8/3/2019 Amtrak_Acela - Student Teaching Note

1/1

NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK):

ACELA FINANCING

Teaching Note

(Adapted from the Darden School of Business)

In the late 1990s, the National Railroad Passenger Corporation (Amtrak) faced a rude awakeningas the U.S. Congress stipulated that Amtrak eliminate its reliance on federal subsidies by 2002.In response, Amtrak drew up a plan for self-sufficiency, the centerpiece of which was a new,high-speed passenger service that it hoped would boost revenue enough to make Amtrak self-sufficient by 2002.To run this new service, Amtrak needed to purchase $750 million worth ofnew locomotives and train cars in 1999. Three alternatives were available for funding thepurchase: debt financing, lease financing, or reliance on federal sources.

The case opens in April 1999, with Amtraks Chief Financial Officer (CFO) Arlene Friner

instructing her staff to review a leveraged-lease proposal that has just been submitted by BNYCapital Funding LLC (BNYCF). The objectives of the case are to:

Introduce students to financial leases as a financing alternative.

Explore the lease-versus-buy decision and the conditions under which financial leasearrangements make sense.

Exercise skills in the valuation of financial leases.

Suggested Questions:

1. What is a financial lease? How does a financial lease work? What advantages ordisadvantages does it have over debt and vice versa?

2. What are the advantages and disadvantages of each of the three financing alternativesgiven in the case?

3. Which alternative did you choose? Why? Provide quantitative support for your answer.4. What does a sensitivity analysis show? What are the key bets in the decision?