Brightline Noise

There’s lots of noise coming from Brightline, the company that is operating private passenger trains between Miami and West Palm Beach, with a goal of eventually reaching Orlando. Yet underneath the noise it appears nothing is really happening.

First, last September, Brightline bought XPressWest, a company that has gained permission, but not much funding, to build a high-speed rail line from Las Vegas to Victorville, California, because apparently a lot of people in Victorville (population: 121,000) have to get to Vegas really fast. Brightline supposedly paid $120 million for XPress, but it isn’t clear what it got for that money since XPress didn’t really have any assets other than building permits; most likely Brightline paid the $120 million in some sort of securities.

Second, a couple of months later, Richard Branson’s Virgin Group purchased a “minority interest” in Brightline. Branson has a lot of nice things to say about Brightline and Wes Edens, the co-founder of Fortress Investment Group and the lead supporter of Brightline.

“On the potential of rail travel,” says Branson, “Wes and I are kindred spirits.” But no one is saying exactly how much Branson has invested in Brightline, and while was enough to rebrand the company Virgin Trains USA, it wasn’t enough to finish building the line to Orlando.

We know that because, on the same day that the Virgin alliance was announced, the new company said it would make an initial public offering to sell stock. The company hoped to sell enough stock at $17 to $19 a share to raise $619 million.

However, a few days ago, Virgin announced it was cancelling the stock sale, saying it had found “alternative financing sources.” However, company insiders said that the real reason for the cancellation was that they didn’t think people would pay the hoped-for $17 a share.

One possible alternative financing source is tax-exempt private activity bonds. But Brightline had permission to sell $1.15 billion worth of such bonds provided it did so by May 31, 2018 — a deadline that was extended to December 31, 2018. The fact that it failed to do so, instead getting another six-month extension, suggests that neither the bond market nor the stock market shares Branson’s and Edens’ enthusiasm for passenger trains.

There are good reasons for that lack of enthusiasm. First, rails are really expensive. In its IPO plan, Virgin admitted that completing the line from Miami to Orlando would cost more than $5 billion, which is up from previous estimates of $3 billion. The Las Vegas line was projected to cost $3.6 billion, which is less than previous estimates of $7 billion. In any case, a $1.15 billion bond sale combined with a $600 million IPO would still fall far short of the amount needed to finish either of these projects, much less both.
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Second, it is one thing to improve service for an already existing customer base and it is quite another thing to whip up new customers out of thin air. In Britain, intercity trains carry nearly 8 percent of all surface passenger travel, and (thanks to privatization) that share is slowly growing. In the United States, they carry a tenth of a percent, a share that is shrinking.

Nor is there much indication that Brightline will reverse that trend. The company expected to attract a million riders in its first year; actual ridership was little more than half that. The company spent $92 million operating trains in the first three quarters of 2018 but collected just $5 million in revenues.

Due to those losses, Brightline’s financial situation “looks very precarious,” says Ozgur Ince, a finance professor at the University of South Carolina. The company currently doesn’t have enough cash on hand to operate its existing trains to the end of this year, much less start construction on new lines.

At least some of Brightline’s riders were people who were already riding trains, specifically Tri-Rail commuter trains that also connect Miami with West Palm Beach (though with more stops). The year before Brightline opened, Tri-Rail ridership grew by 4.8 percent (not counting September, 2017, when ridership was heavily impacted by Hurricane Irma). In 2018, the year Brightline opened, Tri-Rail ridership grew by only 0.9 percent, and in several months it actually shrank from the previous year.

There are no existing passenger trains from West Palm Beach to Orlando (or, for that matter, from Victorville to Las Vegas) from which Brightline can steal customers. So it’s easy to see why investors would be wary of “kindred spirits” whose enthusiasm for passenger trains leads them to overestimate ridership and underestimate costs.

One of the costs of Brightline is pedestrian fatalities. A woman was killed by a Brightline train just few days ago. She appears to be the fifteenth fatality from the company’s passenger trains. Assuming ridership is up to 800,000 by now and all riders are going the full distance between Miami and West Palm Beach, that works out to about 250 fatalities per billion passenger miles, which is ten to fifty times deadlier than other forms of mechanized travel in the United States.

Fatalities aside, Brightline is looking more and more like some kind of securities scam. The company keeps hinting it may start construction from West Palm Beach to Orlando as early as next month and that construction of the Las Vegas line could also begin this year. Both seem highly unlikely since it doesn’t have any money. Optimistic claims that “high-speed trains are finally coming” to the United States look like a bunch of hot air.