INTRO: Tasked with eliminating operating subsidies by the end of 2002, America’s national passenger operator has abandoned its long-standing policy of cutting costs in favour of growing revenue. Backed by computer models showing widespread benefits, Amtrak has launched an ambitious strategy to boost passenger and freight revenue by increasing services over the next three years
THIS MONTH will see major alterations to the US national passenger network, with the start of Amtrak’s summer timetable on May 21. Extra services and route changes are the first fruits of an aggressive expansion plan announced by Amtrak President &CEO George Warrington on February 29 (RG 4.00 p203).
Enhancing rail services in 21 states, the so-called Network Growth Strategy is part of the corporation’s drive to eliminate federal operating subsidies. Under the 1997 Amtrak Reform & Accountability Act, Amtrak must be self-sufficient by the end of fiscal 2002 - the financial year to September 30 2002. Amtrak insists it is on course to achieve this goal, having surpassed its business plan targets for the last two financial years and the first quarter of 1999-2000, although a recent report from the Amtrak Reform Council cast doubts on the corporation’s accounting (RG 3.00 p133). The growth strategy is expected to add another $65m a year to its profits from 2003.
’The Network Growth Strategy builds on Amtrak’s financial success over the last two years, but it is grounded in the understanding that we can never grow complacent’, said Wisconsin Governor Tommy Thompson, Amtrak’s board chairman. ’Amtrak must constantly search for new market opportunities and keep on growing - just like any other business. And like other businesses, we are using state-of-the-art commercial tools and analysis to increase our market share and improve efficiency.’
In the face of declining subsidies, Amtrak introduced major service cuts in April 1995 and May 1997, although some trains were saved by political pressure. But Warrington now admits that this policy backfired. ’We nickeled-and-dimed ourselves into a downward spiral’, he told the Philadelphia Inquirer. But ’the revenue we lost exceeded the amount we saved.’ Thompson agrees: ’we tried to shrink into profitability, and it was a disaster. We have spent over a year going through each one of our routes. We’re confident that we’re going to be able to expand the service and increase profitability.’
Warrington recognises that going for growth will require improvements in service quality: ’we know what we can do. We’re going to get our service quality right. We’re going to establish a national system that works. And that’s a massive departure from the mental state that has surrounded Amtrak for 25 years.’
Warrington remains confident that Amtrak can eliminate its operating subsidies by 2003, despite the continuing delay in introducing its 240 km/h Acela Express trains on the Northeast Corridor. Ridership on the first two Boston - Washington Acela Regional trains, launched on January 31, was up by over 35% after the first month.
The Network Growth Strategy was immediately endorsed by President Clinton, who met members of the Amtrak Board on the day of the announcement. Pledging his support for full funding of passenger rail services, Clinton called on Congress to pass his $989m budget for Amtrak in fiscal 2001. The president also reiterated his strong support for the development of high speed rail corridors.
Developing the strategy
Amtrak has been working with consultants KPMG to develop models to test in depth the economics of various routes and assess potential for growth in passenger, mail and express parcel revenue. This underpins the entire growth strategy, which envisages an airline-style network of hubs and feeder spokes. Warrington also plans to copy airline fare structures, including discounts for advance purchases and higher prices for last-minute travellers.
Amtrak and KPMG considered hundreds of route scenarios, including the elimination of under-performing routes (below). However, the analysis revealed that the loss of direct revenue from a single poor route, combined with the loss of connecting revenue for both passengers and parcels traffic, exceeded the marginal cost savings. Unlike previous consultants, KPMG recognised that Amtrak’s financial strength is derived from its interconnected network that can be used as a strong base to build revenue.
The Network Growth Strategy envisages an expansion of long distance passenger services by around 10%. During the initial phase, Amtrak will expand 11 routes and run extra trains on three others, increasing ridership by 7% and passenger-km from 8·5 to 10·8 billion. A new hub will be created at Fort Worth, with trains to New York, Chicago, Los Angeles, Orlando, Oklahoma City, and possibly to Mexico in the future.
The strategy is designed as much to add mail and express business as passenger revenue. All the new or modified routes are seen as having major freight potential. But even if Amtrak achieves its targets, it will only be handling 0·13% of the total US freight tonne-km. Reflecting the controversial 1998 ruling by the Surface Transportation Board that expanded Amtrak’s authority to carry mail and express, Warrington describes that figure as ’a rounding error’ posing no threat to the other rail operators. Amtrak hopes to create a ’partnership with the freight railroads covering the network expansion, but has still to agree terms.
Mail & Express takes off
Non-passenger business has been growing strongly ever since the 1998 ruling (RG 7.98 p450), and in fiscal 1999, revenue increased by 18% to $98m. Growth was particularly strong in the last two months, as additional equipment came on stream, and the company expects further growth in the current year.
Express revenues grew by 93% in the year, as Amtrak formed strategic alliances with freight railroads including BNSF and Norfolk Southern, the Mark VII company and premium road haulier Swift. Mail revenue, primarily the movement of periodicals for the US Postal Service, grew by 9% as Amtrak introduced more direct services linking the USPS area distribution centres. Warrington hopes to target first-class mail in the future.
Vice-President, Mail & Express, Ed Ellis estimates the US logistics market to be worth over $200bn. He insists that ’Amtrak’s continued investment in Mail & Express equipment and facilities underscores its commitment to serve that portion of the market that requires expedited service and is transported at premium prices.’
On November 15 Amtrak confirmed its move into the refrigerated produce market, signing a 15-year agreement with Michigan-based ExpressTrak, following the success of a pilot programme. Last month was due to see the entry into service of the first of 350 refrigerated boxcars being rebuilt to carry fresh produce at passenger train speeds. All are due to be delivered by the end of 2001.
ExpressTrak specialises in moving produce such as fresh fruits and vegetables and other temperature-sensitive commodities. Using Amtrak’s regularly timetabled services running at up to 145 km/h will enable the partners to offer time-competitive deliveries on long-haul routes, particularly on city centre to city centre journeys.
As well as new services, Amtrak is investing heavily in terminals and rolling stock. During 1999 new terminals were opened in Los Angeles, Seattle, Springfield Massachusetts, and Harrisburg, Pennsylvania.
A $3m Mail & Express terminal in Chicago was officially dedicated on December 10. Augmenting the existing facilities at Chicago Union Station, it is expected to become one of the busiest hubs on the network. The largest Amtrak-owned terminal, it has eight covered railcar docks, seven covered lorry docks, and 370m2 of enclosed space for heated storage and offices.
Last year the Board approved the purchase of another 200 RoadRailers and 100 Express boxcars to augment the existing fleet of 456 RoadRailers and 250 boxcars. Over 200 privately owned RoadRailers have now been approved to run in Amtrak trains. Up to 4 000 more boxcars and RoadRailers are to be bought or leased as part of the Network Growth Strategy. Building on the ExpressTrak agreement, many of these vehicles will be refrigerated for the movement of perishable traffic including meat.
Hub-and-spoke operations
Reinforcing the network effects identified in the computer modelling, the Network Growth Strategy will strengthen connections between services at major hubs such as Chicago and Fort Worth. This should make the passenger services more attractive, but more crucially will create twice as many through routes for Mail & Express traffic than at present. In addition, interconnection of services will allow for a more efficient deployment of locomotives and rolling stock.
Warrington expects the new network to make Amtrak more competitive. ’A larger, better connected system of trains [will] provide greater choices for travellers and shippers of time-sensitive express’, he insists. The first route changes should take effect this month, with more following in October. Some schemes will not come on stream until 2002, pending completion of track upgrading works.
The growth strategy envisages:
