Tuesday, July 5, 2011

Brief Note #13: William Grindley's continuing analysis of the financial hazards of High-Speed Rail

Brief Note # 12 was about operating expenses and how the rail authority has not been candid about them, underestimating both construction and operating costs.  This Brief Note (#13) is about the anticipated revenues; that is, what the farebox receipts will bring in, set against the operating expenses.  

If costs exceed revenues, the rail operator will have to turn to the state.  But, that's not allowed.  My problem is that this problem won't come up until the train is built and operating. Until then, each side has it's informed and considered opinion. It becomes their word against ours. And that means, they will keep on building.

And, after spending $6 billion or so on 100 miles of tracks that can't support high-speed rail, we still won't know anything about whether this train is capable of producing surplus revenues, since the Central Valley by itself obviously can't produce an adequate ridership.

You could say that this is why the best place to build first would the be most busily trafficked segment in California and the second busiest in the US, Los Angeles to San Diego.  If anywhere, this is where a fast train might break even.  However, it's not going to happen.

As Grindley points out, it comes down to ridership numbers and ticket costs.  Both numbers have been jiggled in order to produce the desired results and justification to continue construction.  Over time, the ridership numbers have gone down and the ticket costs have gone up.  At some point, the two sets of numbers will make it patently clear to everyone that the train must not be built.

Indeed, it should be totally obvious now to everyone, including the Democrats, that if it proceeds, this rail system will be built on financial quick-sand and it will slowly sink into bankruptcy of its own costly weight well before it is completed.  You can call the whole damn thing a "sunk cost." 

And, there's nothing more fun to have around than a costly partially built infrastructure White Elephant that has little use, is there?  And the entire state of California can point to it and say, thank you, Democrats.  Job well done!

Brief Note #13 – June 27th 2011
From the authors of The Financial Risks Of California’s Proposed High-Speed Rail
Project and six Briefing Papers. Available at http://www.cc-hsr.org/

Finding: Realistic operating margins depend on realistic operating revenues.

Background: The litmus test of the CHSRA’s ability to attract $38-54Billion of private
capital will be the perceived reasonableness of both aspects of their projected operating
margin (or operating surplus) – the ability to gather estimated revenues and pay operating
expenses to create a long-term stream of positive operating margins and therefore a Return
On Investment (ROI) for investors. This Note addresses the reasonableness of CHSRA’s
assumptions about its revenues.

Several authors with backgrounds in operating businesses pointed out problems with
revenue assumptions in the Authority’s 2009 Business Plan. 1 Among those are:
With a full cost-recovery, round trip cost of a SF-LA auto trip at about $412, and
gasoline-only trip at about $200, the Authority’s $840 round trip for a family of four doesn’t
seem financially attractive. Nor would more realistic train round trip tickets for four at
$1520.2 If over half of all their 39,000,000 riders in 2030 are to come from displacing auto
trips, the Authority has a passenger volume and therefore revenue problem.3

The Authority set their baseline airline ticket prices higher than they should be. That
overstatement inflates all the train’s revenues since train ticket prices were set at 83% of
airline ticket prices.4 Decreasing the baseline airfare would decrease train revenues since
cannibalizing air or auto passenger traffic is the market segments the CHSRA envisions.
OECD recognizes that: “Low-cost carriers might respond to the emergence of a high-speed
rail alternative . . . A similar improvement on the rail side would be very costly given
the cost of trains, and this would reduce rail’s market share and profitability.”5 CHSRA did
not incorporate inevitable airfare competition into their ticket-pricing model.

By 2009, CHSRA needed higher average revenues per passenger because ridership
estimates dropped by more than 60% – i.e. from about 100 Million to 39 Million in the tenth
operating year. The Plan says “ Between 2000 and 2030 population is forecast to grow by
42% to 48 million, and employment will grow by about 51%. This growth will increase total
inter-regional travel by 65% to 911 million trips a year, with auto keeping its lion’s share,
but with a nearly five fold increase in conventional rail trips.”6 Several revenue-based
questions arise.7 How does employment increase twenty percent faster than population and
why would inte-rregional travel increase half again as fast as population growth? Where are
considerations of new technologies now replacing corporate travel?

Conclusions: The 2009 Plan’s revenue assumptions bear little resemblance to the quality of
an investment-grade document the private sector will demand for due diligence work and
further postpones, if not negates, the possibility of raising $38-$54Billion.


1. See: CHSRA 2009 Report to the Legislature and the Addendum of April 8, 2010.
2. See: Appendix A to The Financial Risks of California’s Proposed High-Speed Rail Project; October 2010.
3. In its 2008 Business Plan, the Authority states that the 550 million auto trips between the regions in 2000 was 96% of the total
trips. See: Figure 7, page 6. In its 2009 Business Plan, year 2000 auto trips represent 95% of the total. See: page 68.
4. Op Cit, CHSRA 2009 Report
5. OECD and International Transport Forum: JOINT TRANSPORT RESEARCH CENTRE Round Table, 2-3 October 2008, Paris;
Discussion Paper No. 2009-7; Competitive Interaction between Airports, Airlines and High-Speed Rail: May 2009,pg. 14
6. Op Cit, CHSRA 2009 Report, page 68.
7.Brief These are posed in Appendix C to The Financial Risks of California’s Proposed High-Speed Rail Project; October 2010, prepared
by Alan Bushell.

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