Amtrak, which is officially called The National Railroad Passenger Corporation, is a passenger railroad provider that runs short-distance (under 750 miles) and long-distance trains between more than 500 destinations in 46 states and in three Canadian provinces. It operates more than 300 trains daily over 21,400 miles of track. Amtrak only owns about 623 miles of this track. The rest are owned by a variety of other “host railroads,” private companies that Amtrak pays to use their tracks.
- Amtrak is a state-owned enterprise. This means that Amtrak is a for-profit company, but that the federal government owns all its preferred stock.
- Amtrak made $3.5 billion in 2019 and shrunk its loss by 82.8% YoY.
- Amtrak provides rail service to over 500 destinations in 46 states and three Canadian provinces.
- Amtrak transported 32.5 million people in 2019. That's 89,000 every day.
Amtrak was founded in 1971 as a state-owned enterprise when the federal government stepped in to save an American rail industry that had been pushed to the brink of collapse by a host of macroeconomic forces. By the 1960s, the proliferation of air travel and highways increased competition in the civilian transportation industry to unsustainable levels for rail companies. This, combined with rising labor costs and outdated regulation that deterred private expansion resulted in the U.S.’s two largest rail companies, Pullman Company and Penn Central to declare bankruptcy by 1970. The Nixon administration intervened and Amtrak was the result.
Amtrak receives considerable subsidies from both a state and federal governments, but is managed as a for-profit company. This is not unusual. No country in the world operates a passenger rail system without public support. That said, Amtrak’s “for-profit” status is sadly ironic. The train company has never been profitable since its founding nearly fifty years ago. It is only thanks to its subsidies, which over the years amount to over $45 billion, that the provider has survived.
Given its chronically unprofitable history, 2019 wasn’t a bad year for Amtrak. Amtrak earned $3.5 billion in revenues last year, which was up about 3.4% YoY. More importantly, the rail provider’s losses shrunk by an impressive 82.8% YoY.
The Business Model
In 2019, Amtrak served 32.5 million passengers, over 89,000 every day, while employing more than 18,000 people. A recent study showed that almost two-thirds of passengers come from the 10 largest metropolitan areas and 83% of passengers travel on routes shorter than 400 miles. According to the company's annual report, ticket sales from these passengers make up the bulk of Amtrak’s revenues. Amtrak also makes money by leveraging its infrastructural assets.
76% of Amtrak’s revenues in 2019 came from ticket sales and roughly 80% of that came from short-distance trips. This means that ticket sales from short-distance lines are the bread and butter of Amtrak’s business. One of these lines in particular, the Northeast Corridor (NEC), which runs from Washington D.C. to Boston, is vitally important to Amtrak’s financial survival. In 2019, this line accounted for 38% of Amtrak’s passengers, 56% of its total revenues and almost all of its operating profits. 6 of its 10 busiest stations are along the NEC. To give you an idea of how heavily Amtrak relies on this line, consider that the first section of the “Principle Business” section in the company’s annual report is dedicated to the NEC.
Amtrak operates on 21,400 miles of track but derives 56% of its revenues from the Northeast Corridor, which is only 457 miles long.
Relative to the NEC, all of Amtrak's other lines are small potatoes. Ticket sales from all of Amtrak’s other short-distance lines, including the Pacific Surfliner in California, the Amtrak Cascades in the Pacific Northwest, and the Hiawatha and Lincoln lines near Chicago, accounted for only 23% of Amtrak’s 2019 total revenue.
Amtrak’s long distance lines are its least profitable, making up only 21% of the company’s 2019 total revenue. It is also the slowest growth segment of Amtrak’s business. Short distance ridership was up about 4% last year, but long distance ridership went up by only 1.7%.
Ticket prices for Amtrak trains range anywhere from $6 to $1000, depending on the trip. However, prices for Amtrak’s most popular routes average around $140.
State and Federal Subsidies
Amtrak receives funding from 21 state agencies and 18 states to support its short-distance lines (all except the NEC). 47% of all Amtrak trips last year took place on state-funded lines. In total, Amtrak received $234.2 million in state subsidies last year, which amounts to 7% of its total revenue.
Furthermore, Amtrak received roughly $1.8 billion in federal grants in 2019. In its annual report, however, the company does not consider these subsidies revenue. These funds are part of the $8.1 billion sum that the Fixing America's Surface Transportation (FAST) Act of 2015 allocated for Amtrak to use between 2016 and 2020.
The amount of money Amtrak received from the federal government between 2016 and 2020.
Leveraging Infrastructural Assets
Amtrak derives the remaining 24% of its revenue, $837 million, from an assortment of business activities related to the infrastructure it owns. Amtrak owns 623 miles of NEC track as well as station structures, platforms and parking facilities near some of the 526 stations it serves. Amtrak leverages these assets by charging freight train and commuter train companies to use its track, and by charging access to and/or development of its stations, platforms and parking lots. Revenues from this segment of Amtrak’s business grew by 4% YoY in 2019.
Despite its heavy reliance on state subsidies and inability to turn a profit, Amtrak is growing, and it has big plans for the future. In the face of the changing economy and climate, Americans are increasingly eschewing cars and airplanes from more efficient and environmentally friendly modes of transportation. This trend bodes well for companies like Amtrak. To capitalize on this trend, Amtrak’s must make quick progress toward its primary goal; replacing its aging fleet.
New Acela Express Trains
Amtrak’s most important assets are its trains, and Amtrak's most important trains are its Acelas. These high-speed trains travel up to 150mph, making them the fastest trains in the western hemisphere, and generated $642 million in revenue for Amtrak last year. However, like most of Amtrak’s fleet, its Acela’s are getting old. The company’s fleet of 20 Acelas has been in service since 2000.
In 2016, Amtrak announced plans to build a new fleet of 28 Acelas by 2021. All of these trains will be put to work on the NEC line, its most frequent trips being between Boston and New York, which is likely to remain Amtrak’s most popular route.
The top speed of Amtrak's Acela trains, the fastest trains in the western hemisphere.
In 2018, Amtrak awarded Siemens Mobility, a subsidiary of the German conglomerate that manufactures traffic systems and railway technology, an $850 million contract to build 75 new passenger diesel “Tier 4 locomotives." These trains travel up to 125 mph and are meant replace aging trains used for regional travel. Many of the soon-to-be-replaced trains have over 25 years of service.
Aging trains are a huge problem for Amtrak’s public image, which has undergone serious damage due to the company’s poor safety record of late. There have been eight serious crashes or derailments in the past five years alone.
In response to these shortcomings, Amtrak has is implementing what it calls the Positive Train Control (PTC). The PTC is a communications network that combines GPS, radio signals, data centers and dispatchers to closely monitor the status of every Amtrak train, all the time.
Extending the Network
Amtrak is working to extend its reach into some of the fastest-growing regions of the United States, i.e. the South, Southwest and Mountains States. Recently the rail provider added stations in Virginia and North Carolina. Going forward, Amtrak will also extend its NEC further into Maine and plans to lengthen its Southwest Chief long-distance line to Colorado.
Keeping Prices Down
To improve its competitive edge over busses, air travel and private cars, Amtrak must keep its prices down. This won’t be easy, even with government subsidies. As it stands, Amtrak tickets are generally cheaper than flights, but still cost considerably more than busses. For instance, it costs at least $55 to take an Amtrak from Boston to New York, but a bus starts at $14.
Amtrak's high prices are attributable to a confluence of factors that make the rail business extremely costly in the United States. Amtrak’s trains are old and thus depreciate quickly, are costly to maintain, and require significant investment to replace. Volatile oil prices have increased Amtrak’s expenditure on fuel in recent years, and poor track coverage and maintenance decrease Amtrak’s reliability, making it harder for the company to justify higher prices.
Amtrak must keep its ticket prices low to compete with busses, air travel and private cars.
NEC Repair Backlog
Amtrak’s cash cow, the NEC, is approaching the limit of its capacity. Unfortunately, the price tag for the corridor's urgently needed repairs and infrastructure expansions, which include massive tunnels and bridges as well as general maintenance, is a whopping $45.2 billion. If Amtrak fails to secure this astronomical amount of funding, the NEC will begin to face increasingly serious operational constraints while its ridership increases. Of all the challenges Amtrak faces, this one may be its achilles heal. If NEC ridership begins to buckle, so will Amtrak’s cash flow.
Federal Funding Cuts
Due to its status as a state-owned enterprise, Amtrak’s survival is ultimately up to the federal government. And, perhaps unsurprisingly, the Trump administration seems happy to let Amtrak fail. The Trump administration’s current budget for FY 2020 proposes a dramatic 53% reduction in grants for Amtrak. A cut like this could be no less than catastrophic for Amtrak. Thus, it’s not an understatement to suggest that Amtrak’s future hinges on the election of a democratic president in 2020.