Franchising Amtrak Train Stations

By Andrew C. Selden

May 5, 2018

Thousands of American businesses, some very small, some quite large, have employed a business technique that enables them to leverage their capital and managerial resources to build and maintain networks of retail sites numbering in some cases in the multiple thousands. These networks are far larger than anything the business itself could afford, or manage effectively. When used competently, the technique can deliver amazing returns on the investment. The technique is called franchising.

Franchising has been successfully employed in every imaginable business sector, sometimes for the retail sale of tangible products (e.g., automobiles or ice cream), sometimes for services (e.g., education, fitness, or lodging). Some franchises even involve the conversion of a successful established business into a unit of a larger franchise network (e.g., real estate or travel agencies), or devolution of an existing company-owned dealership into the hands of the former manager, now acting as an entrepreneur.

A “franchise” is the license by a franchisor to a franchisee of the right to use the brand, business format and operating system owned by the franchisor, in exchange for specified fees and the franchisee’s commitment to establish and operate the business in accordance with the system standards set by the franchisor. This is the method that makes all Burger King units look and act more or less identically to each other, but distinctively different from competing chains.

Ownership of the licensed property remains with the franchisor, together with the sole and exclusive authority to set brand standards. Ownership of the franchised business resides with the franchisee. The property licensed is similar to leased equipment used in the franchisee’s business.

The great strength of franchised business networks arises out of the franchisee’s equity in the franchised business. It is the franchisee’s capital that is at risk, just as the potential rewards of a successful business belong to the franchisee. This concentrates forcefully the owner’s attention on the successful operation of the business. Most franchises involve an owner-operator who is a hands-on manager, in daily contact with customers of the business. Even so successful a franchisor as McDonald’s has found that having too many of its restaurants owned by McDonald’s, rather than franchisees, isolates management from the customer, and produces both reduced store-level profitability and damage to the brand’s customer goodwill.

To the franchisor, use of franchising accelerates growth (by leveraging its capital and management resources), leverages its own capital and returns on investment of capital, and facilitates entry into distant or difficult markets that the franchisor might struggle to reach using only its own resources.

What does any of this have to do with Amtrak? First, set aside (as beyond the scope of this commentary) the opportunity value to Amtrak and its customers of franchising train operations in particular routes that Amtrak does not understand or value. Let’s focus, instead, on the opportunity to convert local Amtrak stations into a national network of small individual profit and growth drivers, rather than the obsolete cost centers that Amtrak sees in them. And, let’s assume that Amtrak would retain ownership of the big city stations—Philadelphia, Los Angeles, Chicago—as “company stores” under its direct control.

That leaves more than 500 places across the country where Amtrak trains stop where a station facility could be established, or taken over, by a local franchisee (quite possibly, the existing agent) who would be a licensee of Amtrak’s brand, operating systems and know-how but would also own the resulting business enterprise. The franchisee, as in any other system, would be responsible for investing in a station facility, new or old, that meets Amtrak’s facility standards, and providing station services to customers, using Amtrak’s computer systems, printed materials and operating techniques.

Many if not most of Amtrak’s smaller stations, even those on once-a-day long distance routes, will support such a business provided it is part of another local business operated from the same physical facility. Some established franchisors already follow this model by licensing their business as an adjunct to another existing business (e.g., a pizza stand in a C-store or a college foodcourt). With an Amtrak station, the station’s building might also support a restaurant, car rental agency, florist, or any of a myriad of local businesses. It may be in many cases that the Amtrak agency is merely the add-on and the other business actually pays the rent. That doesn’t matter.

What’s in it for Amtrak? Station agents don’t just sell tickets. Especially in non-commuter markets, they provide a wide range of extremely valuable services to customers. These include checked baggage service; ticket sales; travel counseling to customers who contemplate long, multi-night travel, involving connections, stop-overs, choices of sleeping car accommodations, and special on-board services (almost impossible to explain or individualize using only online tools); information on local connections and transit services; problem solving for missed or late trains, passengers meeting others at a station, and general information services; customer safety on train platforms; community relations for Amtrak, including local sales and marketing activities; information about parking and local businesses; and, sales of Amtrak vacation packages. All of this is lost by the false economy of “un-staffing stations,” but is assured at every franchised station, by contract and through the informed self-interest of the franchisee.

Franchising is a regulated form of business, but the regulations are well-understood and easy to comply with. They entail only modest costs. Only one “director”-level employee at Amtrak, working with a qualified outside experienced franchise consultant or attorney, would be required to manage a station franchise program.

A station franchising program could be in operation in less than six months, at an initial cost of less than $100,000. It would begin to pay dividends immediately in improved sales and revenue, public awareness, and customer satisfaction scores. A well-crafted franchising program could have a payback period of less than two years. It would be a strong “win-win” for both Amtrak and its customers, and the communities that Amtrak serves.

 

Andrew C. Selden is a former franchise lawyer, who is a past Chair of the American Bar Association’s section on franchise law, called the ABA Forum on Franchising. He has established and supported for clients dozens of franchise networks, small and large. He was a long-serving member and past chair of the regulatory body that writes and administers franchise pre-sale disclosure obligations, and has written and lectured extensively on franchising.

 

 

Defining Passenger Train Passengers

Who are the denizens of a modern passenger train? Asking that question is about the same as asking for a breakdown of the denizens of a small city.

Passenger trains meet the mobility needs of a wide swath of the population, whether it’s on a long distance train traveling from the Midwest to the West Coast, New Yorkers heading to Central and South Florida for a winter vacation, or passengers riding on a state-sponsored corridor train on New England’s Downeaster service.

Passenger train critics say passenger manifests are populated by somebody’s grandmother going to visit her grandchildren, or others who can’t afford to travel any other way. The critics always cite those who are afraid (or, smart enough not) to fly.

Everyone else they believe travels the way they believe they should, either by driving a private vehicle or flying.

The critics are wrong.

A typical passenger train full of passengers has:

– Leisure travelers, often referred to as VFRs – visiting friends and relatives. There is no age category for this group of passengers.

– College students and others of the Millennial Generation, most of which have no prior prejudice about riding a train. To this group of riders, taking a train is a natural choice, based on price, convenience, and amenities to make them comfortable, such as Wi-Fi.

– Business travelers, many of which are found on state-sponsored corridor trains, but are also found on long distance trains, too, because of the valuable time found on a train where much can be accomplished by using a laptop computer and other portable electronics used in business.

– Retirees exploring the country. This category usually has disposable income, is willing to pay for amenities and have flexible travel schedules.

Here is what it gets interesting:

– Uninformed critics believe passenger train riders generally do not have high levels of education and, therefore, are satisfied with just basic transportation. Critics are often greatly surprised to learn of the great number of passengers – particularly on long distance trains – which not only have college and university degrees, but also have higher levels of degrees, such as doctorates.

– Critics do not understand the basic appeal of passenger train travel, which includes choices of group accommodations in coaches or private accommodations in sleeping cars. Critics do not understand a passenger train is a small moving city, and, therefore needs many of the amenities of a small city such as a restaurant to eat in, a lounge area for recreation and to enjoy the company of other travelers while enjoying a quiet drink or snack, and a comfortable place to sleep.

Those who do not know history are doomed to repeat it. That includes those who believe there is little or not future for passenger trains and those who choose to ride the trains.

Mobility is about choices, whether by passenger train, private vehicle, bus, airplane, river barge, or ship. It’s impossible and intemperate to label societal groups as passengers, because passengers come for all walks of life and all economic groups. Spend some time in a train station and look over those about to entrain or who have just detrained. It’s a little bit of everyone, which means all areas of society are being served.

 

 

Amtrak’s Empire Builder: A Multi-Tasking Mobility Machine That Baffles The Experts (Including Amtrak)

By F.K. Plous

Physicists argue that the bumblebee cannot fly because its body is too heavy and its wings too small. But the bumblebee does not know this, so it flies anyway.

Beware of “experts.” Wherever they look they find another bumblebee.

Take the so-called “passenger train experts.” They claim Amtrak’s Chicago-Seattle Empire Builder shouldn’t work: its route is too long, its speed too slow and its territory too thinly settled to attract today’s travelers.

The Builder doesn’t know this, and so it’s the best performing train west of the Alleghenies.

Looking at what the Empire Builder actually does, not what its critics think it does, explains why.

Not your grandfather’s long distance train

Technically, the critics are right on one point: The Builder starts its run in Chicago, and finishes up in Seattle, 2210 miles and two time zones west after 43 hours and 10 minutes on the road. In that sense it is indeed a “Chicago-Seattle” train.

But that’s not the way its patrons use it. Only about 9 per cent of the Builder’s passengers travel the entire distance.

The remaining 91 per cent of the Builder’s passengers are short- or medium- distance travelers. They ride between any and all combinations of Chicago, Seattle and 45 intermediate stations (A smaller section of the train branches off from the main train at Spokane, Washington, and finishes its run in Portland, Oregon.).

Count ’em: 931 trips on one train!

In fact, the permutations of all those stations yield no less than 931 possible city pairs for which Amtrak’s computers can print a ticket good on the Builder.

So it might be better to think of Amtrak’s Empire Builder not as a long distance train, but as a series of heavily used intercity corridor trains linking places such as Fargo and Spokane, Milwaukee and Glacier National Park, or Winona and Grand Forks.

“And it is heavily used,” says an Amtrak spokesman in Chicago. “I’ve visited every community the Builder serves and the people up there depend on it—college students, business people, tour groups, overseas visitors who want to see the American West, retirees, families visiting relatives, Native Americans traveling between reservations, tourists and skiers headed for Glacier, patients trying to get to the Mayo Clinic in Minnesota.”

The Builder is their lifeline

“There is no other form of transportation up there that links the big cities with the small towns the way the Empire Builder does,” the spokesman says. “There is very little bus or air service. The Interstate is 100 miles south—all they have is U.S. 2, which is mostly two-lane. The weather up there is terrible in the winter. Without the train there is no way to get around.”

The average trip length on the Empire Builder is 716 miles, about a third of the train’s total route. Station stops sometimes are long because people get on and off at every stop, even tiny rural points that most interstate tourists ignore.

“The Builder is their lifeline,” the spokesman says.

First class few finance many in coach

Interestingly, Builder passengers traveling more than 1,000 miles make up only 23 per cent of the train’s ridership—but they generate 63 per cent of the revenue. The 47 per cent who travel less than 500 miles provide only 20 per cent of the revenue. And sleeping car passengers, who pay premium fares, provide 43 per cent of the Builder’s revenues, despite making up only 16 per cent of its passenger list.

“That effectively refutes the argument you sometimes hear that Amtrak shouldn’t be operating trains for so-called ‘wealthy leisure travelers,’” says an Amtrak official.

“The first class travelers make train travel possible for the coach passengers,” the spokeman said off the record. “I’d call that a good deal. The airlines use the same economics to keep their coach fares reasonable.”

But no matter how the data are sliced, no single market segment dominates. The Empire Builder is everybody’s train, gathering and distributing so many varieties of travelers between so many origin-destination pairs that no other transportation resource can match its versatility or efficiency.

‘A multi-tasking mobility machine’

“I don’t consider the Empire Builder a Chicago-Seattle train,” says James E. Coston, chairman of Chicago-based Corridor Capital LLC. “That’s just where its rolling stock originates and terminates. The Builder actually is a multi-tasking mobility machine that serves dozens of markets at once.”

Coston, who worked as an Amtrak ticket and baggage clerk when he was a college student and served on the Amtrak Reform Council from April, 2000, to December, 2003, said the Builder’s logistical efficiencies are not unique.

“All the long distance trains have similar demographics and economics,” he said. “I used to sell Amtrak tickets and handle baggage at Chicago Union Station, and the customers we served came from everywhere and went everywhere—not just to the end points. The principle is the same whether you’re talking about the Empire Builder or the Southwest Chief or the California Zephyr or the City of New Orleans. The reservations computer showed the vast majority of the riders originated or terminated at intermediate stops that either did not have air service or were very fatiguing to reach by car.”

90 million Americans won’t fly— they need more trains

And there are lots of potential riders still out there, Coston said.

“Thirty per cent of Americans surveyed have told pollsters they absolutely will not fly, either out of fear of flying or just plain discouragement with the airline system,” he said. “Plus there’s a large and growing number of people who cannot drive or prefer not to drive. That’s a category that used to include mostly senior citizens, but now it includes large numbers of millennials. Add them together and you find there is a very large market for short distance travel on long distance trains. We need at least one more train on each of those routes.”

Why more service?

“Substantial numbers of people already are boarding the westbound Empire Builder at Fargo at 3:49 a.m.” Coston said, “and there are lots of people boarding the eastbound at 2:10 a.m.

“Can you imagine what kind of business Amtrak would be doing at Fargo if another train went through at a decent hour? The Fargo-Moorhead area has more than 100,000 people. And every Amtrak overnight train has between five and 10 stops it serves at an inconvenient time.”

Rolling stock shortage limits travel

Amtrak carried 31.7 million passengers in 2017, up almost a million from 2015.

“Basically, all of the long distance trains are now running full because Amtrak’s long distance fleet has not been expanded since the 1980s and actually has shrunk because several cars have been lost in wrecks while several dozen others have been sidetracked for repairs the company cannot afford,” Coston said.  “It simply hasn’t got the money to accommodate all the people who would like to ride.”

Coston said the plight of the long distance trains is further complicated by Amtrak’s failure to update its reservation computers with an important software upgrade.

“It’s unfortunate, but Amtrak has no way of tracking how many applicants for tickets are discouraged by their inability to find coach or sleeping-car space on the dates when they want to travel,” he said.

“Computers did not have the capacity to measure this phantom demand when I worked at Amtrak Reservations in the 1970s,” he said.  “They do now, but Amtrak has never bought the kind of software that tracks what people do when they can’t find the right match of train and travel date. Do they switch to a different travel date, do they decide to fly or drive, or do they decide not to travel at all? There are way to get this information, but Amtrak seems not to be interested in measuring this kind of unmet customer demand.”

Train watchers have seen the lack of equipment and the lack demand software take their toll. This writer watches the Empire Builder several times a week as it makes its way through the North Side of Chicago. Until 2017 its standard consist in the summer vacation season and over the winter holidays was 12 cars. Then, as age and lack of maintenance ate into car availability, one coach was dropped and the standard number of cars dropped to 11. Even at the height of the summer travel season and the Thanksgiving and Christmas rush periods the 12th car failed to reappear.

“Each day that car failed to run Amtrak lost the capacity to carry 65 passengers,” Coston said. “In fact, because the seats on a long-distance train turn over two or three times per trip as passengers board and leave at intermediate stations, the lack of a 12th car may have kept 100 or 200 people from traveling.”

So were there 100 or 200 people out there every day who wanted to ride the Builder but couldn’t because that car wasn’t there?

“We’ll never know,” Coston said, “Amtrak’s reservation computer isn’t programmed to find out how big the Builder’s market really is. Amtrak doesn’t know the market for its long-distance trains and isn’t interested in finding out.”