Metro

Keolis lost $9.9m on commuter rail in 2014, audit says

Commuter rail operator looking to reduce costs

Some passengers have been forced to stand up during rush-hour rides on commuter rail trains.
Harrison Hill for The Boston Globe
Some passengers have been forced to stand up during rush-hour rides on commuter rail trains.

An independent audit shows that the MBTA’s commuter rail operator is losing money and has been borrowing from its international parent company to make ends meet — revealing a company that must cut costs even as it tries to repair an aging fleet and make its trains run on time.

An audit obtained by the Globe shows that Keolis Commuter Services ended 2014 with a net loss of $9.97 million after taking over the T’s commuter rail service in July. The company expects to lose more money in 2015, according to the audit completed by PricewaterhouseCoopers, the accounting firm.

Leslie Aun, a spokeswoman for the company, revealed few specifics about how the company is cutting back, saying such information was private and competitive.

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She also said such losses are typical in the first few years of such a large contract.

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“You don’t walk into a situation like this and start making money off the bat,” she said. “These are big contracts. You have to make a lot of changes.”

Keolis Commuter Services, the Boston outpost of the French transit group Keolis, took over in July, after it was chosen for a $2.68 billion, eight-year contract over the former operators, the Massachusetts Bay Commuter Railroad Company.

Pressed for specifics on how the company is reducing expenses, Aun provided a list of ways that Keolis is trying to improve upon practices under Massachusetts Bay they consider outdated and inefficient.

In one example, she said Massachusetts Bay used to schedule employees using an Excel spreadsheet that was time-intensive and inefficient. Since taking over, Keolis has implemented a “modern system” to streamline the process and save money, she said.

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“We’re looking at literally every aspect of the commuter rail operations for ways to operate more efficiently and to reduce unnecessary costs — from how we schedule employees to how we order supplies,” she wrote in an e-mail.

But Joseph A. English, who heads the local chapter of the Association of Railroad and Airline Supervisors union, said he worries that such fine-tuning avoids the real problem: That Keolis bid too little for the contract and doesn’t have enough resources to properly operate the rail system. “You just don’t have enough people,” he said.

Aun said the company is still hiring for positions left open by Massachusetts Bay and there are a number of one-time expenses that will not exist next year.

“Most expenses were investments in operational improvements such as a new safety program and the opening of the first dedicated customer service call center,” Aun wrote in an e-mail.

The total operating expenses of Keolis Commuter Services in 2014 amounted to $175.8 million in 2014, with about $131.2 million going toward wages and benefits. It employs about 2,000 workers, and about 1,800 are in unions, according to the audit, which is required under the terms of its contract.

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The company had about $166 million in net revenue for 2014, according to the audit. The recent losses amount to about 6 percent of that amount.

‘We’re looking at literally every aspect of the commuter rail operations for ways to operate more efficiently and to reduce unnecessary costs.’

Leslie Aun, Keolis Commuter Services spokeswoman, in an e-mail 

Aun said some of the losses stem from the fines the company has had to pay the Massachusetts Bay Transportation Authority for trains that are late, dirty, or subpar in other ways. Since October, Keolis has paid the maximum amount for late trains every month. The company has also been fined for other shortcomings every month.

The company had to pay $2.6 million in total fines for the year of 2014, according to the audit.

Extreme weather, old trains and tracks, and leadership troubles have all contributed to Keolis’s problems in late 2014 and this year. A series of relentless snowstorms slammed the company in late January and February. Even after the snow melted, the T released figures saying about 14 percent of Keolis trains ran late in May. [The MBTA has since said some of those trains were late because of factors outside of Keolis’s control.] Keolis has also warned that delays will persist because of the hot weather.

Aun said the company has been challenged by many “unpleasant surprises” after taking over the contract. Though she did not mention the previous operator by name, she alluded to “poor maintenance of the locomotive fleet” and a “lack of modern business processes” of Keolis’s predecessor.

“We’re here for the long term and are making changes that we know from experience will lead to a better service,” she wrote in an e-mail.

Michael Verseckes, a spokesman for the state Department of Transportation, said the MBTA is reviewing the finances of Keolis Commuter Services to make sure the company lives up to its contract.

“The MBTA does not believe that the losses at KCS will adversely affect customer service,” he said.

Keolis S.A., the French parent company of Keolis Commuter Services, has a lot on the line with the operation of Boston’s commuter rail system, one of the largest in the country.

The T’s commuter rail represents one of the company’s first major forays into the American rail market. Keolis S.A., which is owned in part by the French National Railroad Company, is also the parent company of a separate subsidiary that runs a commuter railroad in Virginia. But the MBTA’s commuter rail — which provides more than 129,000 rides every weekday — overshadows that operation.

The audit shows that both the international company and the French national railroad have subsidized the Boston operation.

Keolis Commuter Services repaid $20 million in principal to its parent company and $8.8 million in principal to the French National Railroad Company, according to the audit. Keolis Commuter Services also paid the entities for consulting and interest on the loans.

Asked about the funding from the parent company, Aun said Keolis Commuter Services fully expects to be profitable.

“They provided the initial funding to make the investments as a strategic business decision because they believe this is an important piece of business,” Aun said.

Nicole Dungca can be reached at nicole.dungca@globe.com. Follow her on Twitter @ndungca.