U.S.: Stephen Gardner’s Amtrak isn’t growing and may be shrinking with no way out as it seems to follow a false interpretation of federal law Stephen Gardner himself wrote

By Andrew Selden, Guest Commentator; May 23, 2022

It is widely acknowledged that if a business is not growing, it is dying.

Amtrak, ostensibly the nation’s intercity rail passenger business, has cleverly painted itself into a corner where it cannot grow, no matter what demand arises and no matter how it might want to respond. How could it achieve that implausible position?

Photo provided.

Nearly 15 years ago, congress adopted the Passenger Rail Investment and Improvement Act of 2008 (PRIIA), one in a long series of reauthorization laws enabling Amtrak to continue its existence and receive its annual subsidies under separate appropriations bills. Amtrak’s current CEO, Stephen Gardner, who was a congressional committee staff employee at the time, is widely believed to have crafted the legislation. The legislation enacted what has come to be called “the snapshot” defining Amtrak’s skeletal national network of passenger train services as consisting of three parts: the Northeast Corridor (Boston-New York City-Washington, D.C.); non-NEC routes shorter than 750 miles; and routes 750 miles and longer.

The treatment under the law of the three segments differs significantly.

Amtrak’s trains in the NEC are 100% federally-subsidized, including the mostly Amtrak-owned railroad over which they operate. The NEC’s railroad is consistently the big nut for Amtrak because the infrastructure in the NEC—its track, bridges, tunnels, large urban stations, proprietary electric power system, shops and yards, and certain other costs—consistently costs far more than its trains produce in revenue. In a typical pre-Covid year, the infrastructure costs came to nearly $2 billion, of which the federal subsidies would cover about 75%, with the last 25% kicked down the road as “deferred maintenance and purchasing,” because Amtrak simply cannot pay out dollars it doesn’t have, even on critical infrastructure upkeep.

These deferrals are disguised in Amtrak’s reports as “budgeted but unspent ‘capital’ ” items. Translation: fixed facility upkeep work and materials purchases that were legitimate and important enough to have been incorporated in formal annual spending budgets, but for which Amtrak ran out of cash before the work could be done or the materials purchased. The sum of decades of such deferrals is the current (acknowledged) “state of good repair” deficit, totaling in 2022 about $42 billion.

Amtrak’s NEC trains in the last pre-Covid years generated almost, but not quite, enough to cover their own direct operating costs—direct train crew and station labor, police, electric power consumption, ticketing, insurance, food and beverage losses, shop operations, etc. The difference between revenue and operating costs, amounting to several tens of millions of dollars a year, pre-Covid, is also made up with federal subsidies.

States served by Amtrak’s NEC trains contribute nothing to their operating or fixed facility deficits.

The second segment of the national network was defined as routes outside the NEC of less than 750 miles; in practice, however, most of these trains operate over much shorter distances of 200-300 miles. The law directed Amtrak to develop a consistent basis for assigning costs to these routes so that states (or hypothetical other sponsors) who contracted with Amtrak to operate regional corridors would have a single, uniform, costing system to determine costs for which the sponsoring state would be contractually obligated.

The law does NOT prohibit Amtrak from operating such routes itself for its own account, although Amtrak immediately interpreted the law (falsely) as prohibiting it from operating such trains unless subsidized by a sponsoring state so that Amtrak recovered from the sponsor its “fully-allocated costs” of operating each such service.

Amtrak also (falsely) interpreted the law as allowing it to impose APT (“Amtrak Performance Tracking”), its own internal Rube Goldberg cost allocation system (which is not compliant with Generally Accepted Accounting Principles and is never audited) on states that choose to hire Amtrak to operate state-sponsored trains.

Under Amtrak’s scheme, states outside the NEC pay 100% of whatever Amtrak says a state-sponsored train costs, net of whatever Amtrak says its revenues are. Amtrak refuses to operate any train over a route shorter than 750 miles outside the NEC unless a state pays the costs Amtrak assigns to it.

The result is that non-NEC corridor trains incur modest operating and infrastructure (station and shops but no railroad upkeep) losses paid by sponsoring states, while Amtrak’s NEC trains incur modest operating losses and huge infrastructure and fixed facility costs that are 100% federally subsidized.

States like Illinois, California and North Carolina pay twice—for their own trains plus a contribution to the NEC trains—while Pennsylvania, New York and Massachusetts pay nothing for any of the scores of Amtrak trains on the NEC spine (but do for trains on regional and branch lines, like the Harrisburg branch and the Springfield shuttles).

The federal legislation offers no rationale for the prejudicial, disparate treatment favoring one small group of states over the rest of the nation. Hardball politics and the fact that only a small group of northeastern members of congress pay close attention to Amtrak may be the complete explanation.

The third category of trains in the “snapshot” consists of trains that operate over routes longer than 750 miles. These are the 15 inter-regional routes served by “long distance” trains, usually equipped with coaches, sleeping cars, and in most cases dining cars and café/lounge cars, because passengers using these services are travelling much longer distances over much longer time periods. Amtrak operates most of these routes with only one train a day in each direction; two inter-regional routes have service only three days a week, and the Atlantic Coast corridor (pre-Covid) had four trains a day. On average, passengers using these services are on board over three to five meal periods, although on average first class (sleeping car) passengers ride over much longer distances.

Amtrak’s inter-regional Empire Builder. Photo courtesy of Dennis Larson.

Contrary to Amtrak’s propaganda, this is Amtrak’s largest and most commercially successful segment, consistently producing the most transportation output, the highest return on invested capital, and having both the greatest load factor (percentage of available seat miles sold to paying customers) and in their respective travelsheds the highest market share of intercity passenger transport of any trains Amtrak operates.

Inter-regional trains are operated at 100% federal cost for any difference between revenues and costs. As a group, these trains consistently earn a large positive annual cash flow, before Amtrak assigns shares of various system costs that are, for the most part, not incremental to the operation or discontinuance of any of these trains.

Amtrak (falsely) interprets the PRIIA language as limiting it to operating only the inter-regional routes in service at the effective date of the law. In fact, the statutory language is NOT prescriptive on this point, but merely descriptive. The law could just as easily be interpreted as a “floor” rather than as a “ceiling,” simply prohibiting Amtrak from reducing or eliminating any of the routes in service at the effective date of the law, without first complying with a specific service reduction procedure that is prescribed by law.

This brings us to the vital issue of growth. Amtrak is not growing. Even before the Covid epidemic, Amtrak’s national share of intercity passenger travel was both tiny and shrinking, in a steadily expanding U.S. market for intercity travel. This was especially true in the first two PRIIA market segments, the NEC and the sub-750 mile regional corridors, where Amtrak’s trains could never sell more than half their inventory of available seat miles (and many routes were far below that).

In the post-Covid world, demand for intercity rail passenger transport snapped back strongly in inter-regional markets, but lags badly in shorter corridor markets, most notably in the NEC.

But let’s assume for discussion purposes that demand was present and growing in all three of Amtrak’s business segments: the NEC, regional corridors, and inter-regional markets. What could Amtrak do to respond to that demand, do what it is chartered to do, and grow its business (perhaps in the process mitigating its chronic losses and dependence upon federal subsidy)?

The answer, according to Amtrak’s senior management, is: “Nothing.”

According to Amtrak’s willful misinterpretation of the PRIIA law, it cannot grow anywhere, except in the one segment of its business where it is already heavily overinvested and experiencing its softest demand, the NEC. So if demand were to grow in the NEC, Amtrak could respond with whatever new services congress was willing to subsidize. And for what appear to be largely political reasons, Amtrak continues to expand capacity in the NEC that it cannot sell.

In other regional corridors, Amtrak cannot grow, because it says it cannot serve such markets without a state sponsor to cover whatever Amtrak says the trains lose on a fully-allocated cost basis.

While states outside the Northeast are increasingly interested in sponsoring regional services, they are decreasingly interested in hiring Amtrak to run the trains, due to Amtrak’s opaque, arbitrary and inconsistent cost allocation practices.

Amtrak’s internal route accounting and cost allocation systems in fact are incapable of performing, and do not provide, incremental cost analysis to evaluate proposed new services, such as adding trains, or even adding cars to existing trains. 

The key here is that Amtrak says it cannot run a sub-750 mile train outside the NEC unless it has a state sponsor to cover whatever Amtrak says its “fully-allocated costs” are. Even facing strong growth in demand, Amtrak says its hands are tied—it cannot and will not add service on its own, and will immediately discontinue service if a state ceases subsidizing it.

Because of this interpretation, combined with Amtrak’s uniform experience of poor commercial performance in these markets, Amtrak’s sole interest in new sub-750 mile markets is finding state sponsors willing to pay inflated “fully-allocated” costs assigned by an arbitrary, opaque, unaudited and non-GAAP costing system. The list of such states is small and shrinking.

Amtrak’s “ConnectsUS” scheme (to develop new short corridors at initial federal cost but only subject to state sponsorship and a phase-in of full state subsidy) is neither a serious nor sincere plan because (a) it won’t work for routes that cross a state border, and (b) it relies on the APT costing system with its many flaws.

It’s really a sophisticated money-laundering scheme to generate cash for the bottomless “needs” of the NEC infrastructure. The New Orleans-Mobile test case shows the economic folly of this idea with its plan to invest $100 million to start up a corridor that will lose $7 million a year on operations, for a market share too small to measure.

In inter-regional markets longer than 750 miles, where actual output and potential growth are the largest, Amtrak also cannot grow because it (falsely) claims that under the PRIIA “snapshot” it cannot add a new 750+ mile route without express congressional authorization. Between that excuse and the false assertion that it cannot operate shorter corridors without state sponsorship, Amtrak could not so much as interconnect two existing inter-regional routes, no matter how much new, marginally-profitable, business that might produce. And, according to Amtrak, a new inter-regional route is out of the question.

Amtrak, in short, has dug itself into a rather deep hole. The practical effect is that all future growth in the national network of intercity rail passenger services will have to come from non-Amtrak providers.

States can just as easily contract with any number of available service providers to run regional corridor trains as with Amtrak. They have strong incentive to do so, as Amtrak—through the experience of several contracting states, and several competitive regional rail contract bidding processes—is the high-cost, opaque, difficult partner. Host railroads have already shown willingness to contract with third parties for the operation of passenger trains on their lines, using railroad labor (as in the case of Minnesota’s Northstar regional rail service) or qualified third party labor (as in the case of Rocky Mountaineer, and others).

Minnesota’s Northstar regional rail service. Photo courtesy of Dennis Larson.

It once seemed less likely that states would sponsor an inter-regional service, but even that may no longer be true as we see happening with a new regional rail authority in Montana exploring restoration of inter-regional (and more than 750-mile) service across the southern tier of Montana. Once that succeeds, others are sure to follow, given Amtrak’s stubborn resistance to innovation and growth. Indeed, according to Amtrak’s own dogma, they are ineligible even to bid for the Montana business: because the route exceeds 750 miles, it lies outside the PRIIA “snapshot.” Amtrak cannot contract with Montana to operate the train as a state-sponsored sub-750 mile route, it cannot add it as a new inter-regional route without federal approval, and no authority exists to operate a state-sponsored route longer than 750 miles.

Competition in providing consumer goods and services is always a good thing. For intercity rail passenger transport services, Amtrak—however inadvertently—has assured that such competition will arise in response to growing demand that cannot be satisfied by Amtrak. The country will be better off for it.

About the author:

Andrew Selden of Minneapolis, Minnesota is President of United Rail Passenger Alliance and Minnesota Association of Railroad Passengers. Mr. Selden is a retired nationally known franchise law attorney and is the author of a book and numerous scholarly articles on the subject.

Andrew Selden

In a 1998 Amtrak Board of Directors vote, Mr. Selden lost out to George Warrington to become the new CEO of Amtrak.

In January 1986 Trains Magazine published Mr. Selden’s article “How to get Amtrak out of the woods.” Editor David P. Morgan labeled Mr. Selden “The dean of pro-passenger Amtrak critics.”

The biographical information for Mr. Selden accompanying the 1986 article said, “Andrew C. Selden … graduated Magna Cum Laude from the University of Minnesota Law School in 1971… A lifelong railroad enthusiast (a painting of the running gear of a streamlined NYC 4-6-4 hangs on an office wall), he became seriously concerned with Amtrak’s future after the 1979 route cutbacks of the Carter Administration. … Selden has taken issue with Amtrak accounting procedures and management/marketing strategies in numerous privately circulated white papers. His “The High Cost of Amtrak Accounting,” a three-part analysis co-authored with. Dr. E.P. Hamilton III, a Texas professional engineer, appeared in the August/September, October, and November 1984 issues of Passenger Train Journal, and elicited a feature-length response by Amtrak Vice President-Corporate Planning and Development Timothy P. Gardner in February 1986 PTJ. Selden gratefully acknowledges the technical assistance of the Surface Transportation Systems Institute, Nordberg-Herzog & Associates, Inc. and The Balcones Group in preparation of this (1986) article for Trains.”

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