Report questions economics of Florida’s private passenger rail

Today, March 9, 2015 we received this insight from Robert Poole of the Reason Foundation regarding All Aboard Florida

Although construction is under way on the southern portion (Miami to West Palm Beach) of the new All Aboard Florida passenger rail system, opponents living to the north of there are gearing up to try to stop its second phase, from West Palm to Orlando. Activists operating as CARE FL (aka Care Florida, LLC) have persuaded county officials in Martin and Indian River Counties to commit up to $4.2 million in taxpayer money for legal fees and other activities in an effort to derail phase 2. Exactly what they plan to do, legally, is unclear. But their first product is a report released in February

“An Economic Analysis of All Aboard Florida” was produced for CARE FL by Prof. John N. Friedman of Brown University, a Harvard-educated economist who recently completed a year on the Obama White House National Economic Council. The headline conclusions of the 14-page report are the following:

  • It would take a ticket price as low as $34 one-way to attract 1.5 to 2 million annual passengers.
  • The company will generate annual losses exceeding $100 million, based on revenues barely in excess of operating costs, as well as large debt service costs.
  • It would take one-way fares of $273 to break even, assuming such high fares did not seriously reduce passenger numbers.
  • The company will nonetheless benefit from a claimed $50 million to $73 million of annual taxpayer subsidies.

That’s quite an indictment, so the question for reporters, transportation analysts, and legislators is whether those are believable numbers. Neither Friedman nor I have seen the investment-grade traffic and revenue study, on the basis of which All Aboard Florida is raising money and under way building stations and improving tracks and bridges on its southern right of way. But I did manage to find out who did that study: Louis Berger, a well-respected global engineering firm. I have reviewed a five-page critique of the Friedman study by a Louis Berger analyst who appears to have worked on their investment-grade study.

The thrust of the Berger critique is that, lacking information about how the ridership and revenue projections were actually done, Friedman made top-down assumptions such as comparing ridership on Amtrak’s Northeast Corridor trains with his estimate of passenger-rail market share in Florida. Likewise for estimates of mode choice among driving, intercity bus, passenger rail, and flying. Berger’s Al Racciatti goes into some detail explaining their development of a detailed dataset based on the respective MPO regional travel models, supplemented by data on air, bus, and commuter rail markets. They also did original survey work , including an 8,000-person origin-destination survey and an 1,800-person stated preference survey regarding mode choice. All the analysis considered separately local/commuter service and long-distance service, as well as business versus leisure travel. The Berger study also explored more speculative prospects for markets not currently served, such as Miami-visiting international travelers who may wish a side trip to the Orlando resorts, university students, resort visitors, and others.

Another critical difference is fare estimation. Friedman’s paper seems to be based solely on value of travel time metrics. By contrast, the Berger analysis reflects a far more detailed assessment of demand for different types of trips by different types of passengers. This looks to me similar to how airlines price, sometimes called Value Pricing, as invented and implemented by American Airlines back in 1992. If that is what All Aboard Florida is planning, its pricing will be nothing like what Friedman has assumed, but will rather be fine-tuned based on a whole array of factors that have been shown to maximize airline revenue over more than two decades.

In fact, when I contrast the two ways of looking at AAF’s prospects, it strikes me that Friedman has analyzed the planned service as if it were Amtrak—i.e., as if run as a government enterprise. What has impressed me from day one about AAF is that it appears to be designed around an actual business model, not something cobbled together by politicians. That doesn’t guarantee it will be a profitable venture, but it is considerably different from all the government-run U.S. passenger rail projects currently planned or in operation.

Let me close with a comment about Friedman’s claims of taxpayer subsidy. The largest dollar amount is the federal government’s foregone tax revenue on the tax-exempt private activity bonds (PABs) that have been approved by U.S. DOT for this project. But PABs are available for surface transportation projects done via public-private partnerships (P3s) that serve the public, as opposed to only private clients. That’s why PABs have been issued since 2003 for 10 P3 toll roads and one P3 commuter rail project. The idea is that since government projects can issue tax-exempt bonds, the private sector risking its own money to provide comparable public-use projects should be able to get financing on the same terms. All 11 of those projects involve some degree of tax funding, in addition to the private financing. By contrast, AAF is getting no taxpayer money, so it seems to me its case for using PABs is even stronger.

Friedman’s other claim is that the $214 million inter-modal center at Orlando International Airport, paid for by grants from the FAA and Florida DOT, is a taxpayer subsidy to AAF, since it will use that location as its Orlando terminus. In fact, that center was planned long before AAF (and is similar to one that already exists at Miami International). It will serve commuter rail and light rail, in addition to AAF, plus rental cars and other ground transportation. Moreover, AAF will be paying rent at what it has said are “fair market rates.”

I have no particular horse in this race, but as a transportation policy researcher, I hate to see claims made about a project that are based on insufficient information, misleading interpretations, or are just plain wrong. All Aboard Florida is not taxpayer subsidized, and it appears to have a plausible business plan. Whether or not its market analysis is correct should be no concern to public policy. If the project fails, it is the investors of equity and purchasers of bonds that will be on the hook, not taxpayers.

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