What Does Wall Street Really Say About HSR?

What Does Wall Street Really Say About HSR?
Jul 16th, 2010 | Posted by Robert Cruickshank
.........................................................................

http://www.cahsrblog.com/2010/07/what-does-wall-street-really-say-about-...
..........................................................................

Earlier this week Bill Lockyer told the San Diego Union-Tribune that investment bankers on Wall Street are skeptical of California’s high speed rail project. Unfortunately, Lockyer has offered neither evidence nor details of these statements, so we can’t really respond to them directly. (That’s not to say Lockyer is making it up, I’m sure he has heard these things.)

But we do have some evidence that investment bankers are bullish on HSR in general. Last week UBS published the following study on HSR in Asia. Thanks to Missiondweller for sending this to me. (PDF link)

HSR

Here’s their conclusion:

Our European transport analysts Jarrod Castle and Dominic Edridge wrote an interesting Q-Series report in January 2010.

They found that the impact of HSR on airlines has thus far generally been very negative. For instance, in Spain, the impact of HSR on air travel between Madrid and Seville has been severe: within six months of an HSR link opening, the number of weekly flights between to two cities fell from 71 to 40, and the airlines lost more than 20% of market share in a year (COST 318 “Interaction Between High Speed Rail and Air Passenger Transport” European Commission, Directorate-General of Transport, final report, Luxembourg, 1998).

And this was not a one-off. The BBVA Foundation estimated that since HSR was introduced, the market share of air fell by 25% on the Paris-Lyon route (31% in 1980 to 6% in 1997), 32% on Madrid to Seville (40% in 1991 to 8% in 2002), and 6% on Hamburg-Frankfurt (10% in 1985 to 4% in 2000). HSR’s market share has risen from 0% to 70%, 61% and 48%, respectively, on these three routes.

In terms of drivers of market share, Jarrod and Dominic highlighted that studies have found that rail journey time is the single most important factor in determining rail market share. Specifically, the longer an HSR journey takes the lower the market share relative to air. The two charts below are extracted from their report.

And their conclusion on risk:

We believe risks to equities include regional and global economies, interest rates, commodity prices, and many other factors. Forecasting corporate earnings is difficult because it is affected by a wide range of economic, financial, accounting and regulatory trends, as well as changes in tax policy. These factors could impact shares negatively.

The railway sector in China is highly regulated. We believe the main risks are tariffs and policy. Currently, both passenger fares and freight tariffs are tightly controlled by the MOR and China NDRC and are not easily changed. The main policy risk is that rail operators have no control over their own operations and are subject to intervention from the MOR.

In short, UBS is not at all concerned that there would not be enough people riding these trains. It sounds like the “Wall Street investment bankers” Lockyer talked to did not include UBS, and instead included people not very familiar with HSR, who are locked into the 20th century pattern of thinking that for someone reason, Californians are unlike the rest of the world and wouldn’t ride a fast, convenient, affordable train when one was given to them.

.................................................................................
comments:

Emma
Jul 16th, 2010 at 14:00#1 Wow! Thank you for the numbers. I didn’t know that it was that significant. I’m very sure that nobody here in San Diego would fly to San Francisco. It takes hours to drive up to SF. A high-speed train would make it possible to visit San Francisco for a day and then come back. I really can’t wait for the LA-SD extension.
[Reply]
Spokker Reply:
July 16th, 2010 at 9:48 pm
Possible? Yes. Desirable? Depends on how much cash you have to burn. If you’re going to pay to go all the way to SF, you might want to stay for a couple of days to make the fare worth it.
[Reply]
Joey Reply:
July 17th, 2010 at 12:57 am
If you’re on a quick, late-notice business trip and don’t really have time to spare, then day trips could make sense.
[Reply]
adirondacker12800 Reply:
July 17th, 2010 at 8:51 am
Ya mean like the people who now get on the 6:20 flight in the morning and the 4:45 in the afternoon?
[Reply]
Spokker Reply:
July 17th, 2010 at 8:52 am
Business types. I don’t think it’ll be worth it if you’re just sight seeing for the day, unless you’ve got cash to burn.
[Reply]
adirondacker12800 Reply:
July 17th, 2010 at 8:56 am
Their cash is just as green as pleasure travelers. Greener when someone decides on Tuesday that they need to be in the other end of the state on Wednesday and are willing to pay premium prices to get a seat.
[Reply]
Spokker Reply:
July 17th, 2010 at 9:02 am
Yes, I agree. Same day return trips will be great for business travelers.
But if you are just going to San Francisco to see the Golden Gate Bridge, I don’t see how it would be worth it to shell out a lot of money for a same day return. Maybe if the fares were really going to be $55, but that’s probably not going to be the case.
[Reply]
jim Reply:
July 17th, 2010 at 10:05 am
SNCF has, several times, made the point that at a trip time of two hours or less, ridership jumps. I think that this is the day trip threshold. If the trip time is significantly longer than two hours, people think of the trip as requiring an overnight stay. But a two hour trip allows for enough time at the destination to make the trip worth it and still get back before night. Many more people are willing to take a day trip than an overnight trip. No matter how low the fare, an overnight stay bumps the cost up considerably. People like to sleep in their own beds. So get trip time down near or preferably below the magic two hours and you tap into a much larger travel market.
[Reply]
Ted Crocker Reply:
July 17th, 2010 at 8:44 pm
Did anyone notice that Siemens put up a marketing page where you can compare ridership time between the various choices and HSR, and they show 3hrs, 2min for SF-LA, not 2hrs, 38mins per HSRA? I’m a bit surprised Siemens is posting run times longer than the maximum required by the bond measure. This can’t make the HSRA too happy.
http://adsoftheworld.com/media/online/siemens_highspeed_rail
Peter Reply:
July 17th, 2010 at 9:27 pm
@ Ted Crocker
Did you even bother to read the assumptions that Siemens made for this very basic simulation?
http://www.usa.siemens.com/entry/us/en/highspeedrail_banner.htm
“The trip by rail includes car journeys between the city hall and the city’s train station at both endes, and 15 minutes waiting for the train.”
2:38+0:15=2:53. Add in the car journeys at each end, and you get 3:02.
adirondacker12800 Reply:
July 17th, 2010 at 9:58 pm
Peter: Reading the assumptions would make the FUD much less effective.
Peter Reply:
July 17th, 2010 at 10:02 pm
I know, I know. It’s just fun to call out and mock the FUD’ers.
jimsf Reply:
July 17th, 2010 at 11:12 pm
in fact I sell a lot of trip to tourist where they make san diego a day trip from their base in la. and thats a 3 hour trip. surfliner down in the morning, hit the zoo, and whatever, catch a northbound surfliner back to la at the end of the day. open tickets makes it simple and if you’re on a cali rail pass, where travel is by 24 hour day not by trip, you can do the whole thing and only use one travel day. Same thing works for santa barbara. oh and yosemite too. out and back in a day… and thats a 5 hour trip each way.
Ted Crocker Reply:
July 18th, 2010 at 1:35 am
Peter, You’re right. I missed that note. I looked up the travel times on Mapquest. Backing out 5 mins in SF, 2 mins in LA and 15 mins waiting brings us to exactly 2:40 per the bond measure. I should have known that’s what they based their figures on. I thought the 3:02 number seemed odd. Thanks for putting it in perspective.
A&P, FUD. The name calling continues. Rod Diridon and Quentin Kopp taught you well, I see. Very clever and very mature. Really makes one want to engage with you. It’s been pointed out on this blog before that this behaviour only encourages people like NONIMBYS who is clearly an unstable individual (or would like us to believe he/she is). I’ve never once called anyone a name on this blog no matter how much I’ve disagreed with them. You’d all be preaching to the choir if it weren’t for some opposing views, and that doesn’t help any of us. I respectfully ask that you knock it off.
PS. I hope NONIMBYS isn’t one of you as threats take it to another level.
Spokker Reply:
July 18th, 2010 at 1:38 am
Stirring up fear, uncertainty and doubt is a kind of negative advocacy that you are engaging in. I’m not saying it’s a bad thing to do, but you are doing it.
wu ming Reply:
July 18th, 2010 at 3:16 am
living in the central valley, i often take the train into the bay area (or drive. ugh) for day trips. takes about 2 hours or so.
the business travel will be a huge part of ridership too. i know a guy who works for caltrans who is always doing these awful combinations of short hop flights and rental cars to check out pavement jobs around the state, having a high speed trunk line will make those business trips a lot easier.
Peter Reply:
July 18th, 2010 at 9:57 am
@ Ted Crocker
If you actually missed the part where they explained where their assumptions came from, then my comment about FUD was out of line, and I apologize. It was just something that some certain commenters who dislike the project would have posted, who do nothing other than post random negative articles about HSR they dug up on the Internet with a “ZOMG!!! We’re doomed! We should pack up right now!!” attitude. They are without a doubt engaging in all-out FUD.
What irks me about FUD is that all it does is distract from the real issues.
jimsf Reply:
July 17th, 2010 at 11:07 pm
I would totally go to from sf to hollywood for lunch and shopping for the day and go home after dinner and a show. 9am train to la, red line, hang out, have fun, 10 pm train home. hell if they run all night you could go to the club till closing and catch the 2am home and be in bed in time to get up for late sunday brunch in sf.
no doubt there will be rt excursion fares available. too. Still cheaper than a hotel in la for a few hours.
[Reply]
Tony D.
Jul 16th, 2010 at 14:13#2 Outstanding work Robert and Missiondweller! So some on Wall Street may indeed invest in HSR. Related to the affects of HSR on European aviation; once HSR is up in running by 2020, could be the death knell for San Jose International Airport. Or at the very least, we won’t see any more expansions at SJC. I swear everytime I look up to see a jet arriving at SJC it’s a Southwest Airlines 737.
[Reply]
Thomas N
Jul 16th, 2010 at 17:29#3 I had to wonder whether a Swiss bank like UBS can be considered part of “Wall Street,” as the term refers to American financial institutions. The title of this blog entry is misleading if this is true.
[Reply]
tony d. Reply:
July 16th, 2010 at 6:36 pm
It’s called the global economy pal.
[Reply]
Joey Reply:
July 17th, 2010 at 12:56 am
Oddly enough there seems to be more interest in CAHSR from foreign capital than domestic…
[Reply]
Andre Peretti Reply:
July 17th, 2010 at 4:38 am
And oddly enough Wall Street is definitely interested in European HSR. Goldman Sachs has bought enough shares of Eurotunnel to become majority owner. If Eurotunnel wins the bid to buy HS1, Goldman will be a major HSR player.
And don’t forget that Paris-Lyon TGV, the mother of all European HSR, was financed by Wall Street. When the SNCF floated its bonds, I suppose American bankers just asked a few commonsense questions: the SNCF? Who’s on their board? What’s their record? What’s their rating? AAA? – OK, buy.
Now, just imagine they ask the same questions about CHSRA and you can guess the answers.
Warren Buffet once said “I never buy a product I don’t understand”. Obviously, Wall Street bankers understood the TGV but don’t understand CHSR. Maybe an effort should be made so that they do.
[Reply]
bleh Reply:
July 17th, 2010 at 5:42 am
Or perhaps they just think they understand it all too well. Big infrastructure projects in the US, especially if it’s not a new highway, don’t have a good track record over the last decades.
It’s imperative that they start building it as soon as possible to show that this is not yet another HSR project that doesn’t go anywhere. The ARRA money’s certainly going to help in that respect. Let’s just hope that the naysayers don’t succeed.
[Reply]
Ted Crocker Reply:
July 17th, 2010 at 8:36 pm
The lead finance team consultant for deriving the CHSR 2008 business plan was Infrastructure Management Group (IMG), with input from both Barclays and Goldman Sachs (who replaced Lehman on the team after their demise). So I’m a little confused. It seems Wall Street has been plenty involved with HSR both here and abroad. With all that knowledge, GS lines up to buy shares of Eurotunnel yet they don’t seem eager to jump at the chance to invest in their own business plan here in Cali? Why? Is it really because they don’t understand CHSRA?
[Reply]
Peter Reply:
July 17th, 2010 at 9:30 pm
“With all that knowledge, GS lines up to buy shares of Eurotunnel yet they don’t seem eager to jump at the chance to invest in their own business plan here in Cali? Why? Is it really because they don’t understand CHSRA?”
Because the Authority hasn’t completed environmental planning and isn’t yet ready to ask for money? It hasn’t even been 2 years since this project went from vapor-ware status to mega-project. Things take time.
[Reply]
Ted Crocker Reply:
July 18th, 2010 at 1:54 am
You don’t think the HSRA has asked yet? I don’t know, maybe you’re right, but I’d have to guess they’re dying for someone to come forward. They’ve got to prove that they can get the money lined up sooner rather than later if they want continued funding from the state or the fed. I would guess that proof is needed in the form of bonified offers. Remember Simitian basically drew a line in the sand. The point is if the project is as rosy as the HSRA potrays it to be, then the offers should be a no brainer even without the environmental planning complete. Since they don’t seem to be lining up, then this suggests that the private investors want to see how things flush out because it is too close to call (or worse).
[Reply]
Peter Reply:
July 18th, 2010 at 9:49 am
But Ted, the Chinese have already made it known that they want to invest. As has SNCF, Siemens, and one of the JR’s (I can never remember which). They just haven’t made concrete proposals yet because the Authority has not made any concrete requests. Once the Authority gets environmental clearance for a segment (most likely Bakersfield – Merced and LA- Anaheim, shortly followed by SF- SJ), they will have a much better idea how much exactly it will cost, which will enable them to quickly move forward with financing proposals. Like I said, it takes time to plan a mega-project, and not all the money will be there right from the beginning. You can’t reasonably expect the Authority to have all its ducks lined up straight from the get-go.
[Reply]
Peter Reply:
July 18th, 2010 at 10:02 am
“You don’t think the HSRA has asked yet? I don’t know, maybe you’re right, but I’d have to guess they’re dying for someone to come forward.”
Unless they are willfully breaking the law, they cannot have put out requests for financing without making it public. Bagley-Keene Act and all that. The board members cannot even talk with one another about the project without possibly running afoul of the Bagley-Keene Act. So we would know about any requests for financing they would have expressed.
[Reply]
YesonHSR Reply:
July 17th, 2010 at 8:13 am
there far more long term forward thinking..
[Reply]
adirondacker12800
Jul 16th, 2010 at 18:17#4 “Wall Street investment bankers” ……… wouldn’t ride a fast, convenient, affordable train when one was given to them.
Wall Street investment bankers take fast convenient affordable trains every day except for a few. They usually swipe their Metrocard to do it.
[Reply]
Drunk Engineer
Jul 16th, 2010 at 20:18#5 If nothing else, this blog posting indicates nobody should be taking investment advice from Robert.
UBS (like most ‘Wall Street’ firms) is a brokerage. That means they market bonds, they don’t invest in them directly. Whenever a firm like UBS is hired to market a bond, they always produce glowing analyst reports, like the one posted above.
These days, after the bubble, and especially after yesterday’s $500 million fine against GS, everyone understands analyst reports are meaningless. They are a sales tool, which could very well contradict investment decisions firm makes internally.
[Reply]
mike Reply:
July 16th, 2010 at 8:48 pm
I didn’t read Robert’s post as saying, “Because Wall St. wrote this everything it says must be true.” I read it more as refuting Lockyer’s claim that everyone on “Wall St.” is saying that HSR won’t make sense. Though he didn’t even make that claim – he just claimed that “Wall St.” is telling him that LA-SD could be privately financed while LA-SF could not be. Is that really what he’s hearing? Hard to say…
[Reply]
Missiondweller Reply:
July 17th, 2010 at 12:26 pm
UBS is an investment bank though they do own a retail brokerage in the US (Paine Webber).
[Reply]
mike
Jul 16th, 2010 at 20:55#6 The interesting thing about the Spanish/French/German experiences is that in every case the long-run HSR ridership was at least 1.5-4.8x higher than the pre-existing airline passenger figures for the same corridor. Many people are skeptical that HSR could achieve 20 million pax/year between SF and LA (the CHSRA “77% of airline fares” forecast; this includes intermediate markets) when the SF-LA air traffic is only 10 million pax/year right now. Yet the exact same thing has happened everywhere else.
[Reply]
morris brown
Jul 17th, 2010 at 11:09#7 It is really amazing to see Robert rebutting the Treasurer of California, Bill Lockyer, with an article from UBS, that paragon of virtue.
For instance:
http://www.law.com/jsp/article.jsp?id=1202428390609
UBS to Pay $780 Million Fine in Tax Case Settlement
What one should know is that Kopp and the CHSRA have been claiming for years that the private investors were onboard, that dozens of investors were just waiting to invest. Well where are they Robert? We are still waiting for hard cash to be put up. They are now waiting for the State of California to guarantee their investments. They are not about to risk capitol on this boondoggle.
Yes indeed UBS research reports should be trusted and taken as gospel.
Robert has been steadfast in criticizing the Reason Foundation and their report on this project, claiming among other items, that they were puppets of the oil industry, adn thereby anythign in that report was suspect at best.
[Reply]
Alon Levy Reply:
July 17th, 2010 at 11:19 am
Are you denying that Reason is a paid shill for the oil industry, Morris?
[Reply]
YesonHSR Reply:
July 17th, 2010 at 11:27 am
Yes Morris the Reason Foundation that voice of solid reasoning
[Reply]
Eric M Reply:
July 17th, 2010 at 11:49 am
Jesus Christ Morris, take your head out of the sand!! Just a couple of months ago China said it was willing to put up AT LEAST $10-12 billion towards our system. Along with Siemens, which said it was willing to take a risk of investment without revenue guarantees. No one is going to write a check yet because we are not done with the environmental review process. Enough is enough Morris Brown. It’s people like you with backward thinking that is making this country fall behind, but you don’t care because it will not directly benefit you. Just keep writing all sorts of letters/emails to your city council complaining about everything under the sun because obviously you have too much time on your hands. The only boondoggle is your way of thinking. Selfish!!
[Reply]
John Burrows
Jul 17th, 2010 at 12:15#8 My computer skills are limited, but earlier today I logged on to a longer version of the UBS report, something like 40 pages. Now all I can get is a 14 page version. How do I get back to the longer report?
[Reply]
John Burrows Reply:
July 17th, 2010 at 5:15 pm
Ignore my previous comment—– been looking at too many reports—
There is a brief paragraph in the UBS report on page 4, under heading of Railway Operators that might make potential investors less bullish. “HSR may actually offer very poor returns for operators given high investment costs”. Later in the same paragraph there is a statement that the Chinese Wugang Line will make a return on investment of only 10 per cent until 2019. I guess that in most cases investors are not operators, but wouldn’t this be an indication that investing in HSR might not be a such a good idea unless it was for the long term.
My take on reading this report is that some investors might want to put their money into development around future HSR stations rather than in HSR itself.
[Reply]