Railroads: A Reader Writes

In the pile of mail that strained our transom after our post on why high speed passenger rail is a madman’s dream or an idealist’s delusion here in the US, this from Andrew Alexander stood out, we print it in full:

Public Railroads Monopoly

Some of the best investments in history have been railroads. Buffet had a masterstroke in buying Burlington Northern, paying $26B. Ackman’s made billions off these types of investments and Hunter Harrison is lionized as a railroad operator. He would take railroads and get them to 40% operating margins. For some reason, every railroad network with sufficient scale in America is fabulously profitable, except for Amtrak. The only real difference is the type of load they carry and the ownership/management quality. Let’s compare Amtrak and Burlington Northern Santa Fe.

BSNF’s network is about 32,500 miles of network, and they have 35,000 employees. In the quarter ended 9-30-22, Burlington had $6.6B of revenues against $4.6B of expense for a 30% operating margin. So today, on a conservative multiple, BSNF’s annual $10B earnings is worth about $100B, or 4x what Buffet paid. They are a financial powerhouse. 

Amtrak, by contrast, is a financial disaster. On revenues of $3B, they have $4.8B of expenses, losing almost $2B a year. They have 21,400 miles of network and 17,100 employees. 

So, just roughly speaking, what explains this? Is it due to poor management? Was Amtrak just cursed with a poor railroad network and BNSF’s is better? Is it really better to carry freight as opposed to people? I guess you could say that since humans are much more valuable on a per tonnage basis than freight, they are a better customer for railroad, but at the same time, because it’s much more valuable on a per tonnage basis, its less expensive on a per unit basis to fly, so the railroads have to compete with airplanes and cars. That could be one explanation. 

It is also possible that a pound of coal is just a better customer because it does not care when it arrives at the power plant and does not need to be cared for and fed while enroute to be burned up. 

I don’t think that these dynamics explain the shocking disparity in productivity per employee. It is tough to compare the activity levels of freight vs passengers, but just on a high level, it seems like Amtrak has roughly the same number of employees per mile of track, but BNSF has revenue of about $800,000 per employee and Amtrak has about $175,000 of revenue per employee. BNSF’s cost per employee is about $600,000 and Amtrak’s are about $300,000. 

I think the most plausible explanation is that BNSF simply has better management. My instinct is that if competent management took over Amtrak, they would have it profitable within months. For example, the CTA in Chicago should be super profitable. There is no way that a monopoly of the commuter train lines in a city of millinos should run operating losses. If you look at Japan rail, my cursory review is that it is printing money. 

No reason for the Amtrak, or CTA, to be losing money. They should be fantastically profitable. Prove me wrong. 

We had some jovial back and forth with AA. We think it’s pretty hard to make Amtrak “fantastically profitable,” that’s just not how it’s built, nor should it be the goal. Is there enough rail demand in the USA to make passenger rail profitable, or is it just not our vibe? We drive. We’re not Japan, in geography, culture, or organization. In the NE Corridor rail makes sense (and is often packed). Not sure what other routes we could guarantee. Even LA to Vegas or LA to SF might not pay out: it’s cheap and fast to fly. Burbank to OAK to BART and you can be in the Mission in time for lunch.

Profit aside though, for the rail fan who feels the spiritual power of the train, power not captured on the P/L statement, a few more reliable routes might create connection, and value immeasurable.

Do write if you have fire or insight to offer: a diablog is better than a monoblog.