Is passenger transportation bad business?

Don Phillips is a transportation reporter, and a damn good one. For a good part of his forty-year career, he has written a column for Trains. Don’t take my word for it. You can read his bio here.

For about the past, oh, forty years, he has repeated his opinion that, with the possible exception of cruise ships, transportation of passengers is a money-losing proposition. He recently repeated this opinion in Trains’ August 2017 issue, in the context of his argument that everybody lies to the public about the profitability of Amtrak.

In the world of railroad accounting, however, things are not and have never been as black and white as truth versus lie. Creative accounting, as well as accounting methods sanctioned by government custom and regulation, made it easy to fool even the savviest investors.

Take passenger profitability, for example. By allocating the lowest possible percentage of fixed costs to the passenger side of the business, railroads could make passenger operations look profitable. Another method of doing this was attributing a higher than realistic contribution of passenger operations to freight revenues.

This worked only as long as freight railroads wanted to run passenger trains. Once they did not, attribution of 100 percent of fixed costs of a given line to passenger operations became an unstated goal that would convince the railroad regulators to allow train-offs.

Long traditions of such obfuscation do not go quietly into that dark, empty roundhouse. Amtrak only runs passenger trains, but, by allocating excessive percentages of fixed costs to long-distance routes, Amtrak can make the Northeast Corridor look almost profitable. There’s nothing illegal or even unexpected about this. Accounting rules often allow a corporation to present itself in the best possible light, whether for stockholders or stakeholders. In Amtrak’s case, the latter is Congress, state legislators, local transit agencies and taxpayers.

But Mr. Phillips is both intelligent enough to know this and right in his assertion. Passenger trains do not make money. What passenger railroads, bus lines, and airlines tend to play down when discussing profitability is the level of subsidy each receives.

For the purposes of this argument, let’s define subsidy as unearned money received by the corporate entity that is also often tax exempt, and let’s ignore that this money often, if not always, comes out of the pockets of tax-paying citizens.

Let’s start with bus lines. They use public highways and often, though not always, public terminals built with money collected as taxes at federal, state, and local levels. They have the advantage of all of the amenities of public highways and Interstates, including signaling systems, congestion warnings, rest areas, and the like. While they share their rights of way with other vehicular traffic, they are not required to give way to or wait for “priority” forms of traffic. Bus lines pay taxes, but not in proportion to the cost of use of fixed government assets.

Then there are the airlines. Modern airlines could not function at the current volume and profit levels without the air traffic control system, a federal system that also uses state and local tax money to fund towers and other controls at regional and municipal airports. Consider the federal airways their form of right of way. While airport fees are charges to airlines, they do not cover the cost of construction and maintenance of the airports, but usually only the operations of terminals and baggage handling areas. Most major terminals were built using bonds issued by government bearing interest paid for with tax revenues. The only form of priority air traffic for which airlines must wait is military. Airlines also pay taxes, but again not in proportion to the cost of use of fixed government assets

Compare this with passenger railroads, which are subsidized directly by government entities with taxing authority. Their rights of way are often publicly owned but mostly over privately held rights of way for which corporate owners also pay taxes. They give way to all other traffic, in most cases, belonging to the “host” railroads, and they do not pay taxes on their owned rights of way.

All three modes discussed have aging assets that remain in use and require ever increasing costs to maintain. Don't complain about Amtrak's aging fleet until you look up the age of most airliners!

I think Mr. Phillips has it right. I think, if you were able to gather enough data for each form of transportation and apply accounting methods that were uniform across the forms and that uniformly apply fixed costs where they are incurred, none of them—not one—would make a profit by the definition we all know and love. And we would see that subsidies for all modes of passenger transport are no better, nor worse, for any one of them.

Passenger transportation belongs in the category of public utilities, necessities that are probably more innovative when run by private enterprise, but which must be either regulated or supported by government in order to achieve the public-policy objective of having a vibrant, democratic economy. It’s a pity that Congress can’t see Amtrak in this light, and probably never will.

©2017 – C. A. Turek – mistertrains@gmail.com

(Charles A. Turek is a writer and novelist based in Albuquerque, NM. After four decades working in areas of the insurance industry related to transportation, he now writes on all aspects of American railroading. Charles is a political conservative but believes in public funding of passenger rail as a part of the federal government’s constitutionally conservative obligation to provide for defense and public infrastructure so that private enterprise may flourish.)