Amtrak Food and Beverage

Back on Halloween, Amtrak’s Office of Inspector General released a new report on the state of Amtrak’s food and beverage service. Unsurprisingly, it continues to lose money, to the tune of $72 million in Fiscal Year 2012. There are several issues, however, which it overlooked or otherwise did not appear to notice which I thought worthy of comment.

The first is that the Acela’s food and beverage profitability, and by extension that of the Northeast Corridor as a collective whole, does appear to be a case of cooking the books. Unlike the complimentary food on the long distance trains, which is accounted for according to the menu price, Acela first class meals are attributed according to a calculation based on hotel meals in four cities which Acela serves. In May of 2011, this formula was adjusted with the result of a significant increase in revenues attributed to food and beverage.

Put plainly, this sort of formula is complete crap. Even if there is not a true menu price due to the meals not being sold to other passengers, a notional menu price should still be created, if solely for bookkeeping reasons, based on the cost of food and a normal and customary markup. The prices of meals at hotels near Amtrak stations has absolutely nothing to do with the cost or appropriate price of the food which Amtrak is serving. It may serve as an appropriate guide to the food which Amtrak should serve or the general price range of its offerings, but it cannot be used in isolation of the actual food itself.

Next we come to the Auto Train, the single most pointless train in all of America. The sole justification for the Auto Train is that it makes money; it provides no useful transportation service such as one might argue with the other long distance trains. Predictably, it loses tens of millions of dollars each year. I find it somewhat surprising that rail advocates who argue passionately for more long distance sleepers do not advocate the breaking up of the Auto Train and the distribution of its sleepers amongst other routes which might find more use from them; perhaps they fear the logical conclusion of an opportunity use argument against long distance equipment in general.

That aside, the Inspector General is swallowing camels while straining gnats when it comes to the Auto Train, marking only an objection to the Auto Train, and three long distance routes, spending $480,000 on complimentary wine and cheese tastings. Quite frankly, this is a pittance and, if one insists on investigating this, a better question would be how much does Amtrak make in revenue from sales of wine and cheese as a result of the tasting. Instead, the Inspector General should have questioned just why Amtrak spends quite so very much on food and beverages for passengers of the Auto Train.

For every single passenger aboard the Auto Train, Amtrak spends a total of $52.89 in food and beverages. That’s not the menu price, that’s not the price including labor, that’s strictly the commissary cost per passenger. To put the problem another way, for every three dollars which Amtrak collected in ticket revenue from passengers aboard the Auto Train, one dollar was spent on food and beverage service. Now, the Auto Train is naturally going to have a higher amount of spending than any other train; in view of the high fares which are paid in order to transport their vehicles, every passenger is given complimentary food, not merely the sleeper passengers. Perhaps this is a reasonable business decision by Amtrak to drum up additional business. What is not a reasonable business decision by Amtrak is that this extends to complimentary alcohol as well. Alcohol is one of the most profitable things there is in the food industry with markups of four to five times the actual cost to the restaurant. It should never be given away just for free like that, but only in such a fashion as to increase sales otherwise (such as a wine and cheese tasting which then offers bottles of wine for sale).

Let’s return to that commissary cost, $52.89 per passenger. That’s the cost of a single dinner and a continental breakfast and the food cost of a continental breakfast is extraordinarily low; a typical price including labor and profit margin is generally under $10 per person. If this represents a normal per person figure for sleeper passengers on other trains, there are some profoundly disturbing implications for the question of whether sleepers actually result in a marginal contribution to train revenues.

I grant that use of a contracted commissary may result in higher food costs than direct purchase of raw ingredients and as such, Amtrak can expect a higher ratio of food costs than the 33% of sales that restaurants normally go for. However, this ratio is never less than 42.9% (Silver Star) and exceeds 100% on six trains: the Auto Train, Sunset Limited, Crescent, Southwest Chief, Lake Shore Limited, and the Texas Eagle. That does not account for the cost of labor, which is tremendously high. A waiter, or any other Amtrak on board service employee, receives a wage of $25.54 per hour and has a total cost, including benefits and employer paid taxes, of $41.19 per hour according to the Office of Inspector General. This is far in excess of the $8 to $10 an hour that a normal waiter may receive here in the state of California, with higher levels of paid benefits and employer paid taxes as well for Amtrak employees, and in both cases the employees receive tips.

I do not begrudge anyone a living wage and even with positions that are normally heavily tipped,  I am strongly in favor of a rate of pay which allows them an affordable living without a reliance on tips. But Amtrak’s labor costs are insanely out of line with anything that could ever be profitable and are significantly higher than what is necessary for a living wage. Generally I oppose comparisons to other industries, but in this case I think it is a valid one: Is Amtrak on board service truly worth being recompensed, before tips, at the same rate as nursing?

But, though the long distance dining car is doomed to make direct losses, perhaps it makes an indirect profit. Perhaps the dining car, and the free food that it provides for sleeper passengers results in sufficient additional sleeper revenue as to overshadow the losses. This may, perhaps, be true on some trains. It is most certainly not true on the Sunset Limited, Cardinal, and Crescent, where the cost of providing food and beverage service exceeds the total revenue from all sleeper passengers; in the case of the Sunset Limited, even with the revenue transfer from the sleepers, food and beverage losses exceed total sleeper passenger revenue.

Let’s assume that coach passengers on other trains, by and large, follow a similar pattern to the Palmetto, with the same average revenue and costs ($3.99 and $5.09). This will underestimate things on both accounts slightly of course, since some coach passengers do purchase meals (at a loss for Amtrak) from the diner, but useful for a first run through. Under this assumption, even the best performing train, the Silver Meteor, has food and beverage expenses amounting to 33.7% of total sleeper revenue, an average amount which comes up to 66.6% of total sleeper revenue, and the always terrible Sunset Limited coming up to 150% of sleeper revenue. The vaunted sleeper fares, which Amtrak admits are not set with consideration of the cost of food and beverage service in mind, very quickly disappear once food and beverage service is brought into play.

Let’s look at it another way. Each car incurs a certain amount of costs per mile for fuel (.03 gallons according to Table 3.4) and maintenance. As a per mile charge, this necessarily results in a higher charge for the Western trains, which travel up to 2,438 miles per run, and lower ones for the eastern trains and tri-weekly Cardinal and Sunset Limited. In absolute terms, this number ranges from a daily train low of $489,256 on the Capitol Limited to a high of $1,529,237 on the California Zephyr. As a percentage of sleeper revenues, this generally runs the gamut of 5-10%, for an unstaffed dining car with no food in it, with the notable exception of the Cardinal, where it amounts to 21.64%, rather easily explained by the fact that the Cardinal possesses only a single sleeper. Of course an unstaffed dining car is rather pointless, so let’s add the costs of staffing to it. Admittedly, most trains include a separate lounge, so we’ll discount those trains by the labor cost per mile of the Palmetto, which is coach only with a dinette (88¢ per mile) and the Coast Starlight twice to remove the Pacific Parlour Car. This isn’t a perfect solution of course; wages are paid by the hour, not by the mile, and there are pre and post trip paid duties, but it should get us into a reasonable ballpark. The result? Just under half of Amtrak’s sleeper revenue is dedicated to dining cars and that before they’ve even paid for any food. For the daily trains excluding the Auto Train, the average sleeper fare is only $71.91 higher than the average coach fare once such figures are deducted; a fare that must still account for the actual cost of food, the dedicated sleeper attendants, and the opportunity cost of using a lower capacity sleeper car instead of a coach car.

Is this an unfair assessment for the sleeper passengers? Unfortunately no. The dining car exists solely for the purpose of sleeper car passengers. Passengers on the Palmetto find themselves perfectly satisfied with a dinette despite traveling the same distance as coach passengers on the Coast Starlight. Yet the Coast Starlight finds it necessary to add not merely a dining car, but also a second lounge, the Pacific Parlour Car, dedicated for the sleeper passengers. What revenue is spent by coach passengers in the full dining cars, over and above the cost of food, serves to subsidize the sleeper passengers. Even then, even if every single dollar of revenue attributed to the diner came from cash, at no point does the revenue exceed the labor hour cost plus food cost (it exceeds labor cost by about a nickel in June).

Until the 1980s, food in the diner car was strictly a paid for extra, no matter whether one was a coach passenger or a sleeper passenger. It is time for Amtrak to either return to that tradition or to adjust sleeper fares in order to recover the full cost of providing complementary meal service to the diner passengers. Advocates for the long distance trains like to crow about how high the occupancy factors are for these trains (a feat accomplished by having a small number of seats); they should have no problem with fares increasing in order to recover costs until such time as total revenue actually begins to drop. An additional benefit of returning to the prior tradition of all passengers paying at the diner is that it should decrease demand somewhat, allowing for more cars to be served with a single diner.

Amtrak should also divest itself of the Auto Train. As I mentioned before, it serves no justifiable purpose except to make money, which it manifestly fails to do. It is possible that the equipment on the Auto Train (8 Superliner sleepers, 4 deluxe sleepers, 8 Superliner coaches, 6 diners, and 4 lounges) may allow for better cost recovery on the other trains. This sort of self-justification is something which every Amtrak supported route should be regularly subjected to; routes should never be kept running with abysmally poor ridership simply because they currently exist and nor should they do so in the hopes that there may be a future service improvement, especially since the capital cost of equipment should be accounted for. Yes, subsidies may be necessary for certain social goals, but they should still be given out on the basis of the biggest bang for the buck.

This is a question that is going to especially trouble the Western long distance trains as the Superliner equipment wears out and new bilevels are available thanks to the corridor purchase order by California and certain other states. Are these trains worth a capital investment of seven hundred million, likely over a billion dollars with new locomotives, and an ongoing annual subsidy of three hundred and fifty million dollars? Would the nation be better served instead by using the money for other programs (such as Essential Air Service) or by funding alternate capital improvements, such as an extension of the San Joaquins to Redding or Chicago to Omaha several times daily? These are questions that will be asked by Congress in the coming years and they do not bode well for the long distance trains until and unless they are able to remarkably improve their performance by, among other things, getting rid of losses for food and beverage service.

An Excel copy of the spreadsheets created to work on this is available here.