All Aboard Florida is a plan by the Florida East Coast Railway (FEC) to run moderate-speed passenger trains from Miami to Orlando. Where a highway trip over the route takes about four hours, FEC promises train times of just three hours. While an airline trip is just an hour, when an hour is added for going through airport security, FEC thinks their route will be competitive.
The railway’s ridership study estimates the operation will attract 4 million riders per year by 2019 and that the fares these riders will pay will be enough to operate the line as well as cover the capital cost of building 40 miles of new rail between the FEC’s current tracks in Cocoa and Orlando Airport. However, a counter-study by Brown University economist John Friedman and funded by Citizens Against Rail Expansion, which opposes the train, disagrees.
Friedman estimates the line will only attract 1.5 to 2.0 million passengers a year and the fares they will be willing to pay will come nowhere near covering the railroad’s costs. As a result, it will have losses of more than $100 million per year and will soon default on the debt it plans to incur to build the new line.
The Antiplanner isn’t opposed to All Aboard Florida as long as it’s not subsidized. I am, however, skeptical that it can make a go of it even with modest subsidies. Indeed, several things seem about the proposal–some of which I’ve previously noted— make this proposal seem especially questionable.
First, in 2014 the railroad sold $405 million worth of private activity bonds (a special class of bonds that get government rates and tax exemptions) to pay for the first steps in the project, but the 12 percent interest rate they paid seems ludicrously high at a time when average treasury bond rates were just 3.5 percent. This suggests that the railroad didn’t believe it could persuade people to buy bonds at a lower rate because the investment was so risky. Now it wants to sell $1.75 billion more bonds, hoping it will get a lower rate, with a plan to use some of the revenues from the new bonds to pay off the old one.
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Third, a commuter rail line known as Tri-Rail is already operating between Miami and West Palm Beach. All Aboard Florida is counting on getting half of its riders from this portion of the route, which means it will have to capture a lot of passengers away from Tri-Rail. But it projects fares of $30 for this segment, while Tri-Rail (and Greyhound) fares are around $7. How many people will really pay more than four times as much to save a few minutes?
Fourth, FEC seems to assume that the airlines won’t cut their fares in order to compete with a train. But we know that cut-rate airlines often serve such short-haul routes for very low prices. Since one end of the proposed rail line will be at an airport anyway, most people will see little advantage in taking a train if the planes are less expensive.
Fifth, despite claims that the proposed operation will be unsubsidized, there are a variety of subsidies built in to it. The state of Florida will build the railroad’s station in Orlando. County governments will have to beef up grade crossings to meet the higher standards mandated for 110-mile-per-hour trains. (Since the rail line was there before most roads, the one that arrived later has to pay the cost of crossing improvements.) The private activity bonds themselves are a subsidy of sorts since they aren’t taxed like truly private bonds would be. Friedman estimates annual subsidies will be somewhere between $50 million and $75 million per year.
The builders of the Union Pacific from Omaha to Ogden–part of the first transcontinental railroad–realized that the real money was in construction. They used government subsidies to pay exorbitant rates to build the railroad, then sat back and let the railroad itself go bankrupt.
While the subsidies are there, the real question is just what FEC is thinking with the plan. Can it possibly believe it can earn enough revenue from rail fares to pay back nearly $2 billion worth of bonds? Or is it imitating the builders of the Union Pacific? Or is this really some kind of real estate scheme to get permission to build high-density housing near the planned rail stations?
Excellent assessment. However, the first $405 million bonds sold were not PABs – they were just your standard junk bonds. The prospectus and sale were private and the sale was stopped when the interest rate reached 12%. Our counties and private concerned citizen groups are trying to stop the PAB’s from being sold by challenging the US DOT’s approval of the sale. We are waiting for the Final Environmental Impact Statement from the FRA to be released to determine if they took into consideration the over 12,000 comments received on the Draft EIS. Then there may be even more challenges. One of our biggest concerns is the combination of express trains on the same tracks as freight trains carrying HAZMAT including Ethanol and Liquid Natural Gas, to name two. We believe that there should be a national dialog about expanding passenger rail by combining it with freight – it may be cheaper but it is also more deadly – particularly on a 100-year old route with 340+ grade crossings. FEC’s safety track record is abysmal.
However, the first $405 million bonds sold were not PABs – they were just your standard junk bonds. The prospectus and sale were private and the sale was stopped when the interest rate reached 12%.
This makes more sense. Bonds that carry an interest rate of 12%, even with the advantage of tax-exempt status, sound a lot like junk bonds. This project sounds quite risky.
Fortress spent $3 billion to buy FEC. I have a hard time imagining they’d risk that investment for real estate. The side developments may be lucrative but a few billion lucrative?