Business Case Study

Amtrak Is on the Wrong Side of the Tracks

(page 204)

The National Railroad Passenger Corporation, better known as Amtrak, began operations in 1971. The railroad has more than 20,000 employees and serves more than 500 destinations in the United States and Canada on more than 21,400 miles of track. Amtrak customers took 32.5 million trips in 2019, setting a record year-over-year increase of 800,000 passengers.72

Congress created Amtrak because private railroads were failing. By the 1940s, rail travel became less popular as Americans chose buses, planes, and cars to get around the country. Eventually, the U.S. government consolidated the majority of passenger rail service under Amtrak’s umbrella. The federal government is Amtrak’s majority stockholder and guarantees its financial support, but the company is operated as a for-profit organization rather than a government entity.

Though it was created to save an unprofitable railroad system, Amtrak itself has never earned a profit since its inception. For example, the company lost $194 million and $170 million in 2017 and 2018, respectively. Americans continue to choose other modes of transportation over Amtrak, and government subsidies are all that stand between the railroad and bankruptcy.73

Let’s take a closer look at what’s going on at America’s only high-speed rail provider.

A LOSING MODEL

One of Amtrak’s biggest problems is its price. For example, a four-hour Amtrak train from New York City to Boston is more expensive than hopping on a one-hour flight. Amtrak charges these high fares on popular Northeastern routes because its other routes across the country are either unprofitable or operating at a loss.74 According to Virginia Mercury, ridership may be able to grow if Amtrak’s prices were reduced.75

Amtrak’s other challenge is America’s sheer size. It is the fourth largest country in the world with 3.8 million square miles of land. Compare this with Japan’s rail service, which has to cover an area smaller than the state of California. All of this rail needs maintenance and repair, which Amtrak can’t afford. For example, simply bringing the rail tracks in the 453-mile Northeast Corridor to a state of good repair will cost $42 billion.76

To make matters worse, Amtrak’s rails aren’t the only asset in dire need of fixing. Its passenger cars have expected lifespans of 25 years, yet the average car in its fleet is well over 30 years old. And Amtrak’s biggest investor, the federal government, which has spent more than $100 billion in taxpayer funds to keep the rail service operating, doesn’t have the appetite to make large-scale investments in the railroad.77

LEADERSHIP HAS A NEW PLAN

Amtrak hired Richard Anderson as CEO in 2017 to chart a new strategy for the company. Anderson, formerly Delta Airlines’ CEO, is changing the railroad’s route system and the services it provides in the hopes of leading it to profitability for the first time in its 50-year history.

The first part of Anderson’s plan includes breaking up long-distance train routes and substituting bus service. For example, he wants to change the Chicago to Los Angeles route and replace 500 miles of the trip with bus service. Anderson believes these types of routes don’t meet the needs of today’s commuters. “If we’re going to deal with congestion, growing populations and the carbon footprint of automobiles, Amtrak is the best answer for intercity transportation in a 200- to 300-mile market,” he says.78 Reducing the number of unprofitable routes won’t only help the carrier’s bottom line, it will also reduce the costs associated with maintaining large swaths of railroad tracks.

The second part of Anderson’s plan includes a reduction in some of the company’s services. For example, Amtrak has decided to scrap its traditional dining car service. The reservation-based dining cars, staples of the U.S. railroad system, had shiny silverware and white linens. Fresh food, which could rival high-end restaurants, was provided by onboard kitchens. Now, Amtrak provides prepackaged meals and no longer has “white glove” service in most of its dining cars. The company estimates that this change will save around $2 million a year and attract a younger generation of new riders who are on the run, on their phones, and not looking to sit at a fancy, communal table. The change “is part of an evolution,” says Peter Wilander, Amtrak’s customer service chief.79

DERAILED PLANS?

Amtrak’s strategic plan is showing some early success. The company posted a $29.8 million loss in 2019, its best operating performance ever.80 And the company believes 2020 will be even better. “Our expectation is that in 2020, we will actually make money, we will have positive earnings for the first time in the company’s history,” says Amtrak Board Chairman Anthony Coscia.81

However, critics believe Anderson’s pursuit of profitability has caused Amtrak’s service to suffer. Jim Mathews, president and chief executive of the Rail Passengers Association, says train riders are lamenting the end of the dining car. “It is not just the food, it is the experience,” he tells The Washington Post. Skeptical lawmakers, responsible for subsidizing the company, echo Mathews’ concerns. “This is shortsighted and foolish,” says Tennessee Congressman Steve Cohen. Representative Cohen feels Anderson is doing to rail service what he did to air service. Amtrak’s decision is “like Delta Air Lines taking away amenities to passengers on their airplanes and making air traffic more like traveling on a bus,” he says.82

Lawmakers, many from less populated states, have also taken aim at Anderson’s plans to cut long-haul routes, which include stops in states like Kansas and New Mexico. “The idea that Amtrak would think about replacing passenger service with bus service for 400 miles and believe that we would still have a long-distance passenger train service is something I can’t get over,” said Kansas Senator Jerry Moran. Moran’s criticism doesn’t just put Amtrak’s congressional budget allocation in jeopardy. The government also has broad discretion to direct the railroad to take or not take certain actions. In this case, the Senate ordered Amtrak to run its Southwest long-haul route as originally planned, shattering Anderson’s strategy.83

Other lawmakers think the company’s entire model should be re-evaluated. Oregon Congressman Peter DeFazio believes Anderson’s profit-focused philosophy is inappropriate for a government-owned company like Amtrak. “I think part of the problem we’re dealing with is the original mandate from Congress, which said that [Amtrak] is supposed to be run as a for-profit corporation,” says DeFazio.84

Anderson’s plans seem to be stalling as the company is on the verge of profitability.

FOR DISCUSSION

Problem-Solving Perspective

  1. What is the underlying problem in this case from Amtrak CEO Richard Anderson’s perspective?
  2. What are some of the causes of this problem?
  3. Do you believe Anderson’s strategy and plans will turn the company around? Explain.

Application of Chapter Content

  1. Describe how Amtrak is making changes to become profitable.
  2. How does congressional skepticism impact Amtrak’s development of its mission and vision statements?
  3. Define one specific strategic, tactical, and operational plan that Amtrak can utilize.

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