In Amtrak’s 2016 Fiscal Year, the US commuter train company transported 31.3 million passengers, which averages out to roughly 85,700 people per day. With more than 300 Amtrak trains in service, the national rail company travels to more than 500 stations in 46 states. While these numbers sound like the work of a robust travel company building its customer base, a sad reality exists for Amtrak. Unfortunately, since its foundation in 1970, the company has never generated a profit. Government subsidies to the tune of $46 billion have kept the company afloat since 1970.
How Amtrak Operates
A convergence of macroeconomic forces, transportation trends, and consumer habits drove the entire passenger travel industry to the brink of bankruptcy in the 1960's. Air travel and the national highway system increased competition against trains. Costs of labor had swelled to unsustainable levels. Outdated regulations and taxes deterred private expansion. And even the United States Postal Service had abandoned the transport of letters and packages on railways, shifting to trucks and airlines as well.
By 1970, two major rail companies went insolvent, the Pullman Company and Penn Central—the latter after one of the worst merger and acquisition disasters of all time.
Congress and President Richard Nixon wanted to ensure the long-term survival of the industry, and in 1970 passed the Rail Passenger Service Act to ensure the continuation of inter-city rail travel. Amtrak was founded as a publicly funded company operated and managed as a for-profit railroad corporation. The company has a de facto monopoly on passenger rail travel, and operates mostly on rails owned and operated by private freight operators. Amtrak does not own the majority of the rails on which it runs, and it must build its schedules in more rural areas around the freight operators who are transporting bulk around the country.
Although operating under one company, it has two different types of service. The first is a national network of routes that comprise distances of 750 miles or less. It partners with 18 states (under 19 operating agreements) to offer short-distance services. The second is a network that connects routes up to 2,438 miles in length. Amtrak has 15 long distance passenger routes and maintains a shipping unit that hauls packages and, occasionally, larger cargo across the country.
How Does Amtrak Make Money?
Amtrak has 300 trains in service, which transport more than 31 million travelers each year. The company’s primary form of revenues come from ticket sales, although its prices would be substantially higher if the US government did not subsidize travelers.
It’s most profitable line runs along the Northeast Corridor. Amtrak’s Northeast service stretching from Washington, DC to Boston accounted for 37 % of its riders, 38% its annual revenues, and nearly all its operating profits, in 2015. It is along the Northeast Corridor that Amtrak owns several hundred miles of track. But its real strategic advantage is that train stations are typically situated in the heart of many metropolitan areas compared to airports, and the brief stops through cities are a much better alternative to driving along Interstate 95. In fact, a train from Washington DC to New York City saves at least an hour compared to driving.
The company’s long distance routes lose money annually and rely almost entirely on government support in order to keep them afloat. There is chatter about the possibility that Amtrak could one day become a private company, and if that were to happen, it is likely that any new owners would cut unprofitable train lines and focus on the company’s most successful lines along the East Coast and the West Coast.
The Bottom Line
The company’s primary competition includes transportation company Greyhound Bus Lines, Inc., in addition to discount and regional airline companies such as Spirit Airlines, Inc. (SAVE) and Southwest Airlines Co. (LUV). And as Congressional pressure ramps up on the public-private partnership of railways, Amtrak will likely continue to rely on public subsidies for its long-term survival.