Poor Management Leads to Millions in Losses

WASHINGTON — Poor management controls of Amtrak’s food and beverage service lead to millions in losses annually, reports reveal.

The Amtrak Inspector General (IG) and the Government Accountability Office (GAO), at a recent Congressional hearing, outlined their separate reviews of Amtrak’s food and beverage service and the substantial losses incurred by Amtrak due to poor management.

According to the IG’s review, Amtrak’s food and beverage operations lose up to $150 million each year. The IG figures do not incorporate losses resulting from theft, which were discussed in the hearing as being significant.

The GAO review found that for every dollar Amtrak brings in for food and beverage revenue, it spends about two dollars.

“For the passenger, some form of food service is both a practical necessity and often a key social and leisure component of the rail experience,” said U.S. Rep. Steve LaTourette, R-Ohio, Chairman of the Railroads Subcommittee.

“For the railroad, food service is an essential and challenging process that contributes little, other than goodwill, to the bottom line.

“While food operations have never contributed positively to Amtrak revenue, Amtrak has experimented over the years with different methods of managing its food operations trying to improve both quality of food service while at the same time trying to reduce costs. No easy task for any restaurant operation, especially one on wheels.

“Amtrak’s management acknowledges that even though they have made progress on correcting the previous mistakes associated with the current contract, they still have a ways to go, and are pursuing other avenues in an effort to control and reduce costs, while continuing to increase ridership and sales margins,” LaTourette said.

The Report

The Amtrak Inspector General recently issued a report entitled “Amtrak Food & Beverage Operation-Evaluation of FY ’03 Performance” examining Amtrak’s performance on a system, route, and service-type level. The report also compares Amtrak’s performance with that of the U.S. restaurant industries.

“The financial performance of Amtrak’s food and beverage operation is significantly worse than that of the U.S. restaurant industry,” said Amtrak Inspector General Fred Weiderhold.

“In our full report, we find that all of the varying types of food and beverage operations on all Amtrak routes lose money.”

The IG report found that Amtrak food and beverage operations in FY03 generated approximately $78 million in revenue but had $162 million in expenses – resulting in a loss of over $83 million.

However, these figures do not include Amtrak’s additional expense of operating, repairing, and maintaining the 65 lounge/café cars and 83 dining cars where food is served. These costs are estimated at over $65 million per annum.

Lastly, the figures do not incorporate lost revenues due to theft.

“My office and Amtrak management have been involved in a number of investigations of food and beverage workers for the past three years,” Weiderhold said.

“In an eighteen month period alone, 135 employees were dismissed, resigned or were disqualified for improper cash handling.

“The total financial benefit that Amtrak would accrue if it could operate its existing food and beverage operation at the U.S. Restaurant Industry expense to sales ratio is almost $100 million annually,” Weiderhold said.

Poor Management

The Government Accountability Office conducted a separate review of Amtrak’s food and beverage operations. According to their review, GAO uncovered losses in the same range as the IG – about $245 million over three years (FY 2002-FY 2004).

“Amtrak’s financial records show that for every dollar Amtrak earns in food and beverage revenue, it spends about 2 dollars – a pattern that has held consistent for all three years GAO reviewed,” said GAO’s Director of Physical Infrastructure JayEtta Hecker.

Gate Gourmet International, Inc. currently holds the contract to operate Amtrak’s food and beverage service. That contract expires next year.

“The provisions of the contract for food and beverage services provide little incentive for Gate Gourmet to reduce or contain the costs of food and beverages,” Hecker said. “The contract is a cost reimbursable contract, and under it, the contractor can charge for the costs of items purchased, in addition to management and other fees. Given the way Amtrak is managing the contract, none of the contractor’s profit is tied to controlling costs.

“Amtrak is not fully exercising prudent management techniques to control its food and beverage costs and prevent potential improper payments. We found three examples of this mismanagement at Amtrak.

“First, Amtrak has never required the contractor to submit an annual report – which would be independently audited – of budget variances for key line items, even though the contract requires such a report.

“Second, Amtrak has never audited the contractor’s purchase data – which is allowed under the contract – to ensure that the contractor is passing along any discounts or rebates the contractor receives on items purchased.

“Finally, Amtrak does not adequately monitor purchase prices reported by the contractor to identify variances or products with high costs,” Hecker said.

Amtrak Acknowledges

“We concede that the contract we inherited was poorly negotiated and, at times, not managed to the best of our capabilities,” said Amtrak Senior Vice President William Crosbie. “However, in recent years, we have made tremendous strides toward strengthening those weaknesses and created savings, better monitoring, and greater efficiencies.”

In his written testimony, Crosbie outlined steps Amtrak has taken or plans to take in order to reduce losses in food and beverage operations.

Crosbie also stated that Amtrak will not renew the contract, in its current form, with Gate Gourmet.

“It’s outrageous that taxpayers have footed a third of a billion dollars in Amtrak’s food service losses over the past three years,” said U.S. Rep. John L. Mica, R-Fla., Member of the Railroads Subcommittee. “Following the Acela high speed rail fiasco, this calls out for reform. Unfortunately, Amtrak has fine-tuned the art of wasting taxpayer funds.”

“As Congress continues to assess the financial condition and long-term viability of Amtrak, I believe there are a number of business practices that must be examined. I believe their food and beverage operations, for instance, represent a business management practice that, if corrected, could invigorate the railroad’s frustrated financial condition,” said U.S. Rep. Richard Baker, R-La., Member of the Transportation and Infrastructure Committee.

Another witness, Karen Preston from Sacramento, CA, described a trip she and her husband Gary Preston took on Amtrak last December, during which an electrical power outage eventually led to no heat and no food service being provided to passengers for up to 18 ½ hours.

The problem was exacerbated by a lack of information from Amtrak staff, or updates on when any alternate services might be provided.

According to Preston, the Red Cross was eventually called upon to provide the passengers with food and blankets.

“This whole experience has been a horrendous display of neglect of the welfare and safety of passengers,” said Preston. “From bad equipment to irresponsible decisions, it went from bad to worse.”

The Legislation

Meanwhile, legislation that would authorize annual funding of $2 billion over the next three years to finance Amtrak’s capital and operating expenses has been introduced in the U.S. House of Representatives. The bill is pending.

The legislation was introduced by U.S. Rep. Don Young, R-Alaska, Chairman, Transportation and Infrastructure Committee, U.S. Rep. James Oberstar, D-Minn., ranking Democrat, Transportation Committee, U.S. Rep. Steven LaTourette, R-Ohio, chairman of the Subcommittee on Railroads and U.S. Rep. Corrine Brown, D-Fla., the ranking Democrat on the Railroads Subcommittee.

In addition, the four Members also introduced legislation that would provide $60 billion for high-speed rail and rail infrastructure projects.

“Although serious disagreements still exist about Amtrak’s long-term management strategy and structure, there is a common understanding of the need for near-term funding,” said Transportation Committee Chairman Don Young. “This bill, at its requested level of $2 billion per year, will allow Amtrak to continue with critical work under its current five-year plan.

“It is my hope that the funding authorized in this bill will allow a window of opportunity for a last-chance Amtrak turnaround.”

Originally published in the September 2005 edition of The Cross-Tie.