Splitting Britrail Not Such a Good Idea Afterall

wigwagfan wrote:

gprimr1 wrote:I think that it can serve as a warning not only about splitting the NEC but also about privatizing Amtrak will lead to higher fares.

And privatizing Amtrak will not automatically lead to higher fares.

Plenty of things don't automatically lead to other things. However, there is a lot of truth in what actually happens. Introducing profit into a system introduces the desire to milk the customer for as much as they can get away with.

NellieBly wrote:So it's hard to dismiss privatization as a "failure". Failures don't usually generate lots of new ridership.

What we have in Britain is suppressed demand. That is, the desire to travel is so high that fares are being used to choke it off. Instead there should be new capacity to meet the new demand.

We need a TGV line to the north but there is no organisation to plan it. We need a rebuild of Birmingham New Street station (the central station of the whole network), but there is no organisation to plan it. There are numerous choke points where some extra tracks would relieve congestions. Some new electrification is needed to improve the network. None of these things are happening because no-one is in charge of the network as a whole. It is possible that Network Rail may grow to perform these functions, and some people say that it is beginning to do so.

In the US there is clearly more demand for train travel than there is capacity. If the trains actually ran on time and a bit faster, demand would soar. (But I see you always argue for cuts.)

ryanov wrote:Plenty of things don't automatically lead to other things. However, there is a lot of truth in what actually happens. Introducing profit into a system introduces the desire to milk the customer for as much as they can get away with.

I work for the second largest electric utility in the state of Oregon, which also serves five other northwestern states. It is an investor-owned utility (read: for profit).

On our corporate intranet is a graph showing the kilowatt hour price charged by virtually all Oregon utilities - investor-owned, PUD, co-op, municipal provider - all of them.

My for-profit company's consumer kwh charge is in the BOTTOM HALF of the chart. Meanwhile, the five highest charges are from co-ops and PUDs - which are public, non-profit (and in the case of a PUD, a governmental) organizations.

There are a few companies out there who do go out and try to jerk people around (leveraged buyout artists and Enron come to mind), but your statement violates itself, in that just because there is the opportunity for profit does not automatically state that the company will try to maximize profits at all costs. Intercity transportation is full of competitors, and a private company who seeks to replace Amtrak will not have free rein to jack fares without facing the prospect of diluting its passenger base to other modes of transport.

wigwagfan wrote:

ryanov wrote:Plenty of things don't automatically lead to other things. However, there is a lot of truth in what actually happens. Introducing profit into a system introduces the desire to milk the customer for as much as they can get away with.

I work for the second largest electric utility in the state of Oregon, which also serves five other northwestern states. It is an investor-owned utility (read: for profit).

On our corporate intranet is a graph showing the kilowatt hour price charged by virtually all Oregon utilities - investor-owned, PUD, co-op, municipal provider - all of them.

My for-profit company's consumer kwh charge is in the BOTTOM HALF of the chart. Meanwhile, the five highest charges are from co-ops and PUDs - which are public, non-profit (and in the case of a PUD, a governmental) organizations.

The plural of anecdote is not data.

wigwagfan wrote:There are a few companies out there who do go out and try to jerk people around (leveraged buyout artists and Enron come to mind), but your statement violates itself, in that just because there is the opportunity for profit does not automatically state that the company will try to maximize profits at all costs.

Do you know what "profit motive" means? Of *course* the purpose of a profit-making organization is to maximize profits. That's what "for-profit" means, for God's sake.

wigwagfan wrote:Intercity transportation is full of competitors, and a private company who seeks to replace Amtrak will not have free rein to jack fares without facing the prospect of diluting its passenger base to other modes of transport.

Of course, but on the other hand, an *unsubsidized* intercity rail operator who doesn't raise fares significantly above the subsidized lower levels that Amtrak charges will rapidly go out of business. Then again, an unsubsidized intercity rail operator who *does* raise fares significantly above Amtrak levels will also rapidly go out of business, because passengers are not prepared to pay that kind of money to travel by train.

-- Tim

US railroads were once privately owned and operated and were not a disaster then. This may be water under the bridge, but the US made a huge mistake letting the NE railroads go under. They should have bailed out PC and the likes as they love doing with the airlines.

It certainly is good to look at foriegn examples , when deciding what to do with amtrak .

You only have to look to MBTA in Boston and see how they successfully contract out their rail operations to a private operator.

Okay, enough about airline "bailouts". It was the Federal government that ordered the airlines to shut down after 9/11. Do you think the banks and leasing companies gave the airlines a holiday on payments just because they weren't carrying any passengers and didn't have any revenue? So there was (appropriate) reimbursement for expenses incurred as a result of government action. Plus, there were *loans* (those have to be repaid). No bailouts here that I can see.

If I run a for-profit corporation, and the government shuts me down for whatever reason, my expenses continue and I'm entitled to compensation. I'm not a lawyer, but this would seem to qualify as a "taking" under the US Constitution, which prohibits the government from taking property without compensation.

As for bailing out PC and other Northeastern railroads, that was done. It was called Conrail, it ended up costing the U.S. Treasury a net $9 billion in round terms (after crediting the sale of Conrail stock for $2 billion), and that cost was high enough to stop any further talk of nationalizing the railroads.

TimK wrote:Do you know what "profit motive" means? Of *course* the purpose of a profit-making organization is to maximize profits. That's what "for-profit" means, for God's sake.

A for-profit entity does not necessarily need to "maximize profits", nor does it need to charge an exorbanate price for its goods and services. One need only look at #2 on the Fortune 500 list.

Ironically, the #1 entry on the Fortune 500, after reporting a record profit for a quarter, went on a massive media defensive - demonstrating that its profit as a percentage of revenue was much, much smaller than many other companies. That can be demonstrated by looking at the 2nd most profitable company in 2005, which had the 8th highest sales revenues. (And no, it is not a energy or transportation sector business, nor is the 3rd most profitable company.)

wigwagfan wrote:

TimK wrote:Do you know what "profit motive" means? Of *course* the purpose of a profit-making organization is to maximize profits. That's what "for-profit" means, for God's sake.

A for-profit entity does not necessarily need to "maximize profits", nor does it need to charge an exorbanate price for its goods and services. One need only look at #2 on the Fortune 500 list.

Ironically, the #1 entry on the Fortune 500, after reporting a record profit for a quarter, went on a massive media defensive - demonstrating that its profit as a percentage of revenue was much, much smaller than many other companies. That can be demonstrated by looking at the 2nd most profitable company in 2005, which had the 8th highest sales revenues. (And no, it is not a energy or transportation sector business, nor is the 3rd most profitable company.)

It's back to business school for you. The profit motive, which means attempting to maximize profit, is at the heart of the capitalist system, I'm afraid.

Profit margins as a percentage of revenue are irrelevant in this context. The point is that a for-profit company attempts to make as large a profit as it can by engaging in the business it has chosen to engage in.

You're right to say that that doesn't necessarily entail charging exorbitant prices; however, a business that is able to maximize profits by charging exorbitant prices will do so. (Note that this is not the same thing as saying, "Any business that can charge exorbitant prices will do so," because depending on the market and the niche a company is in, charging high prices may or may not be the way to maximize profits.)

Best,
Tim

US railroads were once privately owned and operated and were not a disaster then. This may be water under the bridge, but the US made a huge mistake letting the NE railroads go under. They should have bailed out PC and the likes as they love doing with the airlines.

But, they did...for freight (Conrail, which regardless of what you think about their business model did become profitable after government investment).

wigwagfan wrote:A for-profit entity does not necessarily need to "maximize profits", nor does it need to charge an exorbanate price for its goods and services. One need only look at #2 on the Fortune 500 list.

While true in a more enlighten pragmatic society, in the US corporations MUST by law maximize shareholder profits/value - there have been many shareholder lawsuits about this, and plenty of internet/newspaper chatter on this topic.

Sir Ray wrote:in the US corporations MUST by law maximize shareholder profits/value - there have been many shareholder lawsuits about this, and plenty of internet/newspaper chatter on this topic.

Care to quote the law?

A company can exist for any reason it wants to - including not making a profit. The problem exists when a company sells stock simply on the basis of earning a huge return, and when the board of directors (who legally work for the stockholders) act against that. Thus, the lawsuits. And they haven't all been successful (i.e. Hewlett-Packard, Walt Disney Company).

TimK wrote:It's back to business school for you. The profit motive, which means attempting to maximize profit, is at the heart of the capitalist system, I'm afraid.

Your view is extremely simplistic and not quite 100% valid.

If so, then why would anyone invest in a slow-growth or no-growth business - like the tranportation or communications sectors? Why would anyone invest in a regulated company where the rate of return is dictated by a Public Utility Commission rather than the unobstructed free market? Why would anyone invest in anything but the biggest growth companies?

Look at Warren Buffett's portfolio. Does he invest in snazzy, high return businesses? No! He, just like any other investor, wants to earn a profit - but it does not mean, by any means, to achieve a huge rate of return at any cost. Even Mr. Buffett recognizes that some years will be poor, some years he might lose.

And to bring a railroad into context - look at BNSF. A few years ago, BNSF embarked on a huge maintenance spending blitz, that Wall Street didn't like. So BNSF cancelled many projects and put the profits into investors' hands. Two years later, BNSF reversed direction and is going back to putting the money into the railroad, rather than raking it in as profit. Certainly anyone can attest to how well a railroad BNSF is - are you arguing that BNSF should follow the maintenance guidelines of UP?

I have to take my financial advise from the 2nd richest man in the United States over you, sir. Not to mention, that my employer happens to be a subsidiary of Berkshire Hathaway.

I think rails fall into the same category as interstate highways... rightfully owned and maintained by the State, with some federal funds thrown around to ensure that a poor/unwilling state doesn't screw up goods passing through, with track usage fees akin to tolls on roads like the Florida Turnpike, and a willingness to maintain them to whatever level its users are willing to finance through direct user fees... giving priority to higher-paying users when push comes to shove.

The main problem with rail is that it's just too expensive for normal companies to own. America's railroads weren't built by publicly-traded companies that purchased land a vacant lot at a time at market value and paid union labor rates... they were built by companies that largely got the land for free, and built most of their empires using low-paid workers. And as labor costs increased over the years, they financed the remaining work by selling off the vast amounts of land they ended up owning as a result of building the first round of tracks. That's not because they were evil... it's because it's outright economically impossible to finance and build anything like a railroad if you're forced to buy everything at metaphorical "full retail cost" from the start. It's simply beyond the capital-raising capabilities of even the biggest, wealthiest companies.

It's the reason why tracks are saturated with freight traffic, but capacity is almost never increased. The amount of capital needed, and the length of time needed to pay it down, and the risk involved due to both the amount and duration, make it impossible. An independently-wealthy, land-rich railroad can't do it by liquidating holdings to raise funds, because the very act of trying to liquidate enough of its land holdings to raise the necessary funds would saturate the market and depress the land's value. A Wall Street-traded company can't do it, because their stock value would be destroyed by having that much debt -- assuming it could borrow that much in the first place. Equity financing would be a no-go, because selling enough stock to raise a billion or more would dilute the original owners' holdings to almost nothing.

Personally, I'd like to see Florida buy at least the CSX "A" and "S" lines (other than maybe the "S-Line" north of Lakeland, since it's largely useless for passenger rail anyway... should that ever become a viable market, there's always the median of I-75 to build in or above), and do a semi-cheap double tracking -- one brand new track, with concrete ties and CWR ready to rock someday at 110mph when/if it ever becomes cost-effective to upgrade the signals and crossings to allow it, but 79mph until then... with the original track and grade crossings left largely unimproved and as they are (using the new track mainly for passenger trains, and treating the old track like an big passing zone). Then, they could divide up the passenger market as follows:

a private company (Amtrak could bid, but would get no special favors) has the exclusive right to offer intrastate passenger travel, with a few exceptions and open-access provisions so they couldn't exercise a monopoly right to NOT offer service between two stations. In other words, they could ignore any cities they want, but if they do, they can't stop Florida from allowing someone else to serve those cities instead. Virgin Trains comes to mind as an obvious candidate... they've expressed an interest in Florida rail in the past, and they've become experts at running fast trains on decrepit^h^h^h^h^h^h^h^h sub-optimal track. This company can also offer unticketed passenger service and carry the same kind of freight UPS will let you ship... but wouldn't have monopoly rights to either.

Amtrak would be allowed to continue serving Florida. They could even carry passengers entirely within Florida (ie, pick up a passenger in Miami, carry him or her to Orlando). But, to keep things fair for the official company, Amtrak would have to operate under one firm rule: no railcar can visit the same city more than twice before leaving the state if it carries even a single revenue passenger who boards AND disembarks in Florida. In other words, Amtrak can add a car in Miami, and use it to carry passengers to Orlando... but at that point, the railcar has to follow the rest of the train to Georgia or Alabama before returning to Miami. In other words, Amtrak gets all the obvious interstate passengers, and has a pretty generous leash with lots of loopholes to let them handle plenty of 100% in-state passengers, too. Amtrak could carry UPS-type freight and parcels, but they'd ONLY be allowed to carry packages that were leaving the state or coming from another state.

Commuter rail operators, like Tri-Rail, would operate under the rule that they aren't allowed to offer reserved travel or checked baggage.

FDOT would assume financial responsibility for laying the tracks and pouring the first bare concrete slabs for stations where necessary... but everything beyond that would be up to the local city or county, who'd presumably take enough pride (or at least practical interest) in their community's increasingly-important public image to build and maintain decent stations.

FDOT would be required to charge two track fees: one, per train passing over an improved segment of track (say, $350 to run between Magnolia Park and Auburndale, or $1,400 to run between Kissimmee and DeLand) which would be assessed ONLY to passenger trains and be set at whatever level were necessary to fully-amortize the railroad's initial purchase and rehabilitation by FDOT within 40 years, and a second fee that would be assessed to both passenger and freight equally that by law had to be sufficiently high to cover 100% of ongoing maintenance and operating expenses. The per-train fee would be equal for all trains passing over the improved segment, and FDOT couldn't give a discount to transit agencies (ie, if the cost to run a train from Kissimmee to DeLand were $1,400, that $1,400 would be charged to Amtrak, the intrastate passenger line, and Central Florida Rail equally; if Amtrak by law couldn't be charged it, FDOT would have to personally fund the difference out of its annual operating funds). The goal here is financing transparency. If CFRail hemmorhages cash because it's charging $6/passenger, while VirginRail is making money hand over fist charging $89/passenger, that SHOULD send a strong economic message to the transit agency that it ought to be charging more to riders). FDOT would also be prohibited from rolling anything besides track construction and corridor improvement into the per-train fees (ie, they couldn't build a half-dozen nice stations for CFRail, and try to roll their cost into the segment track charges borne by Amtrak and the franchisee).

The intrastate passenger franchisee would have one more perk... it could demand that FDOT upgrade any segment(s) of track it chooses to a maximum of 110mph standards, within a fairly short timeframe whereby the franchisee would submit bids to FDOT, who'd then have 60 days to either pay the down payment to the bidder of its choosing, or find one of FDOT's own choosing that met the same quality AND expediency standards (ie, FDOT couldn't pick someone who bid half as much, but wanted 24 months to finish instead of 8 months). The financed improvements would immediately be added to the segment's per-train access charges, amortized over the same 40-year period.

Personally, I'm convinced that it is possible to run profitable passenger service, as long as you view and run it as a premium-rate luxury service for people who could drive or fly, but given a viable & more-appealing alternative, would rather not. As opposed to cheap 'n nasty cattle-car transit for the poor unwashed masses whose only real alternative is a bus. At least, over certain carefully-handpicked routes that constitute the passenger rail equivalent of "low-hanging fruit".

The problem is that you have to focus on profit-maximization, not ridersihp-maximization. I had one particularly depressing moment reading an FDOT report on cross-state passenger rail, and realized that two of the scenarios they eliminated from consideration in round II (both involving 110mph upgrades to existing CSX corridors, with a few detours to put stations in slightly better locations) were actually the two that were projected to be profitable, in favor of alternatives that would have required millions of dollars in annual subsidies to sustain... all in the holy name of "ridership". And the fares they identified as "profitable" were only about half what someone running 99.5% "on-time" trains comparable to the best European 1st class rail service could REALLY get away with charging ($29 to Orlando from Miami? Dear god... you could easily charge $49-59 for 2nd class, $89 for first-class AND rake up cash on the alcohol sales while you're at it if you really tried... set aside a guaranteed-child-free "BusinessFirst" car, and you could probably charge $99 or more to sit in it...

wigwagfan wrote:

TimK wrote:It's back to business school for you. The profit motive, which means attempting to maximize profit, is at the heart of the capitalist system, I'm afraid.

Your view is extremely simplistic and not quite 100% valid.

If so, then why would anyone invest in a slow-growth or no-growth business - like the tranportation or communications sectors? Why would anyone invest in a regulated company where the rate of return is dictated by a Public Utility Commission rather than the unobstructed free market? Why would anyone invest in anything but the biggest growth companies?

Look at Warren Buffett's portfolio. Does he invest in snazzy, high return businesses? No! He, just like any other investor, wants to earn a profit - but it does not mean, by any means, to achieve a huge rate of return at any cost. Even Mr. Buffett recognizes that some years will be poor, some years he might lose.

And to bring a railroad into context - look at BNSF. A few years ago, BNSF embarked on a huge maintenance spending blitz, that Wall Street didn't like. So BNSF cancelled many projects and put the profits into investors' hands. Two years later, BNSF reversed direction and is going back to putting the money into the railroad, rather than raking it in as profit. Certainly anyone can attest to how well a railroad BNSF is - are you arguing that BNSF should follow the maintenance guidelines of UP?

I have to take my financial advise from the 2nd richest man in the United States over you, sir. Not to mention, that my employer happens to be a subsidiary of Berkshire Hathaway.

It ought to be obvious (but apparently isn't to everybody) that decisions to invest in a company are made differently from decisions on how to run a company.

Obviously not everybody invests their money solely to earn a profit. That doesn't mean that the profit motive doesn't drive companies as opposed to investors.

For a corporation to fail to maximize shareholder value is not a crime; therefore no statute can be cited, as you previously requested. However, it can indeed be a tort and, as was mentioned, there have been a number of lawsuits over this. Any company that wants to avoid being sued must work to maximize shareholder value, which ultimately means maximizing profit -- not necessarily just in the short term, but maximizing profit nonetheless.

Similarly, Mr. Buffett invests in such a way as to maximize his profits over the long term. That doesn't mean his motives are different, only his methods.

The profit motive is, of course, the basis of the capitalist system, and for you to argue otherwise is just foolish.

-- Tim

Moved to General Railroad Operations.

John Perkowski

One of your two Amtrak Moderators

Not only in Great Britain, but in France too, you'll see a split rail operating scheme. The privatised entity(ies) run the passenger operations (own the cars too) and a shell/shadow corporation (the government) owns, operated and maintains the tracks.

Actually makes sense, the private entity can make/show a profit and the government can foot/hide the cost of the infrastructure within its General Fund. Additionally, if one thinks about it, this is effectively the same model used by the US aviation industry

This is why most people say that there's no way to really assess the economics of the French TGV system, since the infrastructure numbers are buried in the overall transportation budget.