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High Speed Rail Can Be Profitable … With The Proper Routes

April 18th, 2008

April 2011

Recently, governors in Ohio, Wisconsin, and Florida made headlines by rejecting plans to build high speed rail lines within their states. High speed rail certainly faced challenges in the U.S. Some projects should not be approved, while other projects have the potential of adding to the quality of travelers’ lives, reducing pollution, and making money. Proper data analysis should instruct us on these questions. Here, we provide a first-pass analysis that can assist the debate.The fact that high speed rail should have trouble politically among certain U.S. conservatives is not surprising. High speed rail is big government at work. There really isn’t any way to disguise it. Part of what creates the current criticisms stem from trying to make high speed rail seem something other than big government doing big things.All transportation infrastructure projects require the government for (i) acquiring land through eminent domain, and (ii) floating low-cost bonds for construction. This applies equally to roads, rails, and airports. We may think of the Transcontinental Railroad as being built by bold visionary tycoons, but it was a massive government giveaway. The federal government provided (in today’s dollars based on the wages of unskilled labor) from $2.25 to $7.75 billion, plus five square miles of free land for every linear mile of track. Yet, most would regard it as a good deal. We are still reaping benefits from the creation of that transportation corridor.There is public benefit from rails projects. Like all public transportation, rail can provide the following advantages:

  1. It is a more ecologically-friendly method of transportation than airplanes and individual vehicles.
  2. It reduces dependence on foreign oil by using more efficient transportation methods.
  3. In cities, it relieves congestion.
  4. It enables delayed and decreased investment for public roads, airports and other transportation already supported with government expenditures.

The fact that individual states may be unable to handle the economics of high speed rail should not be surprising. Why speak in terms of the Wisconsin High Speed Rail System, the Ohio High Speed Rail System, or even the Florida High Speed Rail System? We do not contemplate the Minnesota interstate highway network. That would be an oxymoron. Neither do we speak of the Nebraska air traffic control system. High-speed rail is best when addressing moderate distances, and that usually means interstate travel. As explained below, only one state (California) has an obvious opportunity for a first rate high speed rail route completely within its borders.The following projects should have the highest potential for being successful in terms of ridership and profitability:

  1. San Diego to San Francisco
  2. Atlanta to Miami
  3. Los Angeles to Las Vegas

What is High-Speed Rail?

First, it is helpful to define what high-speed rail is, and what it is not. Trains certainly have a place in urban commuting, but that is not the focus of this article and the analysis contained herein.

Comparison of High Speed Rails to other means of mass transit

Critics will take exception to the entry of “Surplus” shown in the above table under the revenue expectation for high speed rail. They say, “Passenger trains never make money. Just look at Amtrak”.Respectfully, these critics should look more closely at Amtrak. Amtrak has one route that barely qualifies as High Speed Rail. It is the Acela Express on the Northeast Corridor between Washington and Boston. Of all the Amtrak services, Acela alone operates at a substantial surplus year after year. In fiscal year 2008, Acela had a gross profit of $220.2 million on total revenue of $486.2 million, or a gross profit margin of just over 45% . That’s $64.79 per passenger. Pew Subsidyscope did a more rigorous analysis that included depreciation and a share of system overhead costs, and still came up with $40.50 profit per passenger. If Acela were an airline, it would be credited with a 41 percent share of the market between Boston and New York, and slightly over half of the market between Washington and New York.Acela shares right of way and stations with Amtrak’s Northeast Corridor intercity service. The Northeast Regional Service earns $19.56 per passenger gross profit and loses $4.73 per passenger as adjusted by Subsidyscope. Acela earns enough money to make the Northeast Corridor solidly profitable as a whole.The experience in other countries is the same. High speed rail subsidizes slower intercity lines. For example, France’s SNCF makes a surplus on passenger rail because France’s passenger rail has relatively more high speed rail lines. The presumption that the French must be different than us may be true about many things, but decisions about purchasing transportation are mostly based on economics, and economics tend to be universal.

Selecting where High Speed Rail can be Profitable

This does not mean that you can select any pair of points, connect them with a fast train, and expect the line to operate at a surplus. Obviously, it must be the right points, operating at the right speed, and covering the right distance. Notably, in the above table, high-speed rail is the only rail option that shows primary competition with airlines. High speed rail has its greatest opportunity for profits when competing with airlines.In general, any product or service competes based on the possibility that the offering is better (quality), faster, or cheaper. It is difficult to be all three things at the same time. When this general concept is applied to personal transportation, we can think of these variables as comfort, time, and cost. One can see from the popularity of no-frills airlines that a large percentage of passengers will sacrifice comfort for time and cost.When judging cost, it is important to compare total costs, including additional transportation to get to the airport, and parking at the airport. In the same way, when comparing time, it is important to judge door-to-door time. To put the time consideration into three broad categories of rail operating economics:

  1. If the rail line does not offer door-to-door times better than automobiles, then the rail line must be cheaper than automobiles and buses, or rely on novelty. Such a rail line, particularly for intercity travel, will almost certainly require substantial operating subsidies.
  2. If the rail line offers faster door-to-door times than cars or buses but slower door-to-door times than airlines, then it will need to be priced similarly to driving, and substantially lower than airlines. Such an intercity rail line may run at a surplus if the route has a high passenger demand, but will probably struggle.
  3. If the rail line offers similar or faster door-to-door times than the airlines, it can offer airline-level fares. With the substantial advantages in fuel and maintenance costs, it has a relatively clear path to operate at a surplus IF the market has sufficient passengers.

The general opinion in the Northeast is that the Acela service is very similar in door-to-door times to airlines, and definitely superior to driving. When speaking of having the best door-to-door times, a lot depends on which doors you are speaking. Somebody traveling from Addison Heights (immediately adjacent to Reagan National) to East Elmherst (right across from Laguardia) is going to be faster taking the plane. But it is not necessary to be the fastest door to door time for everyone, just a substantial share of travelers. The overall time savings is reflected in the fares. Last minute unrestricted business class seats from Washington to New York on Acela are currently $208 one way.The next step is to develop a broadly generic formula for door-to-door travel. What are the sequence of events? Our analysis starts with the following assumptions:

Airline:

  1. Travel to airport (60 min)
  2. Check-in, security, boarding (90 min typical for most large airports)
  3. Pushback, taxi, takeoff, departure routing (20 min)
  4. City to City distance at 530mph, route efficiency 98%
  5. Approach, landing, taxi, jetway, disembarking (15 min)
  6. Gate to curbside travel (15 min)
  7. Travel to destination (60 min)

Passenger Car – Intercity distance at 65 mph, 80% route efficiency, 15% allowance for meals, fuel, toilet etc.

Rail

  1. Travel to station (30 min)
  2. Embarking (20 min)
  3. Intercity distance, 80% route efficiency
  4. Trackside to curbside (10 min)
  5. Travel to destination (30 min)

Some might complain that rails are receiving an unfair advantage by having the door-to-airport time be longer than the door-to-railway time. But, it is a general truth that airports are located at the outskirts and railway stations in city centers.Analyzing these numbers, the following limits become evident:

  1. Over short trips, there is no way for the airplane or the train to provide faster door-to-door times when compared to an automobile, even if the travel itself is instantaneous. When the time to get to and from and through the station/airport is more than the time to drive the trip directly, it will always be faster to simply drive directly.
  2. Until trains can travel as fast as planes, there will always be a point where the time spent in arriving, security, boarding, taxiing and so forth will be made up with shorter times travelling in the air.

Currently, the range between these two limits is in the neighborhood of 150 and 500 miles. Improvements in trains speed will increase the range. These limits are graphed in the following chart. The graph shows the distance to be travelled on the x-axis (the horizontal axis). Along the vertical axis, we show the breakeven speed that the train must travel to be faster than an airplane. The shorter the distance, the slower the train must be able to travel in order to be faster than a plane. Intuitively, at shorter distances, the time spent getting through airport security, airplane boarding, etc. make the train faster. At longer distances, the airplane’s faster speed makes it the preferred option for consumers concerned about the time of travel. Average breakeven speed travelled by the train is a function of the distance to be covered. This function is shown as a dotted line. For certain routes (described below), the cities involved are shown and labeled on the dotted line. The above chart also contains two solid horizontal lines to show high-speed rail’s “sweet spot”. Below around 60 miles per hour, a traveler will save time by driving a personal automobile.Although there have been much higher speed records set, the fastest total city-to-city speed for regularly scheduled passenger service is currently 190 miles per hour. A train’s inability to travel much faster than an average of around 190 miles per hour provides an upper limit shown on the chart.Having the cities within a certain distance is only the first of two considerations. The second is capacity or demand. A typical high speed train configuration like the Acela currently holds about 300 people. That is about twice the seating of the narrow body 737/A320 planes that are the workhorses of routes of this length. Presuming (i) ten departure times per day of the train and (ii) high speed rail getting half of the market share, one would be seek city pairs capable of supporting around forty airplane departures per day (before the addition of high speed rail). That is not an absolute minimum since some (perhaps many) passengers would be drawn from automobile or bus transportation, and some passengers will come from intermediate cities on the train route. Still, it should be clear that to have enough passengers to fill a scheduled service, the line needs to be anchored with major transportation hub cities.With the above in mind, we obtained the 100 largest air travel markets in the United States, courtesy of the Brookings Institute. In each case, we calculated the minimum average speed that a train would have to maintain in order to offer the best door-to-door times given the earlier assumptions.

Break even average minimum train speed for air travel

Specific Routes Identified

For most routes, it is impossible to know the amount of automobile traffic that travels from one city to another. Our current technology used to establish traffic counts involves a point-in-the-road volume, but is unable to ascertain where each car began or is ending its travel. For Acela, there is certainly auto traffic that is being replaced by train travel, but we do not know how much. Similarly, travel to/from any of the routes that may be considered for high-speed rail investments also will reduce automobile traffic, but we have no accurate means of estimating this with the data that is currently available. Consequently, the traffic comparisons described herein are conservative; meaning, more traffic is available for the train than is generally being shown.

The number one airline route in passengers is New York to Miami. But this route is clearly too long for high speed rail. However, the second most traveled airline route is occupied by the initial phase of the California High Speed Rail project from Los Angeles to San Francisco. Even if one were to include passengers already taken by Acela, this route carries more passengers than the Washington-New York or New York – Boston markets. The Los Angeles-San Francisco route also covers the 32nd corridor between Los Angeles and San Jose, and the 23rd corridor between San Francisco and San Diego.

The third most heavily traveled air corridor: Atlanta-Miami, is just at the edge of being the right distance for high speed rail. However this route would easily also include the city pairs covering the 14th route (Atlanta-Orlando), the 87th route (Atlanta-Jacksonville), and 97th route (Miami-Orlando). When combined, these four routes, all of which are on a fairly straight path, have sufficient traffic to support high-speed rail.

The next city pair to fit the distance and volume criteria is Los Angeles-Las Vegas (9th). For this route, we include a dotted line that identifies the 5.4 million cars annually that make the trek from Los Angeles to Las Vegas by car via Route I-15. Unlike most auto routes, we actually have reasonably accurate auto traffic counts. This occurs in this one situation because there is nothing terrible interesting in the desert between Los Angeles and La Vegas. Consequently, once a car begins travel in the desert on the I-15 between these two cities, it is a fair assumption that the travel will continue to the other city.

A graph showing the routes with the highest traffic that are also within high-speed rail’s “sweet spot” are shown in the following chart. We include Acela in this chart for comparison.

Airline and Rail Passenger rail volume of Best High-speed

Initially, it may seem odd to leave Chicago out of the picture, but this is correct based on the distances and traffic involved.  Although Chicago appears 20 times in the top 100 air traffic routes, the highest traveled ones (Chicago-New York, Chicago-LA, Chicago-Denver, Chicago-Washington, Chicago-Atlanta, Chicago-SF, Chicago-Miami, Chicago-Las Vegas, Chicago-Boston) lie outside the ideal maximum distance that trains can handle when compared to air.  The first Chicago pair to fit within the 500 mile radius is Chicago-Minneapolis at 39th, so the passenger numbers are nowhere near as strong as the prior lines described.

Here is a U.S. map with what this analysis indicates should be the three best candidates for high-speed rail:

Map of Planned High speed rail

In President Obama’s 2011 State of the Union address he spoke of creating a system where 80 percent of the population would have access to high speed rail by 2036.  That might be the right thing to say to get the support of a majority of people. In practice, the President’s statement may well have a high-speed rail system with several routes that are politically advantageous, but financially draining.Choosing the wrong routes simply because they are in the right states politically will validate the incorrect notion that high speed rail cannot operate without subsidy in the United States. A financially responsible approach will recognize the following public transportation realities:

  1. Long-distance routes continue to be most competitively served by air travel.
  2. Moderate-distance routes between large cities are most competitively served by high speed rail.
  3. Small to medium size cities with moderate travel distances are most competitively served by bus service.
  4. Short routes continue to be most competitively served by bus and commuter rail.

Accepting these realities allows us to put resources where high speed rail can (i) compete for and win travelers’ business, and (ii) operate at a surplus. Accepting these realities also leads to the conclusion that we should stop subsidizing Amtrak’s long, slow-speed intercity routes.

Fulcrum Inquiry performs quantitative economic analysis.