Brightline: The Economics of High(er) Speed Rail

Today, we explore ​Brightline​: The only privately-owned and operated intercity railroad in the United States (and the first train line the US has launched in ​over a century​).

Note: This issue isn’t sponsored by anyone. But to read the full thing you’ll need the ​All-Access Pass​. 🎟️

What is Brightline?

For decades, America has been great at building software infrastructure. Terrific, even. Unmatched in the world.

But physical infrastructure has been another story.

In fact, America hasn’t had any private intercity rail service since 1983, when the Rio Grande Zephyr between Colorado and Utah shut down its service for good.

While the project has had a few hiccups, Brightline has already achieved some major milestones in its quest to provide modern passenger rail to the state of Florida.

Last year marked the completion of Brightline’s long-awaited ​Miami to Orlando​ route. And the firm has already announced plans to extend the line to ​Tampa​ by 2028.

Brightline isn’t your average commuter train. It boasts a maximum speed of ​125 mph​ — well above the ​110 mph​ limit of most US intercity trains.

That’s certainly inspiring to lovers of high-speed rail, who have been begging for a system in America for decades. But it’s still far behind countries like Japan, with its world-famous bullet trains.

While Brightline’s trains (right) are faster than standard American rail, they still lag advanced countries like Japan, where bullet trains (left) can reach up to ​200 mph​. Images: ​MaedaAkihiko​, ​Brightline​

America hasn’t always lagged western countries in rail though.

For example, in 1869 America built the ​first transcontinental railroad​, which helped accelerate the rapid industrialization of the western states.

And at its peak, the Pennsylvania Railroad was the ​largest transportation network in the world​.

 

So why has America fallen so far behind in passenger trains? And what can Brightline teach us about the future of high-speed rail in the country?

Why does America struggle to build high-speed rail?

First we need to define high-speed.

As a general rule, trains with a top speed of 155 mph are considered “high speed.” (That’s the definition used by the ​International Union of Railways​. The EU ​seems to agree​.)

By this definition, Brightline doesn’t actually count as real high-speed rail.

Instead, it falls under what the US Congressional Research Service generously calls “​higher-speed rail​.” Good for marketing, but not quite the real thing.

Amtrak’s ​Acela line​ is the fastest train in the US, but even that doesn’t make the high-speed cutoff, because it tops out at 150 mph.

(That will actually ​change this year​ with new Acela trains hitting 160 mph, giving America its first true high-speed rail).

Meanwhile, world-leading trains in Asia and Europe are racing ahead:

The world’s fastest trains have a top speed over twice as fast as the fastest trains in America. Image:​VisualCapitalist​

The reason America’s trains lag has nothing to do with technology. We know how to build stuff that goes fast.

It has to do with demographics and economics.

America has low population density

The most important factor in whether to invest in intercity rail is population density.

Passenger rail makes the most economic sense when populations are dense enough to coalesce around a few key stations and lines.

Intercity train lines are hugely expensive to build (Brightline’s six-station Florida line cost ​$6 billion​) and they take up a ton of space.

In effect, much (though not all) of America has terrible demographics for passenger rail.

Train infrastructure isn’t meant to be a ​”last-mile​ solution” like walking, cycling, driving, or a local metro system. It’s too expensive to build all over the place. Image: ​Adventure Cycling​

Lower population density makes flying a more attractive option for traveling between far-flung cities — even after ​accounting for​ time spent getting to the airport and waiting in security lines.

Population density is the main reason that Europe has such an expansive passenger rail system and America doesn’t. That’s the economic reality.

Very few regions in America have population density anywhere close to Europe. The European population is also more urbanized and centralized. An estimated ​36% of the EU population​ lives in ​suburbs​, compared with ​​63% in the US​.​ Image: ​WillTook via Reddit​

And while the lovely walkability of European cities has become a ​meme​, it makes an appreciable difference in easy access to major rail stations — compared with driving or renting a car, which both incur extra costs (like transportation, parking, and time)

Finally, the average distance between American cities is larger than Europe, meaning flying is often the most efficient long-distance travel option.

(Incidentally, Australia suffers from similar density issues, which is probably why high-speed rail down under has been ​stuck for 40 years​.)

The car dependency feedback loop

Of course, America’s low population density also ties directly into the country’s car-dependent culture.

Car dependency and low density are stuck in a feedback loop. Prioritizing car-based transportation infrastructure promotes low-density living, as low-density living increases the need for car ownership.

As car ownership increases, passenger rail becomes less of a priority for lawmakers, due to low perceived need. And round and round we go…

Yes, gridlock and traffic from too many cars causes frustration, and can help reverse this trend. But historically it’s been a very tough cycle to break. America has shown it would spend less upfront to add another lane to a freeway, than invest in a long-term rail megaproject.

Europe’s enviable passenger rail system. In Europe, passenger rail makes up 80% of rail traffic, and ​freight makes up 20%​. In North America, these numbers are reversed: 84% of railway usage is freight cargo Image: ​​Rail Map of Europe​

Passenger rail requires subsidies (usually)

Even in a nice dense area like Europe, it’s extremely challenging to make the economics of passenger rail work on their own.

The Europeans know that passenger rail service requires tremendous upfront and operating costs. This is why the European industry relies so heavily on state subsidies.

The flagship rail companies of Spain ​(Renfe)​, France ​(SNCF)​, and Italy ​(Trenitalia)​ aren’t even private ventures. Instead, they’re state-owned.

In 2018 alone, Germany spent ​$13 billion​ in rail subsidies –— over ​twice​ the cost of building the entire Brightline Florida line from scratch!

On top of that, many European countries are experimenting with ​demand-side subsidies​, offering discounted or even free tickets.

The importance of state backing and centralization to intercity rail is partially why ​China has the largest high-speed rail network in the world​ (​45,000 km of track​) over 10x the length of runner-up Spain. China is even debuting ​​maglev​ trains​, as pictured here in Shanghai. Image: ​Alex Needham​

Even if an intercity rail system isn’t profitable on its own, there are valid economic reasons a government might still support one:

  • Labor flexibility. Making it easier for workers to commute
  • Economic activity. Making it easier for tourists and residents to reach amenities & shopping destinations
  • Decreased pollution thanks to fewer cars on the road

But with America’s penchant for privatization, garnering the political will for a new state-subsidized rail program isn’t exactly an easy sell — especially because one already exists!

​Amtrak​, America’s national passenger railroad company, was launched in 1971 with the goal of ​eventually​ becoming a self-sustaining business.

But so far, the company has been unable to turn a profit in its entire history, and has resigned itself to becoming a state-supported venture (and frequent political ​punching bag​).

Why is American infrastructure so expensive to build?

Clearly, making passenger rail profitable is challenging enough on its own. But it’s especially hard in America because of the ​disproportionally high infrastructure costs​.

Tunnel projects always seem to cost more in America. In just one example, building a tunnel in New York cost ​$1.5 billion per mile​ in 2015, compared with $327 million per mile in Berlin in 2009. Nearly 5x more!

But why?

One possibility for America’s high infrastructure costs is something called Baumol’s cost disease.

The general idea here is that in a growing economy, wages tend to go up, even for sectors that have experienced no productivity growth. This results in higher production costs for those industries.

Due to Baumol’s cost disease (and America’s ​notably high wages​ in comparison to other developed countries) American construction labor isn’t much more efficient, but costs a lot more.

There could be other contributors to America’s elevated infrastructure costs, possibly including higher levels of graft & corruption.

Due to the bidding and oversight process, graft is a real problem for American infrastructure. In one NYC tunnel project known as East Side Access (pictured), ​an accountant discovered​ that ​22% of workers weren’t actually doing any work​, and yet were being paid up to $1,000 per day. Image: ​​MTA​

But despite America’s economic and political challenges, all hope is not lost for US rail infrastructure.

One country in particular has demonstrated that it is entirely possible to have a profitable high-speed passenger rail network – Japan. 🇯🇵

What can we learn from Japan’s private rail system?

In 1987, Japan privatized the state-owned ​Japanese National Railways​, chopping the business up into seven private companies.

One of these new companies focused on ​freight​, while the other six were entrusted to operate the country’s passenger rail system – each focused on a different geographic region.

JNR’s dissolution created six private passenger rail firms – JR Hokkaido, JR East, JR West, JR Central, JR Shikoku, and JR Kyushu. Image:​​Vladsinger​

This is instructive when it comes to the possibilities (and pitfalls) of creating a profitable passenger rail business.

See, today, two of these firms are ​still state-owned​Hokkaido and Shikoku.

Like most passenger rail businesses around the world, each has struggled to operate on a self-sufficient basis. That’s left the government unable to drum up private interest in their shares.

But the remaining four are publicly traded on the Tokyo Stock Exchange.

East, West, and Centralare all actually components of the ​Nikkei 225 index​ (although Kyushu, as the smallest of the four, isn’t quite there yet.)

None of the four private former members of Japanese National Railways have quite recovered from the pandemic, but Kyushu is closest. Image:​ ​Google Finance​​

So, what can we learn from Japan’s ability to privatize (at least some) of their passenger rail industry?

Lesson 1: Diversify your revenue

One of the most interesting traits of Japan’s four private rail lines is that they don’t just rely on transportation for revenue.

Both their trains and stations generate revenue in a bunch of related areas.

  • They operate restaurants and shops within stations themselves.
  • Real estate near major stations is valuable. So they manage hotels and apartments close by.
  • Passengers can buy all sorts of upsells and extras.
  • Some firms have gotten creative, expanding into construction and business consulting.

To some degree, all of Japan’s profitable private passenger rail firms incorporate this style of revenue diversification.

On the high end, Central gets 80% of its revenue just from transportation. While for Kyushu, transportation accounts for just 35%.

Japan has mastered the art of revenue diversification. Train transportation essentially acts as a marketing tool for high-margin upsells. ​Source​​.

Note: Japan’s model is similar to the airline industry, where it’s hard to turn a profit just on transporting passengers alone. In fact, the value of airline loyalty programs is often ​higher​ than the airline itself. (People joke that United is a “credit card company masquerading as an airline.”)

Lesson 2: Fast trains can compete with airplanes

Japan is famous for its bullet trains (known as ​Shinkansen​).

As trains approach speeds of 200mph, the gap between planes and trains starts to narrow.

​Empirical evidence shows​ that the introduction of bullet trains on Japanese lines noticeably decreased the market share of air transport for the same route.

Japan’s Shinkansen lines don’t crisscross the whole country — they stick to major routes. But the speed of these lines allows the private companies to go head-to-head with air travel, even over long distances. Image: ​​Raffanumber24​

Some countries are even taking this a step further, banning flights that can be done by train. France recently ​prohibited​ domestic flights that can be done in under 2.5 hours on a train.

Lesson 3: Some subsidization will probably be necessary

We’ve lauded Japan as a unique example of a profitable modern passenger rail system.

But the truth is, even the successful private firms have some state backing.

While subsidization might not be as explicit as state ownership, the Japanese government is still involved in funding the construction of rail —including ​paying for the majority of new bullet train lines​.

In addition, during the spin-off of these private firms, they basically inherited a fully functioning rail system. That means private investors didn’t have to foot the bill, substantially reducing upfront costs.

Finally, these companies often receive low-cost government ​construction loans​, in addition to some level of regulatory protectionism.

Overall, Japan provides a strong example showing that profitable passenger rail is possible.

But it also might show the inevitability of at least some element of state support.

High-speed rail in America: Brightline and beyond

Brightline’s big Florida experiment

While Brightline has recently captured the public’s attention, the project is a long time in the making.

It all started in…

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Author

Brian Flaherty

Brian Flaherty

Brian's interest in finance started from an early age, when he used money saved from working summer jobs to purchase his first mutual fund at 15. He went on to pursue the field in school, eventually graduating from the University of Virginia with a Bachelor's degree in Economics. After graduation, Brian put his expertise to work advising institutions and high-net-worth investors as a strategist at a wealth management firm. Recently, Brian transitioned to pursue a career as a financial writer, where he leverages his writing skills and his financial knowledge to help investors uncover the best opportunities and make intelligent use of their capital.

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