You have quoted yourself and mixed my comments in with your comments.
My argument is simple. Don’t offer discounts unless they cover the variable costs up front and ultimately all or most of the fixed costs. Sometimes a business will offer a loss leader if it has other product lines to make up the difference, or the discounts can be used to hook loyal clientele that will subsequently carry the note. This is especially true for many start-up businesses. This is what I said or at least mean from the get go.
As noted the key point with respect to Amtrak’s premium services (Acela, business class, sleepers, etc.) is whether the pricing covers the incremental costs. Without access to Amtrak’s books, it is impossible to know. It may be worth remembering, however, that in its 2005 report the IG found, amongst other things, that the subsidy for Amtrak’s sleeping car passengers was greater than the subsidy for it
Sam1…don’t play Amtrak or any business for being stupid about what they have to do to stay in business when making contracts and rate. Of course they know they have to get enough to cover costs and add something to the kitty…Stop making them out to be idiots because they aren’t!
Over the past four years Amtrak has lost approximately $1.2 to $1.3 billion per year. Outside of a few budget hawks, most people, by their silence, appear to find this acceptable.
Most Americans don’t use Amtrak. In FY11 only .13 per cent of intercity passenger miles was by train, as per Table I-40, National Transportation Statistics. For those who use Amtrak, most of the people that I have encountered don’t understand how it is funded.
In FY10 the average federal Amtrak subsidy was $ $15.50 per taxpayer. The average tax bill for a median income family was $4,828 as per IRS Table 1.1. Needless to say, that did not register for most taxpayers and, therefore, did not raise any concern about Amtrak’s federal subsidy.
Amtrak requires approximately $1 dollar of federal and state subsidy for every $2 of revenue. Could privatizing Amtrak generate a better result? That is a key question. Covering all of the variables associated with this issue is beyond the scope of this thread. Or maybe even these forums.
The long distance trains cannot generate enough revenue to cover their costs. Depending on how much additional capital is plowed into the NEC and how quickly it is amortized, it could cover all of its costs in time. Interestingly, as I plan to show later this year, after the FY13 numbers have come in, many
In re the above, take a look sometime at Ken’s (greyhound) reasoning on offering differential rates on the same route and distance on freight lines. The airlines do the same. Ditto with Megabus. It is better to fill a seat or car at a bargain fare then to let it sit empty. Some customers might object, but it is a sane practice in a deregulated market.
Sam1: From your elaboration it then seems that you side with the people who would prefer to see no government funding of Amtrak and hence Amtrak ceasing to exist. Unless a private knight in shining armor steps in and magically starts running passenger trains for profit.
Personally, I have nothing against $15.50 of my federal taxes going to fund Amtrak. There are many wasteful things funded by government at all levels, but passenger rail as such is not one of them.
I am all for running things efficiently and I am sure there are many places where Amtrak could do better in that area. At the same time, being fed hand-to-mouth as a beggar by annual budget appropriations that may or may not be there next year, makes it very hard to plan long term. I have personal experience of that, at one time working for state and federal government and trying to manage a media production facility that required consistent investment and long term planning, but what we got was a random amount every year, usually in no relation to actual need. Yet we managed to keep moving forward.
Running passenger service as a comprehensive network in a privately funded and managed model that generates profit is either utterly rare or non-existent in this world. Most passenger rail is either government run or funded by government money paying private operators in a bid or franchise system. There are a few passenger rail services that purport to run regular service on a totally for-profit, self-funded basis, but they are typically limited to running between isolated city pairs and only on days and times when they can be profitable. That doesn’t constitute a network that will seriously attract travelers.
All that to say that I don’t believe that re–privatizing passenger rail in the US will go anywhere. There just won’t be any takers.
Finally, that $1.2-1.3 billion a year you refer to as Amtrak’s loss, I assume is the federal budget appropriation. I consider that an investment. Just as we inve
It is better to fill an empty seat if you can recover the variable cost of that seat and contribute something to the fixed costs. We don’t know whether Amtrak’s pricing models do that because we don’t have access to them.
We use discounts and incentive pricing in the competitive electric utility market in Texas. But we cover the variable costs. They can change depending on time of day. We try to get something for the fixed costs, but don’t always do so, at least in the short run, for a variety of complex reasons.
Southwest Airlines and Greyhound are based in Dallas. We worked closely with them to develop some of our costing models. They were way ahead of us in understanding and pricing in competitive markets. I don’t remember them ever saying that they did not attempt to recover their variable costs. The run empty seats rather than give them away.
Sometimes it is better to fill the seat even if you cannot contribute anything to the fixed costs, providing you are knowingly selling it as a lost leader, and anticipate recovering it over time. But if one loses money filling an empty seat, it is an ineffective marketing and pricing strategy.
Amtrak has lost money every year since its inception. The NEC, assuming that it wears 80 per cent of the depreciation, which may be understated, loses as much per passenger mile as the
Yes, the very, very short term variable cost, which is incremental fuel and seat fabric wear. On a bus or a train, the incremental cost for filling an otherwise empty seat is pretty much the cost to book the ticket! An extra 200# of weight toward rolling resistance fuel (aero drag change is zero) is nearly zero.
I wonder how the number of “taxpayers” is being counted here, Sam. IRS defines “taxpayer” as any person or corporation that is subject to a tax administered by IRS. That is, there are not just persons who actually pay taxes but also personw who do not pay taxes and even most persons who do not file returns because they are not required to. Almost all people in the US are subject to taxes. I wonder if all of those people are included. When it comes to people who don’t file returns I wonder how we can even know how many there are. For example, how can IRS know how many undocumented workers who are paid off the books there are in the United States.
I should have been more precise. I should have said per federal personal income tax payer. In its statistics the IRS differentiates between tax filers and persons with a tax liability, i.e. obligated to pay federal income tax.
If one includes everyone who files a return, as well as other sources of federal tax income, which would be difficult to identify, the amount per tax filer would be less, since in 2010 40 per cent of those filing a tax return did not pay federal income taxes.
The point is on a taxpayer, filer, etc. basis, Amtrak’s loss (subsidy) is small and probably does not register with most people. They don’t feel it and, therefore, don’t react to it. But Amtrak’s subsidy, along with all the other small stuff adds up.
Each year the CBO puts out a report on steps that could be taken to reduce the federal deficit. It consists of reducing or eliminating out flows and/or enhancing revenues. I downloaded the data in 2011into an Excel spreadsheet and went through it line by line.
I isolated every item that was less than $10 billion, which at the time was a small portion
Didn’t the Trains Magazine “Professional Iconoclast” columnist John Kneiling offer up the parable of the automobile dealership “that lost money on every car sold, but made it up on the volume”?
The dealer did not lose money on each car sold…he lowered the price and sold more cars to make up the difference but he sure as hell didn’t sell below his costs. That is he took a smaller profit margin per car but his volume of sales made up for it…
There is no car dealer who did that. Note that I said “parable.” Like in the Bible. Even if your belief is in the literal truth of the Bible, there was no Samaritan man who helped the other man who was beaten and robbed. It is a parable, in other words a story, a story told to illustrate a moral principle, in this case, a man who held religious beliefs contrary to the orthodoxy of the day but was pure of heart in taking pity on a man beaten by robbers and who translated those feelings into concrete action.
On the other hand, in John Kneiling’s times, there were railroad companies that were losing money, not only on their passenger service pre-Amtrak but also on their freight operations, and in Kneilings (unhumble) opinion, railroad management did not have working accounting systems in hand to tell where their money was going, and they were engaged in failed marketing efforts that did not staunch the losses. In other words, they lost money on every car sold, but they were hoping to make it up on the volume.
Maybe individual car dealers never did such a thing, but in recent history, the U.S. auto companies were indeed selling every automobile at a loss and hoping to make up the difference in marketing arrangements. Famously, the US auto makers were selling large numbers of cars to rental car companies and other volume purchasers of automobile fleets (Federal and state governments, etc.). These volume sales may have covered the direct cost or avoidable cost or incremental cost of manufacturing those cars, but the auto companies had large fixed costs, especially retiree pensions and hea
I guess it is so. Now Acela, etc. are expected to cover the fixed costs of ROW infrastructure. The goalposts have been moved (not a parable, a metaphorical example).
All passenger traffic lives in the “non-real business” world. Therefore, you’d have to see more than Amtrak’s books to determine if Acela is worth it or not. What’s the cost of the alternatives to Acela? None, even “do nothing”, come at zero cost to taxpayers.
I have to take your word about the statistics, Sam, as I don’t have the data myself. I do wonder about how people who file joint returns are counted. Are both people considered tax payers even if one has no income?
By the way, Social Security and Medicare Part A (hospital insurance) are not funded by income tax. They are funded by a payroll tax collected under the Federal Insurance Contributions Act. Workers who earn over $50 a quarter are subject to the FICA. Many of these people have incomes too low for income tax. Medicare Part B (medical Insurance) is funded by income tax. I’m not sure about Medicare Part D (prescription drugs).
Deciding Amtrak losses per train is stupid because the whole system has to work within itself and it deemed a service so that one train or one seat does not defeat the whole entity. Plus, Amtrak, being a government agency despite being a corporation, cannot be defined the same as you are defining it here. IT is very complex…a business owned and operated by the Federal Government but not allowed to follow good business practices of investment and allotment of funds like a business but rely on Congressional whims in the form of legislation, allotments, and (Congressional) budgets. In effect there are no answers the way it is set up right now. Congress either has to free Amtrak from it;s reins as it did Conrail or we have to put up with it the way it is. We may have answers and theories but doesn’t mean a thing under the way it has to operate now.
“I guess it is so.” You don’t seem too enthusiastic about the claim that Acela turns a profit on a partial allocation of costs but still is in the red on a full allocation of costs? Do you know differently? Do you have a cost allocation plan, say, that the commuter agencies need to come up with more payments for their “slots” on the NEC? Do you have a traffic model that Acela is paying its way, not only for its variable costs but for its slice of the fix costs?
As to expecting Acela to cover the fixed costs of ROW infrastructure, I don’t think I advocated any such thing. I was reasoning counter to the assertion that the Acela should be offering volume discounts to regular or loyal or frequent customers, citing the example of the automotive industry where such discounts were a failed marketing strategy. As to moving goalposts, I am doing no such thing, literally, metaphorically, or in the sense of moral parables.
As to the remark “lose money on every unit but make it up on the volume”, that remark was not made by me, that remark was made, and it was made frequently on none else than the pages of Trains Magazine, our generous host of this forum. That remark was offered as dark humor regarding a railroad industry that was in a death spiral of discounting its product to make up for service shortcomings, but sometimes you just can’t raise enough money through volume purchases to make discounting viable.
Now that was the David P Morgan Trains, the Trains of years past, the Trains of the archive in the State Historical Society of Wisconsin, a Trains with an editor who openly professed to care enough about 'there still being trains around
Pardon me, but I really do not know what you are attempting to say. Other than your first comment, which seems pretty tangential, the remainder seems to have almost nothing to do with my post and far more to do with your pet peeves with some “advocacy community” you have encountered. Whatever that may be in Madison, it is not what I subscribe to. The goalposts metaphor was not in response to your previous remarks, in any case.
The first poster brought up real Consumer behavior that is not fitting the Model of total time savings alone. In honor of Mr. Coase, let’s build a model from the ground up to figure out why the Consumer is behaving this way, as there obviously aren’t enough fans to float Acela ridership. First assume destination Parking OR Cab Fare has an equal Financial Cost and Disutility of Time Value.
As usual, driving an automobile is the real reference point and competition for most people.
Expense Account: Common Carrier vs. Driving analysis:
Most travel departments allow you to compare Driving to a suitable Common Carrier cost and choose the least expensive financial option. So under these circumstances the cost to compare single occupant driving at 3.1 hours to is:
190 miles x $0.565/mile Total IRS cost of driving + Tolls at $27.5 = $135
Therefore a Common Carrier ticket can be up to this amount and be routinely approved by the expense department, certainly mine. Ok, let’s try to find airfare for that amount. Well shoot it isn’t still 1993 so fares at that level are not available. One week out, a non-stop airfare is $320ish for 1 hour timing and a single stop is $120ish for 3 hour timing (which of course is a pricing scheme made up by the airlines to maximize revenue as the non-stop flight is cheaper to operate). But once you add in access to and from the airport, the one-stop airfare is more expensive time and cost wise than driving and there is little productive time. So is the only alternative driving or the motorcoach? Not on this route…
Acela vs. Regional Analysis:
I believe the original posted prices were at the upper end of the difference, probably indicating the last few seats on a nearly sold out Acela in the AM peak. For other times of day, $30 to $75 price differentials are common when comparing Regional + B