Premature Celebration

The Atlantic may be a bit premature in heralding “the triumphant return” of private passenger trains. This claim is based on the Florida East Coast (FEC) Railway’s All Aboard Florida plan to build and operate for-profit passenger trains from Miami to Orlando.

The success of this supposedly unsubsidized train depends on, among other things, the willingness of the federal government to loan the company $1.6 billion to start the service. The plan is to improve 195 miles of existing track and build 40 miles of new track, plus passenger stations, all of which is expected to cost around $2.5 billion.

To partly fund the project, FEC recently stunned the bond market by selling $405 million worth of bonds promising to pay an incredible 12 percent return. Of course, at rates like that the bonds sold quickly, but at a time when comparable bonds are offering to pay just 6 percent, this raises questions about why the railway is offering to pay twice as much.

One possibility is that the company is playing a shell game in which it claims the cost of the project is more than it really is so it can claim the $405 million as matching funds. Once the feds loan it the $1.6 billion, it can repay the $405 million out of that and then temporarily live high off of the remaining $1.2 billion. In any case, the need for a federal loan makes it possible that federal taxpayers will end up paying for much of the project. FEC also needs the Florida Department of Transportation and Orlando-Orange County Expressway Authority to lease it the land it needs to build that 40-mile extension.

Another reason why the railway may have chosen to offer 12 percent bonds is that it currently isn’t a viable operation. According to FEC’s 2013 10-K annual report, over the past five years railway operations earned net revenues averaging $46 million, but had to pay $59 million a year in debt servicing, leaving an average loss of $13 million a year. The high debt costs resulted from a 2007 leveraged buyout of the company by hedge fund Fortress Investment Group.

After paying the debt service, the year 2013 was the only one of the last five in which the company ended up in the black: it earned a net income of $8,000, which doesn’t begin to repay the $65 million in losses over the previous four years. Based on this, some doubt that All Aboard Florida will ever get off the ground; in any case, without the incentive of a 12-percent return, investors may have been skeptical about loaning more money to a company with a track record like that.

In the meantime, FEC is heavily marketing the project–really, the $1.6 billion federal loan–by hinting at low ticket prices and promising millions in spending on construction in various cities along the route with billions in economic returns to local communities. The railway also promises 32 trains per day at top speeds of 125 mph “at one point.” The the 230-mile trip is expected to take 3 hours, or an average of 76 mph. According to Google maps, the same trip by car takes 3 hours and 17 minutes.

Meeting the Federal Railroad Administration’s (FRA) strict standards for track geometry, grade crossings, signaling, and other requirements for trains to go 125 mph or even 90 mph can be very costly. Outside of some short stretches in Amtrak’s Boston-to-Washington corridor, no railroad track in the United States meets 125 mph standards.

The federal loan program, called Railroad Rehabilitation & Improvement Financing (RRIF), that FEC wants to tap has never given out a loan bigger than $563 million–barely a third of what FEC is asking–and the vast majority of loans it gives out are under $50 million. President Obama may want All Aboard America to succeed so he can say some semi-high-speed rail was built during his term of office, but that’s a poor reason for making such a loan.

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The Atlantic offers the hope that All Aboard Florida is really just a real-estate venture: run a train so that the company can make money on hotels and other developments at each end of the rail line. It points out that FEC has purchased 15 acres of land near proposed stations, mostly in Miami. But the return on 15 acres is not going to repay loans of $2 billion.

It sounds just as possible that All Aboard Florida could be little more than a way to get taxpayers to subsidize Fortress’ debt service on its buyout of the railroad. Given the Obama administration’s track record in making loans to other politically correct ideas, such as solar power and electric cars, Congress should carefully scrutinize FEC’s loan application to see if it really meets the terms of the RRIF loan program.

Update: The Antiplanner obtained a copy of FEC’s prospectus for the $405 million bond sale. What I didn’t understand before is that this money is to be used to start up Miami-West Palm Beach service, while the $1.6 billion federal loan is for the extension to Orlando.

The prospectus estimates about 2 million trips per year by 2021 on the Miami-West Palm Beach segment, increasing to 2.6 million by 2030. In this market, FEC trains will compete directly with Tri-Rail commuter trains and Greyhound and several other bus companies. Between them, Tri-Rail and the buses carry just under 2 million passengers a year between these cities and Ft. Lauderdale, the only planned stop between Miami and West Palm Beach. That means FEC will need to capture most of the Tri-Rail and bus passengers and/or attract lots of people who are now driving.

All Aboard Florida’s advantage is supposed to be speed: one hour from Miami to West Palm Beach compared with 1:45 for Tri-Rail and slightly longer by bus. But this advantage will be offset by higher fares: the prospectus projects fares of $30 from Miami to West Palm Beach, compared with $7 by bus or Tri-Rail.

Meanwhile, FEC’s projected three-hour trips from Miami to Orlando will compete directly with American Airlines, which offers one-hour non-stop service in the same market. American fares start at around $300, while extrapolating from the Miami-West Palm Beach fare of $30, the Miami-Orlando fare would be about $100. But airlines can easily reduce their fares to match; Ryanair, for example, has numerous fares starting around $30. As a recent article in Cato’s Regulation magazine noted, opening up domestic routes to European carriers such as Ryanair could greatly reduce U.S. airfares.

I don’t know if anyone else has noticed, but more and more frequent air travelers are qualifying for pre-check, which almost completely eliminates waiting in airport security lines. That demolishes the argument that trains can be faster than trains on trips of 300-600 miles.

Finally, the prospectus notes that FEC owns 21 acres around the planned rail station in Miami, and it proposes to build a 1.3-million-square-foot transit-oriented development with housing, shops, and office space. That’s all well and good, but is a train that carries 2,750 round-trips a day going to make or break this development? Not hardly.

As I noted above, I love passenger trains and I wish FEC well on its Miami-West Palm Beach venture. I suggest, however, that the Federal Railroad Administration wait to see how well this works out before investing $1.6 billion in taxpayer dollars on the Orlando extension.