Financial Myth Busters: No Way to Run a Railroad

Michael McTague |

Financial Myth Busters: No Way to Run a RailroadThe cart comes down the aisle of the airplane. You were lucky to get an aisle seat, and you see the trolley twenty rows off. When the cart arrives, there are no free peanuts or drinks. Your angry response: “Is this any way to run a railroad?”

Where exactly does this myth come from? It derives from a much earlier era – before modern aviation and wide national highways -- when people relied on railroads and found them well run. It implies anger at poor service and the expectation that good management would prevent any problem – late delivery, wrong shipment, no communication, lack of service, etc.

Let’s examine this myth. Are railroads run well? Were they ever models of efficiency? In the United States, railroads lost their image as the efficient, effective way to travel around the country as automobiles and airplanes pushed their way into people’s consciousness as the comfortable, convenient and safe way to move from city to city. So, for starters, the myth is very old and railroads are no longer seen as safer than airplanes or more convenient than driving.

American railroads can be split into two different functions – passenger travel and freight. The railroad-running myth relates to the passenger side of the business, but hauling freight offers a fountain of management insight. Freight is hauled by four major, private railroad companies. Their profits are rising even during this post-recession malaise. Rail shipments are more efficient than trucks because they use less fuel, haul much greater loads and require fewer employees. These private railroads are also exempt from most aspects of anti-trust law. On the freight side, railroads stand up pretty well to their long-standing image of efficiency and profitability. Warren Buffett agrees; he is the primary owner of the Burlington Northern Railroad.

But the myth relates to passenger traffic. Amtrak, the national railroad of the US, covers the nation, running about 300 trains a day. They boast a similar on-time performance to the airline industry, about 79%. Keeping to a schedule is important, demonstrating quality and reliability. It used to be said that Mussolini made the trains run on time. While that is disputed, it is also indirectly memorialized by Cole Porter’s Anything Goes: “You’re the top; you’re Mussolini.”

Beyond the Mussolini effect, the myth begins to fall apart. Passenger travel by rail in the U.S. turns problematic. Except for the now rare person who is afraid to fly or a retired person who wants to enjoy the scenery and maybe stop off at a few places they have never had the time to visit, few people would consider crossing the nation by rail. Aside from the issues with trains stopping frequently and giving way to the more profitable freight haulers, it is difficult to stay on one train from, let’s say New York to Los Angeles. So, a trip that would take perhaps twenty times as long as an airline flight also involves changing trains often.

The financial picture explodes the myth further. Only the north east corridor turns a profit carrying passengers. In 2010, Amtrak says 79% of its operating costs were covered by passenger revenue. In fiscal year 2011, Congress granted Amtrak $563 million for operating costs and $922 million for capital improvements. The industry contends that several billion dollars are needed to repair infrastructure. So, neither day-to-day nor long-term costs are covered by revenue. Like Fannie Mae and Freddie Mac, two notorious quasi-private organizations, Amtrak also dips into the federal till. Running in the red is no way to run a railroad. (Where is Mussolini when you really need him?)

But, to be fair, if you are ever on a train that missed its schedule and find yourself in a railroad dining car served by a waiter with the nimble tread of the feet of Fred Astaire, having a Ritz hot toddy, a Waldorf Salad and Camembert, smile and nod. What ever you do, please don’t say, “Is this any way to run a railroad?”

Keep reading – another myth will be “busted” next month. Please comment on this myth and let us know which myths need exposure.

Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a private equity firm in New York City.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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