Obama's High Speed Rail Strategy: What Will Happen When the Steel Meets the Track?

Over the past few weeks, John Petersen has written a number of very insightful articles on the energy storage space, with a particular focus on automotive applications. To be sure, this sector has gotten a lot more exciting since Obama's election, with real dollar commitments coming from the government and even tangible signs that certain technologies are moving into the mainstream. It is fair to say that, on the back of explicit state support, batteries and smart grid have dethroned solar as the new "hot" thing in alt energy / cleantech.

Equally exciting in my view is the focus high-speed rail [HSR] is ostensibly receiving from the Obama administration. To me, mass transit (excluding air travel) is to transportation what efficiency is to electricity. Renewable power offers a way to make electricity production "cleaner", but a kWh saved is the best kWh there is both in terms of economic efficiency (at least initially as efficiency eventually runs into diminishing marginal returns) and environmental benefits.

Similarly, while new battery technologies will reduce the air emissions footprint of cars, rail can be, given the right conditions (i.e. high population densities, a congested road system, high fuel costs [whether gasoline, natural gas or electricity], the right distance) a superior economic and environmental alternative per pound of human body transported.

My interest in rail transport (especially of the fast kind) also partly stems from the year I spent living in London and during which I travelled to Paris on a number of occasions (the two cities are 414 km apart, or around 260 miles). The Eurostar was a pleasure to ride; it was comfortable, you left from downtown London and arrived downtown Paris, and it was just an overall much simpler alternative to the plane.

In early March, shortly after details of the American Recovery and Reinvestment Act [ARRA] were made public, I wrote an article looking into two HSR stocks: Bombardier (BDRAF.PK) and Alstom (AOMFF.PK). These were, in my view, the two train makers most likely to experience share price appreciation as a result of potential ARRA HSR money because of their heavy focus in this realm. This is still my view.

Since then, the Obama administration has released a much more detailed plan for its HSR strategy, along with more numbers. Over the weekend, I read through that plan and, after crunching a few numbers, was left wondering: is this enough money to achieve anything close to Obama's HSR vision?

Vision For High-Speed Rail In America

On April 16, the Obama Administration released its plan for HSR, entitled "Vision For High-Speed Rail In America" (see President Obama's announcement in the video below).

A Vision for High Speed Rail from White House on Vimeo

There is more to the ARRA's transportation component than only HSR, and you can find a good summary on Transportation For America's website. The plan released on April 16 focuses solely on HSR and outlines a rather bold vision backed by not as bold an amount of money. There are three pillars to the plan:

1. Projects: grants for shovel-ready projects where engineering work has already been completed
2. Corridor programs: use ARRA money to develop phases or geographic sections of HSR corridors (see map below) that have completed plans and environmental documentation
3. Planning: use non-ARRA appropriations in budgets between FY 2010 and FY 2015 to work toward fully developing and an HSR network

The HSR corridors identified in the plan as holding development potential are shown on the map below (click on the map for a larger PDF). Further details on these corridors can also be found on the Department of Transportation's website.

The plan uses the following definitions for the various categories of HSR (underlines added):

Rationale for HSR

In a recent report on HSR, the Government Accountability Office (GAO) noted the following as arguments in favor of HSR.

On congestion at airports and on highways:

The Department of Transportation (DOT) estimates that several intercity highways linking major urban markets will experience significant congestion by 2035. According to a recent report, capacity limitations will constrain air traffic at 14 airports in 8 metropolitan areas, even if planned capacity improvements are carried out through 2025. In addition, the dependence of growing highway and air travel on fossil fuels raises significant environmental concerns regarding greenhouse gas emissions.

On the demand side:

The National Railroad Passenger Rail Corporation (Amtrak), the nation’s intercity passenger rail provider, has seen nearly a 20 percent increase in riders in the last 2 years, in part because service enhancements in some intercity corridors have improved overall travel time and reliability, making the train more competitive with highway and air travel. Still, Amtrak does not offer service in many heavily traveled intercity corridors. Moreover, Amtrak’s service continues to have slow average speeds relative to other transport modes, and experiences significant delays, often resulting from sharing track with commuter and freight rail. (emphasis added)

In the United States or elsewhere, high speed rail tends to attract riders in corridors with high population and density, especially where congestion on existing transportation modes prevails. (emphasis added)

On optimal ranges:

According to foreign and domestic officials with whom we spoke, generally lines significantly shorter than 100 miles do not compete well with the travel time and convenience of automobile travel, and lines longer than 500 miles are unable to overcome the speed advantage of air travel. Between 100 and 500 miles, high speed rail can often overcome air travel’s speed advantage because of reductions in access and waiting times. Air travel requires time to get to the airport, which can often be located a significant distance from a city center, as well as time related to checking baggage, getting through security, waiting at the terminal, queuing for takeoff, and waiting for baggage upon arrival at a destination. By contrast, high speed rail service is usually designed to go from city center to city center, which generally allows for reduced access times for most travelers.

HSR Funding - Where The Steel Meets The Track

As stated above, the sums going into HSR are overall unimpressive. They are broken down as follows:

1. $8 billion of ARRA money mostly for pillars #1 and #2 above with the added advantage that, unlike other ARRA-funded initiatives, funding for intercity passenger rail development will remain available for obligation until Sept. 30, 2012
2. $1 billion per year for five years in budget appropriations starting with the FY 2010 budget to fund pillar #3 above

This equates to $13 billion roughly over a five-year period. The plan does not, however, claim that this $13 billion is the only money that will be made available for HSR projects. Historically, rail has lagged other modes of ground transport with respect to the federal government matching state capital funding (see graph below). States will therefore be expected to be significant financial partners in the projects as will the private sector. Still, even with significant participation from other stakeholders, the question remains: in today's HSR world, is $13 billion enough?

The best way to gauge the potential size of the federal contribution is to examine it in light of what other recent HSR projects have cost or are projected to cost. The following two tables are taken from the GAO report discussed above. The first one lists out six international projects in Europe and Japan and the second four U.S. projects.

Based on these tables, the international average cost per route mile (excluding trainsets) is in the neighborhood of $66 million with a standard deviation of $41.23 million. The US average is $66.75 million with a standard deviation of $46.96 million. The averages are thus relatively similar. The international median cost is $47.5 million per route mile while the U.S. is $56.5 million. Assuming the U.S. median cost applies to all projects, I created the table below.

Besides using the U.S. median cost, I also assumed that train sets would be priced at the low end of the range discussed below the table of international projects ($32 million per set). I have no real basis for assuming how many train sets will be required, and that doesn't matter - their cost per unit range as reported by the GAO is below the median U.S. cost of building one mile of track. For instance, Siemens (SI) just won a Chinese HSR contract to provide 100 trains at a cost of $10 million a piece, with each train capable of transporting 1,000 passenger. Train sets do not make or brake a project.

This table demonstrates that, in order to get serious HSR mileage out of the current pool of money, construction costs will either have to drop significantly - which is unlikely given that Americans have not been building HSR along with the rest of the industrialized world over the past 20 years and thus have little expertise in the area (the Obama plan discusses this capacity gap on a number of occasions) - or the government's commitment will have to be materially boosted.

The GAO notes that costs can drop to the $4.1 million to $11.4 million per route mile range if projects are incremental rather than new, but that also limits possible speeds to between 80 mph and 110 mph, which in most of the world doesn't qualify as fast. Presumably, a fair chunk of this money will go toward such projects so the the bang-for-the-buck analysis will look a bit better. But what this analysis demonstrates is that current funding levels are no where near high enough to build true HSR (HSR - Express and HSR - Regional in the definitions box above) across even half of the corridors identified on the map.

Conclusion

Unlike battery technologies or the smart grid, a few billion dollars in funding does not provide significant boosts in large, mature industries like rail, so unless the government is willing to up the antes, I wouldn't bet on the U.S. becoming the next major HSR market. China, for instance, is spending $24 billion on one HSR line alone (the article linked to here is worth reading if HSR interests you) connecting Beijing to Guangzhou (1,157 miles or roughly $21 million per route mile - it's always nice to have a labor cost advantage).

The Obama plan acknowledges that it will be challenging for certain states to provide significant matching funds as many of them are in budgetary binds. The GAO study also finds an overall low degree of interest on the private sector's part for HSR given the risks involved; some of the HSR projects the GAO studied in international locales aren't even forecasted to meet operating costs from ticket sales, let alone earn a return on capital invested.

The good news, however, is that there are plenty of places where governments accept this fact of HSR because of the other benefits it provides (i.e. lower emissions, less clogged highways) and where growth will continue to be significant in the next few years. I continue to view Bombardier (BDRAF.PK) and Alstom (AOMFF.PK) as the two firms for which a boom in HSR will have the most notable impact on the bottom line.

I also still think that Bombardier's stock has the greatest capital appreciation potential although it's been mainly flat since I wrote the initial article on concerns over its aviation unit. While some contracts may flow to both companies from the current Obama plan - and we should find this out by later this year or early next - people with an interest in HSR should have their sight set on China, as that is where the action really is right now.

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed in this article.

Comments

[LCACM:]

Very timely article for the current situation. HSR would solve a number of problems that plague the US. Compared to car/plane travel, rail transportation is safer, efficient and less stressful.

Apr 23 04:24 AM

[Javaharv:]

I have been a proponent of HSR for a long time. I have commuted to NYC from CT and the ride would be a lot more pleasant if only the tracks did not shake and bump the hell out of you. I think that the tracks and rights of way are the real challenge. As far as equipment is concerned doesn't GE make the best train engines? I would suggest that the steel suppliers will be big winners in the infrastructure build out. Steel and concrete are essential for almost all infrastructure.

Apr 23 08:16 AM

[TCK:]

Dream On ! The reality will be Amtrak with a bigger tax payer subsidy. To pay for it politicians will raise gas taxes further hurting the economy.

Worse case scenario it is another terrorist target of bridges and tunnels that is not possible to defend.

In any scenario, small town America will subsidize the commute of lawyers, lobbyists, and bureaucrats !

Apr 23 08:17 AM

[jp17622:]

Charles- what are your thoughts on energy storage playing a part in the rail systems. Beacon Power (BCON) has marketed its ability to use their flywheel technology for regenerative breaking systems on rails.

Apr 23 08:35 AM

[john s. gordon:]

re complaints about noise pollution from trains - have any of you lived within 8 miles of a major airport?
for minimum environmental pollution - consider use of fuel cell powerplants to generate the propulsion power for the trains.
> jack

Apr 23 10:15 AM

[brokerinbir...:]

Way too expensive for the utility of the thing. Has anyone considered the topography of the planned routes? I'm no rail engineer, but I seem to recall the level of the grade has a lot to do with the ability to have a high speed rail system. Can that be maintained on all these planned routes? Can the Watermelon Party be appeased sufficiently so that when the track will pass over a certain endangered worm species, the worms will not stop the tracks of progress? Bottom line, this project would be the biggest boondoggle in U.S. history (excepting the war on poverty).

Apr 23 11:09 AM

[pedestriand...:]

People, wake up. Our lifestyles need to change. This starts with the way we use a car every single day to get to work, and a plane to commute for business. We are behind nearly every industrialized nation when it comes to transportation. High speed and intercity rail is the most energy efficient means of transportation especially when run by a smart grid powered by renewables. Think 50 years from now, about your grandchildren, not 2 years from now when conservative, afraid of progress, whiners will be complaining about construction. We need to invest in our future, something we haven't done since before Reagan.

Apr 23 12:13 PM

[Valley Boy:]

I think I'd rather keep my change, thanks.
(The type of change that's in my pocket.)


On Apr 23 12:13 PM pedestriandebauchery wrote:

> People, wake up. Our lifestyles need to change. This starts with
> the way we use a car every single day to get to work, and a plane
> to commute for business. We are behind nearly every industrialized
> nation when it comes to transportation. High speed and intercity
> rail is the most energy efficient means of transportation especially
> when run by a smart grid powered by renewables. Think 50 years from
> now, about your grandchildren, not 2 years from now when conservative,
> afraid of progress, whiners will be complaining about construction.
> We need to invest in our future, something we haven't done since
> before Reagan.

Apr 23 02:19 PM

[Old Trader:]

Intellectually, I agree with the article, but as been pointed out by various commentors above, issues of population density, etc., make this problematic. As Frey ( I think) pointed out, track and the roadbed are key to any truly high speed rail. I recall reading more than once, in different publications, the Acera (sp.?) trains that currently run along the NE coast run significantly slower than they're actually capable or traveling, due to inadequate track and roadbed.

Apr 24 12:25 AM

[TinyTim:]

Interesting article and well documented.
Re: noise pollution from trains-these HSR are all overhead electrified, no diesel-electric. reasonably quiet.

Like a lot of urban mass transit systems (not busses) and commuter railroads, these HSR are a niche application. Sure, London to Paris makes great sense. CA coast and NE corridor possibly.

Has anyone looked at the futurists concept of megalopolis corridors? Looking at your charts, it doesn't appear so. If we're all going to end up in these cities, it would seem HSR between them, and since some are hundreds of miles long, inside them could work.

Since airlines are the main competitors, ticket prices, travel time and convenience are prime considerations. I looked at taking the Amtrak express from LA to Chicago a few years ago and found the cost savings didn't justify the time penalty (and that was for a vacation).

Finally, what happened to the HSR between LA & Vegas I've been hearing about for years? I guess LVCC decided they couldn't go "all in" on that one.

Apr 24 05:47 PM

[Valley Boy:]

The high-speed rail concept seems most applicable only to
those cities close enough together to where it is hardly worth
the airport hassle in order to fly between them. Examples coming
to mind are Los Angeles-Long Beach-Santa Ana-San Diego,
Detroit-Toledo, Tampa-Orlando, Chicago-Milwaukee, Boston-
Hartford-New York-Philadelphia-Balt...
Richmond-Norfolk. It would be a waste elsewhere. Instead of
trying to connect downtowns to downtowns, it sounds like it would
be more feasible to connect the outer limits of each of the
respective metro transit systems with the new rails. In the
northeast corridor, a new route might go around the most
congestion by connecting Laurel, Towson, Wilmington, Camden,
Trenton, New Brunswick, Clifton, New City, White Plains, Stamford,
Trumbull, Waterbury, Hartford, Putnam, Woonsocket, Dedham.
From this trunk line of high-speed rail, some spur light-rail lines
would connect into the more congested areas. The high-speed
rail could follow the highway right-of-ways in a lot of cases. The
states should pay for this, not the federal government, since it
not a national interstate system.




On Apr 24 05:47 PM TinyTim wrote:

> Interesting article and well documented.
> Re: noise pollution from trains-these HSR are all overhead electrified,
> no diesel-electric. reasonably quiet.
>
> Like a lot of urban mass transit systems (not busses) and commuter
> railroads, these HSR are a niche application. Sure, London to Paris
> makes great sense. CA coast and NE corridor possibly.
>
> Has anyone looked at the futurists concept of megalopolis corridors?
> Looking at your charts, it doesn't appear so. If we're all going
> to end up in these cities, it would seem HSR between them, and since
> some are hundreds of miles long, inside them could work.
>
> Since airlines are the main competitors, ticket prices, travel time
> and convenience are prime considerations. I looked at taking the
> Amtrak express from LA to Chicago a few years ago and found the cost
> savings didn't justify the time penalty (and that was for a vacation).
>
>
> Finally, what happened to the HSR between LA & Vegas I've been
> hearing about for years? I guess LVCC decided they couldn't go "all
> in" on that one.

Apr 25 03:36 PM

[harammph:]

China has a MagLev, why can't we? If its above ground it won't interfere with crossings and the Like.

May 23 05:17 PM

[RES RAIL:]

Very factual summary! A few comments:
High Speed Rail (HSR) cannot operate via wind or solar power or off of batteries. France has a tremendous nuclear power base, no coal, no issues.
Current rail lines were not designed for HSR although trains did operate at speeds close to 100 mph "in the day" albeit they might have been the only train on the line!
You cannot blend HSR and freight, period. Right of way must be seperate, also remember, the US rail network was built not by the government but by private or publicly traded companies.

May 25 11:17 AM

[issinflight:]

I think you're right on no immediate investment play on HSR. When our political lobbyists get done with it, 40mph will be called "high speed". The money is pathetic compared to other country's investments.
Remember that all forms of transportation are subsidized, some have more effective lobbyists (Murtha Airport, anyone?). But for medium distances, putting people in tin cans and throwing them through the air between cities, doesn't make a lot of sense.
Read historian Stephen Ambrose's "The Greatest Thing in the World" about the building of the transcontinental railroad, and the graft and corruption the railway companies managed to do in the process of building it. Even today, they "game the system"; Federal law requires passenger priority over freight, except when sidings are too short to allow freights to move aside. so guess what, all sidings are plenty long for Amtrak to wait on, but too short for most freights. And who paid for the land those tracks (mostly) were laid on?

Jun 04 11:54 PM

[Freya:]

Wouldn't the steel tracks have to be replaced in their entirety for the HSR to work?

Would you have to elevate the tracks at intersections or would they be elevated from the start?

I've always felt that it was an idea that would not work in the US simply because of the density of the populations within the 100-500 mile advantage point between cities. Noise Pollution anyone?

Apr 23 04:20 AM