Private passenger rail service thrived in the United States between the mid–19th century and the early–20th century. By the late 1950s, however, passenger rail was struggling because of the rise of automobiles, buses, and airlines. Railroads faced large tax, regulatory, and union burdens not faced by other modes of transportation.1 Federal micromanagement stifled railroad innovation and prevented railroad companies from cutting costs.2 Railroads paid heavy property taxes and were burdened by a special excise tax on rail tickets from the 1940s until 1962.

After a number of major railroads went bankrupt, Congress took over passenger rail in 1970 with the creation Amtrak. Amtrak is structured like a corporation, but the government owns virtually all the stock. The government's rail company was supposed to become self-supporting, but it has never earned profits, and it has consumed more than $40 billion in federal subsidies over the decades. In 2014 it had revenues of $3.2 billion and expenses of $4.3 billion, and it received direct federal subsidies of $1.5 billion.3

It seems unlikely that passenger rail will play a large role in America's transportation future. Rail carries few people compared with automobiles and airplanes, and it makes little economic sense for most intercity trips. However, privatizing Amtrak would allow entrepreneurs to innovate and make rail more competitive and financially viable. Congress should get out of the passenger rail business and give rail the private-sector flexibility it needs to better compete against other modes of transportation.

Amtrak's Failures

Amtrak has many woes. Its quality of service is mediocre and its trains are often late. For the overall system, only about three-quarters of Amtrak's trains are on time, with its long-distance routes having a particularly bad record.4 Amtrak loses more than a billion dollars a year, with its operations are so inefficient that it even loses money on its food service.5

Amtrak has an expensive and inflexible workforce. It has 20,000 employees earning an average $105,000 a year in wages and benefits.6 The company pays a huge amount of overtime, a substantial amount of which appears to be unnecessary and improper.7 More than a dozen collective bargaining agreements cover 86 percent of the workforce.8 Unions undermine efficiency by protecting poorly performing workers and pushing for larger staffing levels. They resist innovation and create a bureaucratic workplace. Former Amtrak head David Gunn complained that at Amtrak's maintenance facilities, workers from different unions were not allowed to share work on projects outside their narrowly designated specialties.9

With late trains and endless losses, Amtrak's management has been subject to much criticism. Over the years, federal auditors have charged Amtrak with a lack of strategic planning, inefficient procurement policies, weak financial management, and insufficient accountability.10 Auditors found that the company manipulated its financial statements to obscure unfavorable data.11 And the company has a history of hiding information from investigators and presenting unrealistic projections to Congress.12

However, most of Amtrak's problems are created by Congress, which prevents the company from making rational business decisions. In particular, Congress insists on supporting an excessively large nationwide system of passenger rail that does not make economic sense. Nor does it make environmental sense for Amtrak to run routes with low ridership.

In his 2004 book, End of the Line, rail expert and former Amtrak spokesman Joseph Vranich argued, "congressional requirements that Amtrak spend money on capital improvements to lightly used routes are outrageous. ... Throughout Amtrak's history, it has devoted too much of its budget to where it is not needed, and not enough to where it is."13

Amtrak operates 44 routes on 21,000 miles of track in 46 states. Amtrak owns the trains, but freight rail companies own about 95 percent of the track. A Pew Research Center analysis found that the system loses money on 41 of its 44 routes, with an average loss-per-passenger of $32.14 An analysis by Randal O'Toole found similar results—only four Amtrak routes earn an operational profit.15 Some Amtrak routes lose hundreds of dollars per passenger and fill less than 40 percent of the seats.

The few routes that earn a positive return are in the Northeast, whereas the biggest money losers are the long-distance routes, such as New Orleans to Los Angeles. The Government Accountability Office found that the long-distance routes account for 15 percent of Amtrak riders but 80 percent of its financial losses.16 In sum, Amtrak spends a lot of money maintaining high-loss routes at the expense of routes with heavier traffic.

Advantages of Privatization

Privatization would increase rail efficiency and reduce costs. A private rail company could prune excess workers, base worker pay on performance, and end harmful union rules. It would be able to close the routes that are losing the most money. Passenger rail makes sense in the Northeast corridor between Boston and Washington, D.C., but that corridor accounts for less than 500 miles within a 21,000-mile system. Other routes may also make sense within a lower-cost privatized system. A privatized Amtrak could close the most uneconomic routes and shift investment and maintenance dollars to the core routes to improve service quality.

Reforms abroad show that privatizing passenger rail works. In his book, Vranich counted dozens of nations that had either partly or fully privatized their passenger rail systems.17 He found that privatized rail systems generally provide better service, increased ridership, and more efficient operations.

In Britain, state-owned British Rail was consuming large subsidies and experiencing a declining market share in transportation. In 1994 the government split up the company and privatized the track infrastructure separately from passenger service operating companies. But ending vertical integration has created some problems, and track infrastructure has since been renationalized.

However, British passenger services have thrived since privatization. Rail ridership has more than doubled in the past two decades, from 740 million passenger trips to 1.5 billion.18 Ridership is hitting levels not seen since the early 1920s, and ridership growth has surpassed the growth elsewhere in Europe. Despite the increase in passengers, the on-time performance of British passenger rail is quite high and surveys find solid levels of customer satisfaction.19

Rail privatization in Britain brought entrepreneurial innovation to the industry. Vranich noted that "private operators have demonstrated more initiative, imagination, and visionary planning than state-run British Rail did in its prime or Amtrak does today."20 In a 2013 study, the European Commission found that UK's railways were the "most improved" in Europe since the 1990s.21

Japanese rail privatization was also a success. In the 1980s, Japanese National Railways (JNR) was stagnating as a result of bloated labor costs, labor strife, and political manipulation. The government-owned JNR was "conservative, indolent, and fearful of change."22 The government broke up JNR into six regional and vertically integrated passenger rail companies in 1987, and then it started privatizing them in the 1990s.

The JNR companies reformed rigid union rules and slashed workforces by roughly one-third following the reforms.23 A National Bureau of Economic Research study found that labor productivity in the Japanese passenger rail companies increased, on average, about 50 percent with the restructuring and privatization of the 1990s.24 It also found that accident rates were cut in half. The study concluded, "The Japanese approach to rail restructuring has succeeded in many ways, by improving productivity, cutting operating deficits, decreasing fares, and providing better services."25

The privatized Japanese rail companies still receive subsidies, but they are more efficient than before and provide better service. Vranich called the results of JNR's privatization "stunning."26 As in Japan, Britain continued to subsidize rail infrastructure after privatization, but the subsidies are now less than elsewhere in Europe.27 The important thing is that the system is more efficient, and ridership has soared. So while subsidies should be ultimately eliminated, the first job in the United States is to fix the rail system's institutional structure by privatization.

A Canadian example also illustrates the power of privatization. In 1990, the government-run passenger rail company, Via Rail, was losing money and canceling services. Fortunately, an entrepreneur stepped in to run the routes through the Rocky Mountains. Today, the Rocky Mountaineer company operates four hugely successful routes in western Canada. Travel writers and international tourist organizations laud the services.28

The United States has its own positive experience with rail privatization—freight rail privatization. When the Penn Central Railroad collapsed in 1970, it was the largest business failure in American history to that date. Other railroads followed it into bankruptcy. Congress created Conrail in the mid-1970s to replace the failed private railroads. The government-owned company consumed $8 billion of subsidies and floundered until Congress deregulated freight rail under the Staggers Rail Act of 1980. Deregulation allowed Conrail to become profitable, and it was privatized in 1987. Since then, U.S. freight railroads have been a dramatic success. Rail's share of total U.S. freight has increased substantially in recent decades.29

Leading rail experts, including two former champions of Amtrak, support privatizing the company. Anthony Haswell founded the National Association of Railroad Passengers in 1967 and is referred to as the "father" of Amtrak. He lamented, "I feel personally embarrassed over what I helped to create."30And Joseph Vranich, the former Amtrak spokesman, came to recognize that the government-run system was a mistake:

Amtrak is a massive failure because it's wedded to a failed paradigm. It runs trains that serve political purposes as opposed to being responsive to the marketplace. America needs passenger trains in selected areas, but it doesn't need Amtrak's antiquated route system, poor service and unreasonable operating deficits.31

Amtrak supporters argue that since other modes of transportation receive subsidies, so should passenger rail. But Amtrak currently receives vastly more subsidies—measured by subsidies per passenger mile—than other modes of transportation, including automobiles, buses, and aviation.32 Automobiles receive relatively little in net subsidies because government highway spending is mainly covered by fuel taxes. That said, subsidies to all modes of transportation should be cut.

The problem for passenger rail is not that it needs more subsidies, but that competitors to rail have become more efficient over time. Real rail prices have risen in recent decades, while real airline prices have plunged because of the deregulated and competitive airline environment.33 Intercity bus prices have also fallen with the rise of low-cost firms such as Megabus. To tackle air and bus competition, rail needs to be moved to a private and deregulated environment.

Amtrak supporters say that we should subsidize passenger rail to reduce energy consumption and help the environment. But intercity buses are more energy efficient than trains, and thus better for the environment.34 Also, running half-empty trains over Amtrak's long-distance routes is a waste of energy.

Passenger rail will probably not play a big role in our transportation future. Today, rail carries very few people compared to automobiles and airplanes. Even a high-speed rail system in the Northeast would reduce automobile use in that region by less than 1 percent, according to a Department of Transportation study.35

But who knows? Maybe that assessment is wrong. Perhaps entrepreneurs could bring enough cost cutting, flexibility, and innovation to passenger rail that it could become financially viable in numerous U.S. corridors. We will never know unless we free passenger rail from the federal government.

Notes:

1 Randal O'Toole, "Stopping the Runaway Train: The Case for Privatizing Amtrak," Cato Institute Policy Analysis no. 712, November 13, 2012, pp. 10–14.

2 Federal micromanagement was through the Interstate Commerce Commission, which controlled railroads between 1887 and 1995.

3 Ernst & Young LLP, Amtrak, Consolidated Financial Statements, Years Ended September 30, 2014 and 2013, with Report of Independent Auditors, (McLean, VA: Ernst & Young LLP, October 1, 2015).

4 Paul Nussbaum, "Amtrak's On-Time Performance Runs off the Rails," Philly.com, August 1, 2014.

5 Jessica Chasmar, "Amtrak Loses Millions in Free Food, Alcohol for Weary Travelers: Report," Washington Times, November 14, 2013.

6 Author's calculation based on data in Ernst & Young, Amtrak, Consolidated Financial Statements. In 2014 total employee wages and benefits were $2.1 billion, and the number of employees was about 20,000.

7 Diana Stancy, "Amtrak Paid $200m in Overtime to Employees in 2014," Daily Signal, June 23, 2015.

8 Ernst & Young, Amtrak, Consolidated Financial Statements, p. 43.

9 Stephen Smith, "Republicans Can Privatize Amtrak If They Want To," Bloomberg View, September 26, 2012.

10 For example, see Government Accountability Office, Amtrak Management: Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and Accountability, GAO-06-145 (Washington: GAO, October 2005).

11 Jim McElhatton, "Amtrak Misled Congress on Finances," Washington Times, May 31, 2010.

12 Joseph Vranich, End of the Line: The Failure of Amtrak Reform and the Future of America's Passenger Trains (Washington: American Enterprise Institute, 2004), pp. 2, 3, 12–35, 171.

13 Joseph Vranich, End of the Line: The Failure of Amtrak Reform and the Future of America's Passenger Trains (Washington: American Enterprise Institute, 2004), p. 5.

14 See Pew Charitable Trusts, "Subsidyscope—Transportation Sector," November 24, 2009, www.pewtrusts.org/en/research-and-analysis.

15 Randal O'Toole, "Stopping the Runaway Train: The Case for Privatizing Amtrak," Cato Institute Policy Analysis no. 712, November 13, 2012, Table 2.

16 Government Accountability Office, Intercity Passenger Rail: National Policy and Strategies Needed to Maximize Public Benefits from Federal Expenditures, GAO-07-15 (Washington: GAO, November 2006), p. 4.

17 Vranich, End of the Line, pp. 139–41, 195–202.

18 U.K. Department of Trade and Investment, The U.K. Rail Industry: A Showcase of Excellence (London: U.K. Government, 2014). See the "Overall Passenger Growth" chart.

19 Association of Train Operating Companies, "Growth and Prosperity: How Franchising Helped Transform the Railway into a British Success Story," July 2013.

20 Vranich, End of the Line, p. 147.

21 See the European Commission study discussed in U.K. Department of Trade and Investment, The U.K. Rail Industry: A Showcase of Excellence (London: U.K. Government, 2014).

22 Fumitoshi Mizutani and Kiyoshi Nakamura, "The Japanese Experience with Railway Restructuring," in Governance, Regulation, and Privatization in the Asia-Pacific Region, National Bureau of Economic Research East Asia Seminar on Economics, vol. 12, ed. Takatoshi Ito and Anne O. Krueger (Chicago: University of Chicago Press, January 2004), p. 335.

23 Vranich, End of the Line, p. 153.

24 Fumitoshi Mizutani and Kiyoshi Nakamura, "The Japanese Experience with Railway Restructuring," in Governance, Regulation, and Privatization in the Asia-Pacific Region, National Bureau of Economic Research East Asia Seminar on Economics, vol. 12, ed. Takatoshi Ito and Anne O. Krueger (Chicago: University of Chicago Press, January 2004), table 12.3.

25 Ibid., p. 334.

26 Vranich, End of the Line, p. 153.

27 O'Toole, "Stopping the Runaway Train," Figure 6.

28 See www.rockymountaineer.com/en_US/about_us/awards_accolades and www.rockymountaineer.com/en_US/about_us/our_history.

29 Randal O'Toole, Gridlock: Why We're Stuck in Traffic and What to Do About It (Washington: Cato Institute, 2009), p. 20.

30 Quoted in Vranich, End of the Line, p. 10.

31 Brian Hansen, "Future of Amtrak," CQ Researcher, October 18, 2002, p. 845.

32 Ken Notis, Federal Subsidies to Passenger Transportation, (Washington: Department of Transportation, Bureau of Transportation Statistics, December 2004), Table 3. See also Wendell Cox and Ronald Utt, "Federal Transportation Programs Shortchange Motorists: Update of USDOT Study," Heritage Foundation Backgrounder no. 2283, June 8, 2009.

33 O'Toole, "Stopping the Runaway Train," Figure 1.

34 Ibid., p. 10.

35 Discussed in David Randall Peterman, John Frittelli, and Williams J. Mallett, "The Development of High Speed Rail in the United States," Congressional Research Service Report no. R42584, December 20, 2013, p. 20.