Making High-Speed Trains Work in the U.S. High-speed rail could work in the U.S., but planners need to follow some simple rules

Making High-Speed Trains Work in the U.S.

High-speed rail could work in the U.S., but planners need to follow some simple rules

TOM ZOELLNER

Jan. 31, 2014 9:40 p.m. ET

High-speed trains have always been a tough sell in the U.S. The technology is as old as Sputnik, but Congress and the states chose to keep the focus on interstate highways in the late 20th century. American critics still complain that bullet trains are too expensive, too underutilized and potentially unsafe.

But that hasn’t stopped the high-speed dreaming. A plan for a train to whisk passengers from Dallas to Houston in 90 minutes is moving ahead; officials announced in early January that they will conduct an environmental impact study for the line. California still expects to break ground next year on a $68 billion express between Los Angeles and San Francisco, even after a superior court judge invalidated the line’s business plan in November.

Whatever the political fate of high-speed trains in this country, planners would do well to remember a universal rule of the high-speed-train era: The sweet spot for revenue is in journeys between 200 and 600 miles. Expressed in time, that is between one and three hours—about what it would take to get from Chicago to Minneapolis or from London to Manchester. From the customers’ perspective, any time shorter than an hour feels like a waste of resources, and sitting on a train longer than three hours strains the patience.

As for “farebox revenue”—what the operator collects directly from the passengers—the most successful lines in the world run between Tokyo and Osaka in Japan (246 miles) and between Paris and Lyon in France (289 miles). Both of these are medium-length journeys between a national capital and a world business center of touristic interest: In other words, both have a large, reliable potential ridership.

Or consider Spain’s AVE, an acronym for Alta Velocidad Española. This land-Concorde gets you from Barcelona to Madrid in 2½ hours, for less money than an airline flight. It is so successful that the Iberia Airlines service between those two cities, once the busiest route in Europe, has lost nearly two million passenger journeys a year since 2008, a 40% decline.

Where bullet trains haven’t worked so well is between places such as Milan and Torino (89 miles). The cost of track construction—$130 million per mile—was a massive capital outlay, in exchange for which the Italians got dubious results in the form of cleaner air and less-crowded highways. China’s new long-distance bullet from Beijing to Guangzhou (1,200 miles) has yet to show a profit after two years. The eight-hour ride promises boredom once the novelty wears off, and many north-south Chinese business travelers still prefer to fly.

Another lesson for the U.S. is that bullet trains work only if there are ample transportation options at each destination. This requires European-style metro systems and dense urban cores, neither of which is middle America’s strong suit. “Trains depend on population density to operate efficiently,” wrote Baruch Feigenbaum, who crunched global rail numbers for the Reason Foundation in a 2013 report. “To compete with the airlines, trains must depart frequently, but they must also fill, or nearly fill, their seats to generate enough ticket revenue to cover their operating costs.”

High-speed rail can work in the U.S., but only in very specific places and with government paving the way and laying the tracks. The rich urban strip between Washington and New York—a high-density thoroughfare since the era of powdered wigs and beaver hats—is the most obvious place. At an average speed of just 68 miles an hour, Amtrak’s Acela is a lumbering mastodon compared with true 186-mile-an-hour high-speed rail. Yet the Acela and other trains in the northeast corridor still manage to capture three-quarters of the air and rail travelers between the nation’s capital and its dominant financial center.

The remaining handful of other likely markets include Dallas-Houston, Chicago-Minneapolis and California’s well-chosen link between San Francisco and Los Angeles, the busiest short-haul airline route in the nation, with an average of 5,000 passengers a day.

Journeys such as these are exactly where the airlines are at their most wasteful. Whether a plane is going 50 miles or around the world, substantial fixed costs must be paid: maintenance, labor, bag loading, taxes, landing fees, cleaning and, especially, fuel. Planes typically burn most of their fuel during takeoff and landing.

Despite this inefficiency, short-haul trips still make up the bulk of U.S. air travel: About two-thirds of domestic flights are less than 700 miles, and about 35% of those are less than 350 miles. It is much harder, of course, to build a high-speed rail system than to add a few new planes to the fleet. But opening new frontiers is never easy.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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