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"[M]any expenses in running an Auto Train service that would be incremental to anybody else are not incremental to us. We can do ticketing and sales without any additional expense." -W. Graham Claytor RAILWAY AGE, January 1983, Page 44
Graham Claytor coined a classic doublespeak term for this -- "unmanning" stations. No matter what you call it, this program illustrates how Amtrak management ignores the concept of opportunity costs when making important decisions.
Early in 1983, Amtrak proposed to "cut costs" (to divert cash for the new train manager cost center) by closing revenue-generating stations serving "low-traffic" stops on the national system. Amtrak initially closed stations if station revenues failed a preset criterion. This ignored the numerous agents already being paid not to work under C-2, who could have operated these stations for several years without increasing Amtrak's outlays or subsidy requirement. Revenue losses were not considered.
This criterion was fallacious. even apart from the effects on revenues and availability of agents under C2, for several reasons. Station revenue data was from a time when a mail-order ticket contest was conducted in the central reservation centers. Passengers calling the 800 number in some cases were told they could buy tickets only by mail, not at the stations-depriving them of revenue. At least two known instances involved tickets valued at several thousand dollars each, whose purchasers were quite surprised to find agents on duty when they arrived to board the train. The revenue criterion ignored travel agent sales, assuming station revenues alone accurately reflect station traffic and workload to check baggage, furnish on-time reports, adjust reservations, provide boarding assistance and so on. Onboard sales were also disregarded, even though the agent may have performed similar services. The criterion also ignored the sparse dispersal of sales representatives in the West, where agents act as de facto sales representatives. Needless to say, this criterion raised a din of protest.
Amtrak then announced a new criterion: the station's "traffic level" measured by the number of coupons collected. Fifteen coupons per day would be the minimum to justify continued operation. This methodology is still fallacious and stupid. First, it discriminates against small stations without ticket printing machines. Each coupon printed by a machine (i.e., each segment on a trip) counts as a ticket, but multi-segment handwritten tickets count as just one ticket. It is unclear how group tickets would be counted. This policy indicates that management has no real comprehension of how their ticket system operates, or is simply incredibly inept at accurately determining patronage and its values.
This issue illustrates Amtrak's failure to understand the basic business economic concepts reviewed in the first article. Amtrak consistently averages system-wide quantities and simply ratios them out linearly when making economic projections or comparisons, neglecting any effects of scale which result in volume selling at maximum profit. Management fails to recognize the actual cost of closing a station and, worse, disregards that closing a station may save x dollars of cost, but may forfeit 2x, 5x or more dollars in revenue. Conversely, manning an unmanned depot may add x dollars of cost, but could produce 2x, 5x or more dollars in revenues. Managers with a good understanding of the dynamic characteristics of the marketplace do not make this mistake.
Another problem was Amtrak's primary reliance on head-count or coupon-count data, refusing to acknowledge the value of those heads or coupons. Crucial factors, such as passenger-miles, are not properly factored into the decision-making criterion. Using coupons as a lazy manager's surrogate for passenger counts, only aggravates the failure. The fatal flaw is that Amtrak's criterion ignores the differential revenues produced by passengers, fails to distinguish market segments and doesn't consider connecting passengers. Incredibly, Amtrak's ridership matrices do not account for connecting passengers. A Cleveland-to-Omaha passenger is counted and reported as two riders, one from Cleveland to Chicago and another Chicago-Omaha. This blinds Amtrak planners to the implications of cancelling one of the connecting trains, or adding new connections, and to the massive economy of scale potentially available in a national system network, Amtrak's assumption that all coupons are worth the same average value is a predictable result of Amtrak's lazy person's aproach to management-dividing revenues by patronage. even within a single segment of a route, to determine average revenue per passenger, eventually inducing the perception that each passenger pays more or less the same.
In fact, most passengers outside the established corridors produce very high revenue per passenger. Many pay thousands of dollars to ride Amtrak and do not have to be pursued with million dollar ad campaigns. It is fallacious to equate those passengers to short-haul corridor riders to evaluate the viability of a manned station.
Amtrak later adopted another criterion: Station revenues had to be at least four times personnel costs to avoid unmanning. Even apart from the C-2 problem, this ignores the local costs of rent. utilities, insurance, ticketing, information and reservations. supervision and the effects of scale derivable from exceedingly modest investments in effective local advertising and sales promotion programs. It also indicates Amtrak still doesn't know how to calculate each station's own actual costs or potential revenues.
Consider this example. On the Eagle, a typical one-way fare is more than $80 per sale, so a station contributing "only fourteen" full-fare, one-way passengers per day would gross at least $1,200 per day or $408.800 per year. According to the ICC, only a third of that pays for direct train operations (fuel, crew, on-board services, track rent and all station costs). The rest goes to Amtrak's tremendous overhead costs. At a typical single agent station, the agent earns about $30,000 for a characteristic single-shift-plus-overtime operation.
A non-NEC corridor station, where $15 fares are the norm, but with a "justifiable" level of 15 passengers per day, grosses about $225 per day or $81,000 per year. That barely covers the cost of two agents, and few, if any, corridor stations have as few as two agents. Triple the ridership and revenues are still less than half the "nonjustifiable" long haul station. Yet Amtrak's criterion would close the $400.000 revenue source and leave the more costly $80,000 station open. Such a decision is nonsense at best, and at worst is evidence of persistent and intentional bias against national system long-haul services.
Annual revenues from a "justifiable" NEC station, where $6 fares, which about 40 percent of NEC riders pay, are the norm. could be as little as $32,850. The criterion would say that 15 passengers producing total revenues of $90 per day justify manning, when 14 long-haul passengers with revenues of $1,100 do not.
Consider the passenger counts necessary for corridor stations to achieve revenue or profit parity with the small-town long haul station. The non-NEC corridor station would have to produce over five times the patronage, or 80 passengers per day. to equal the revenue of 14 long-haul passengers. To achieve this head count. Amtrak would probably staff the station with three to six agents, driving the labor cost over $100,000 per year, $70,000 more than the single-agent station. Nearly 100 passengers per day at the corridor station approaches parity, without reference to advertising and other acquisition costs.
The small NEC station would have an even harder time, requiring between 180 and 225 passengers per day to equal 14 Western small-town long-haul passengers. If the small-town station had a modest increase in patronage, perhaps as little as one new rider every fourth trip. it would outstrip its corridor counterparts, particularly when the difference in investment to produce that increase is considered. But Amtrak either does not understand or has chosen to ignore this phenomenon.
This raises a significant question of resource allocation. Could Amtrak legitimately justify continuation of present staffing levels at large corridor stations based on corridor revenues alone? We seriously doubt it. There is simply too much disparity in the returns per passenger captured. Many NEC stations may be seriously overstaffed because they require no checked baggage service, could or do handle mostly passengers on multi-ride tickets, and could use automated ticketing just as their lowcost, short-haul airline competitors have done. Where is the justification for 80, 100, 150 or 200 on station staff when the vast majority of services do not require that kind of manpower? Over half the arrivals and departures at Los Angeles are this kind of corridor traffic, and stations like New York Penn Station and Philadelphia 30th Street handle an even higher percentage of these no-frills trains and riders.
Would Amtrak not have been better off laying off an incremental 10 to 20 employees, distributed over these large stations, and leaving the little towns, where the one agent is Amtrak's sole presence and salesman, alone? Compare just the difference in revenues and costs and the answer will be apparent. True, corridor stations produce higher head counts (sometimes), but the small national system stations may get far greater revenues per dollar invested in employees and fixed facilities.
How many highly effective, informationoriented small-town weekly newspaper advertisements could Amtrak have bought for these "marginal" stations with the $13,000 they spent in one day in July 1983 for one unsuccessful New England Metroliner ad in the New YorK Times? How many stations could have been manned with the millions spent on the New England Metroliners9 I-low many train chiefs could have been hired with those millions with no station cutbacks out in the hinterlands or maybe even anywhere? Why can Amtrak management continually choose the wrong financial course and get away with it, to the detriment of most of the nation?
What would happen if Amtrak, for once, acted as a real business in the private sector would, using the basic principles of nonlinear economics, economies of scale, maximizing return on investment, and volume pricing at the margin?
An unmanned stop will have a baseline patronage, usually close to zero on a noncorridor route. If no labor or time-intensive changes on an existing train are associated with the stop, as is virtually always the case, and if there is available capacity on board (which Amtrak claims to be true despite frequent standing room only (SR()) conditions on long-haul trains), there are no additional train costs associated with changes made at the stop. Station costs thus can be considered independently here.
Amtrak's systems would predict increased train operating costs from increased ridership, regardless of excess capacity. This is not accurate. Given excess capacity, even over just a segment of a route, to add train costs to the direct cost of the agent double-counts the costs because one-line stations'costs are already accounted in direct costs of train operations. Even adding cars, now idle, or transferred from other routes, does not produce a linear increase in cost.
If the unmanned station is changed by being lighted, heated and maintained by a caretaker, the better service will cause a small increase in patronage. The only difference from a properly staffed station is the lack of an agent, a telephone and minor cost items such as office supplies. Many of these stations don't have or need a computer terminal. To be conservative, assume the agent costs $40,000 per year and the telephone and office supplies cost $1,500. At $80 per passenger, total station costs are recovered from a marginal increase of 519 passengers per year, or less than two additional full-fare one-way passengers per day over baseline! But that is extremely conservative because it still includes the caretaker. Thus two employees at train time, not one, are justified by this tiny increment of patronage.
Suppose the agent replaces the caretaker: breakeven now occurs at about 460 additional passengers per year rather than 519. This increase is just over one per day, or just one new round-trip passenger every other trip. Experience indicates the additional passenger is captured almost immediately from manning the station and is followed by many more. paying back the marginal cost of the agent many times over. This is the fallacy latent in requiring that revenues exceed an arbitrary percentage of station costs.
This approach will result in incredible paybacks even at stations with the lowest traffic levels, since any ticket sales beyond the one-per-trip breakeven point for the agent represents almost pure, genuine operating profit. If the agent deftly sells longhaul sleeper space, the return on the investment in the agent becomes phenomenal. The agent could pay his or her monthly salary with just one sale! The same analytical technique can be applied to computer terminals. advertising and other local improvements, to produce volume sales and maximum profit. because still greater paybacks will occur (up to the point of diminishing returns) with even moderate levels of traffic. This justifies further modest but highly profitable expansions in stations, station staff and even entire new routes in many markets. Amtrak's methodology blinds management to this kind of profit opportunity.
What is at the root of these problems? We submit that Amtrak's failure to understand how their own systems function coupled with use of meaningless and counterproductive planning and route-accounting methodologies, together with a singleminded fixation on cost containment, results in an attempt to starve the company into prosperity just as the farmer tried to do with his horse. This consistently fails in the private sector precisely because it ignores the correct relationship between costs, revenues and volume, and reflects an unrealistic and naive concept of corporate operations. While such oversimplified data analysis and business management are common in. the federal bureaucracy, they inevitably result in bankruptcy when applied to business corporations. Amtrak must be made to understand and implement correct business management techniques if the corporation is to develop any degree of prosperity, credibility and longevity.
Amtrak doesn't have to be this way. It has the computer capacity and data systems to do the job right, if their systems were restructured and their executives knew what had to be done and did it.
When anyone wonders why Amtrak cuts or downgrades services or refuses to add services in the South, Midwest, sunbelt or West due to the alleged cost of the service, remember the 1700 percent overstatement of the true marginal cost of the North Star's reservations service. When your accounting system overstates marginal costs of a proposed activity by a factor of as much as seventeen, it is little wonder management routinely refuses to authorize the proposed activity (remember the widget factory?). Add the overcharging of costs to long-haul food service, Amtrak's misuse of equipment, cutting off its small town sources of big revenues, and the many other flaws of management outlook and route accounting, and it is a wonder any trains still run west of Harrisburg -- or even east. Advocates are entitled to question how much revenue has been lost, how many trains discontinued and not inaugurated and how much federal operating support has been wasted through Amtrak's accounting mistakes and manipulation. Advocates should demand this nonsense be ended, and that available resources be reinvested in highrevenue, high-return services that can earn operating profits to increase Amtrak's revenue-cost ratio, reduce its operating deficit and political vulnerability, and rationally expand services throughout the nation.
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