Planned Growth for Profitability

• Strategy
• Tactics
• Financial Impact (this file)

FINANCIAL IMPACT

Changing Amtrak into a profitable corporation involves application of the concepts of maximum market penetration and optimal use of physical plant.

As an illustration of the impact of under-utilization of physical plant and the diseconomies of scale in present Amtrak operations, the following situation is offered. "National Pacific" operates one train per day over the 300-mile route between cities A and B. Five intermediate stations are located along the route. Two consists are required to make up the train, one set in each direction. Each consist requires five cars and a locomotive. Two coaches and one locomotive are required as reserves to protect the train operation from breakdowns and during repairs, etc. Figure 13 shows the financial breakdown of what happens when a second and a third train are added to this small, one-route system.

                                     One Train        Two Trains    Three Trains

Costs (Annual)
  Direct @ $9.45 / train mile        $2,069,550       $4,139,100      $6,208,650

  Indirect
    Terminals at A and B              1,000,000        1,210,000       1,320,000
    Five intermediate stations          625,000          687,000         749,500
    Maintenance
      Passenger Cars @ $85,000  (12) $1,020,000  (24) $2,040,000  (36) $3,060,000
      Locomotives    @$120,000   (3)    360,000   (5)    600,000   (7)    840,000
    Administrative                      550,000          659,000          769,000
    Subtotal                         $3,555,000        5,196,000        6,738,500

   Sum of Direct and Indirect         5,624,550        9,335,100       12,947,150

Revenues @ $20.05 / train mile        4,390,950        8,781,900       13,172,850
Profit (Loss)                       ($1,233,600)     ($  553,200)     $   225,700

Figure 13. Operating Economies of Scale, Hypothetical Case.

This example shows that while direct costs increase in a linear progression proportional to train miles, the increase in indirect costs is at a much lower rate. The example assumes an operating schedule of 50 miles per hour and a trip time of 6 hours. This schedule might permit one set of equipment to make a round trip and while this would cut maintenance costs by $600,000, the one daily train would still operate at a loss. An accelerated schedule of 60 miles per hour average end-to-end speed would reduce travel time to 5 hours, making single-train operation with one consist or two-train operation with two consists more feasible. If overall average speed could be increased to 70 miles per hour, journey time could be cut to 4 1/3 hours, and if turnaround time were reduced to 40 minutes, then two sets of equipment could provide a service of three trains a day in each direction and generate a profit of almost $3 million. Economies of scale are obvious in increased frequencies of service. They are further enhanced by higher speeds that allow for more effective utilization of equipment.

On the revenue side it is very likely that per train revenues will increase somewhat as the second and third trains are added because greater opportunity exists for cutting deeper into the travel market. This contention is supported by the previously mentioned case of the Los Angeles-San Diego corridor.

The strategy to attain a profit as outlined in Amtrak 90 is to generate revenue faster than common costs rise. When additional trains are placed in service using the same physical facilities, then the ratio of indirect costs to total costs will drop. The application of this idea on an adequate scale can lead to a situation where revenues will eventually cover all costs.

Using the target network projected for 1990, which is based on market potential, and the levels of train service devised to adequately tap that market, operating revenues and direct costs were projected for each year of the eight-year period from 1983 to 1990 (Figure 14).

The data base used for developing these projections was taken from actual 1980 figures reported by Amtrak in its Route Profitability Study.

Daytime medium-distance and short-distance trains have similar operating costs and capacities, so they were grouped together as a single type in these projections. Long-distance and overnight medium-distance trains have higher operating costs because of sleeping facilities and lower revenues-they carry fewer passengers per car (but at higher fares).

Increases in indirect costs were based upon actual staffing needs at stations and servicing and repair facilities and upon an incremental rise in reservations and other common corporate administrative costs. They were prorated on a passenger-mile basis.

An implementation plan is developed in Amtrak 90 for year-by-year additions to the system. Increases in train capacity and addition of new trains and routes takes place in a logical and orderly manner as new equipment becomes available. The plan maximizes use of physical plant. The impact of this staged implementation leading from subsidy requirements to profitability by FY 1989 is portrayed in Figure 15.

Figure 15

Other budgetary impacts are reported in Figure 16. As can be noted, total capital grant requirements are reduced to $4,271 million by subtracting FY 1989 and FY 1990 profits of $389 million from the eight-year capital costs of $4,750 million. After 1990, profits will cover capital as well as operating costs.

Figure 16. Projected Financial Performance, 1983-1990.

Planned Growth for Profitability

• Strategy
• Tactics
• Financial Impact (this file)