By Andrew Selden, Guest Commentator; August 30, 2021
If congress chooses to appropriate new capital to develop intercity passenger rail in the U.S., that capital should be invested:
- In intercity, not commuter, services;
- In a manner that maximizes the return on investment;
- To maximize growth in the use and output of intercity services measured in incremental passenger miles of output; and
- To maximize the scale of the national network of interconnecting routes.
INTERCITY vs COMMUTER SERVICES
Commuter (transit) rail services are defined, managed and funded differently from intercity services. The US Bureau of Transportation Statistics defines “intercity” in terms of travel that is non-recurring and over distances greater than 100 miles. New capital intended for intercity rail passenger development should be allocated to train services catering to passengers traveling over distances greater than 100 miles and on a non-recurring basis.
Markets where more than half of passengers are making short or recurring trips by definition are predominantly commuter (transit) services, not intercity, and should be analyzed and funded as such, not as intercity services.
RETURN ON INVESTMENT
New federal capital for intercity passenger rail development should be invested in a manner that maximizes the volume new rail passenger output per dollar invested, to achieve the highest rate of return on the invested capital.
Investment of federal capital in intercity services should use metrics that capture adequately that the capital is being used effectively and efficiently for the intended purpose. Where a service exists for the purpose of carrying passengers (other than commuters) between cities, the number of riders does not capture the distances over which they are carried. Only a metric that captures distances the riders are carried accurately reflects the volume of transportation service provided.
Intercity passenger services in any mode, and especially rail, measure the amount of transport that they produce in terms not of the number of sale transactions (“ridership”) but the volume of output (“passenger miles”). Airlines, for example, never measure or report their performance by their “ridership,” but by their passenger miles, and load factor. Transit services, by contrast, often use ridership, because fares differ little (if any) between customers, and distances traveled are not measured.
Any new capital allocated to intercity rail passenger services, accordingly, should be invested where it will produce the greatest number of new passenger miles of annual output per dollar invested. Any other use of capital is effectively squandering the capital and the opportunity, by investing it at less than the optimal rate of return.
The simple test for whether any given rail passenger service is already over-capitalized is if it is producing more capacity than existing demand warrants. Trains that are chronically under-utilized (measured by annual load factor, or the percentage of annual available seat-miles that are sold as revenue passenger miles) do not warrant more capital investment, and such investment will not produce any growth.
Trains that are turning away passengers for want of carrying capacity, by contrast, are under-capitalized. Where demand exceeds capacity, shown by higher load factors, additional investment is warranted. Services that have a high potential for growth in output are also undercapitalized if they are incapable of capturing the growth for lack of carrying capacity, or lack of scale in their network. (Trains that are chronically under-utilized, shown by low annual load factor, are incapable of growth, because if growth were to be had, it would already have been captured, and the load factor would not be chronically low.)
FINANCIAL RESULTS OF OPERATION
Some railroads manipulate their financial reports to conceal the real financial results of operation. For example, reports that omit significant categories of costs, such as the annual costs of upkeep on fixed facilities—track, stations, bridges and tunnels—are inherently both false and deceptive. All costs required to sustain a train service must be honestly accounted for and reported in order to understand whether capital is being well-used, or not. Without that information, it is impossible to gauge whether capital has been well used, or even earned a positive rate of return on the investment.
Train and route-level reports of financial performance should conform to generally accepted accounting principles, and be honestly reported in accordance with Securities and Exchange Commission standards for issuers of publicly traded securities. Anything less is not trustworthy. Any recipient of federal capital support should meet these basic standards. Amtrak never reports its trains’ results in this manner.
In all transportation systems, both transit and intercity, the scale of the network determines its through-put. Isolated single point-to-point services generate some use, but the total output of a system climbs exponentially as its legs are interconnected into a network. This reflects a good use of capital due to the leveraging effect of the network.
Small additive expansions of a network drive exponential growth within the network. This effect can be observed in telephone systems, urban freeways, airline hub-and-spoke systems, and the internet. The same effects occur in intercity passenger train networks: the more its routes are interconnected, the greater its growth and output. Longer routes that interconnect more stations show network effects just within the route; longer routes are inherently stronger performers in leveraging capital investment to generate the most passenger miles per dollar invested. Interconnecting longer routes produces the highest output and return on investment, per dollar invested.
New federal capital for intercity passenger rail development should be prioritized to expanding the national-scale network of services, to maximize usage and return on investment, not to develop isolated, short, point-to-point routes. That would be the least productive possible use of capital.