipment and facility maintenance costs and must negotiate new agreements with freight railroads to access their track; (7) Amtrak could substantially increase its funding by making capital investments and improving service quality to retain current riders and attract new ones, but this approach would be costly and difficult to achieve in the current budget environment; (8) the privatization of Amtrak is not feasible because few private firms would be willing to assume the risks of providing intercity passenger service; and (9) Amtrak could realign or reduce its current route system and retain service in the locations where it could cost-effectively carry the largest number of passengers.