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Is This Any Way to Run a Railroad?

You think you've got problems? Amtrak's got an overpaid workforce. Its trains and tracks are falling apart. Worse, the carrier's balance sheet is a flat-out mess.

Installment Plan

That fact is apparent in the recent brake problems that scuttled Acela service for five months. That disruption to the popular high-speed train service underscores a huge challenge facing Smith: repairing and replacing the railroad’s deteriorating assets. Some of Amtrak’s assets, things like overhead power lines and switches, went into service at the turn of the 20th century. In one report, the Department of Transportation’s inspector general noted that “continued deferral [on capital spending] brings Amtrak closer to a major point of failure on the system.”

Amtrak has earmarked $787 million for capital spending in its 2006 appropriations request. But most of the railroad’s current projects will take several years to complete. “It does make it difficult to make long-term decisions when you have a year-by-year-by-year appropriation process,” concedes Smith.

Smith’s task will become more difficult if Amtrak’s credit rating slips any further. In May, Standard & Poor’s placed the railroad’s BBB- rating on CreditWatch, with negative implications. “Without the [government] subsidy, the numbers wouldn’t support the current credit rating,” notes S&P analyst Lisa Jenkins.

A drop of just two notches would reduce Amtrak’s debt rating to non-investment-grade, driving up the cost on future borrowings. That’s worrisome, considering the railroad paid $203 million last year just to cover the interest expense on the mountain of debt taken on during the previous administration. “It’s a lot [of debt] for a company of this size,” Smith grants. “Heck, it’s a lot for a company that operates at a loss and depends on federal funding.”

Still, it’s unclear what changes — if any — would push Amtrak into the black. Even critics within the DoT concede that passenger rail in the United States, as in other countries, will always require some government backstopping. But bringing more financial rigor and transparency to Amtrak would at least place Smith in stark contrast to earlier managers at the railroad, say observers.

So far, the CFO has moved to strengthen Amtrak’s 250-member finance department, hiring more analysts. He has also launched plans to improve the railroad’s outdated data-gathering systems. And he has brought a dose of reality to the profitability issue. “We can do a reasonable rate of return, but it’s not going to be a rate of return that most people understand,” he insists. “A large component of the return is going to be the social good we do.”

In a sign that some lawmakers may understand that social good, the Senate recently began considering a bipartisan bill that would provide Amtrak with nearly $5 billion over the next six years for capital improvements. As of press time, the proposed legislation, which also empowers the DoT to assume some of Amtrak’s debt, was still in committee. It won’t likely come up for a vote until next year.

Until then, Smith will be busy trying to land a line of credit for Amtrak, most likely with his old friends at the FFB. Staring up at the framed letter from the agency on his office wall, he notes: “We don’t have a line of credit. We’re a $2 billion operation, and we don’t have a line of credit.”


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