A private passenger train
It rarely makes headlines these days, but Florida East Coast Railway is one of the most important businesses in the state’s history. A quick narrative: In the 1880s, Henry Flagler (Standard Oil) started in St. Augustine and began building a string of resorts, businesses and communities down Florida’s east coast. To ensure a supply of goods and guests to his resorts, he bought a small railroad and, with some help from the development-hungry state Legislature, expanded the line down the state. Flagler died in 1913. The line eventually became known as the Florida East Coast Railway and ran from Jacksonville to Miami and over a famous series of railroad bridges on to the Keys.
In 1935, a hurricane wiped out the bridges. By that point, however, the Great Depression had wiped out the railroad’s business. Ed Ball, an heir of the DuPont family, got control of the railroad by buying its bonds out of bankruptcy via St. Joe Co. and then litigating the other bondholders into submission. Ball concluded that the railroad’s survival depended on eliminating union-mandated work rules, cutting employees and modernizing the railroad’s operations. His challenge to the unions produced one of the longest strikes in American history, which dragged on from 1963 to 1977 and included shootings and track bombings. The U.S. Supreme Court ultimately ruled in Ball’s favor. Meanwhile, he smartly used the strike as a way to drop passenger service, which had become a money-loser for most railroads by the mid-1950s.
In the 1980s, Florida East Coast Industries was incorporated as a holding company for the railroad and a related real estate development company, Flagler Development. FECI began operating independently of St. Joe in 2000. In 2007, FECI was purchased by a Wall Street investment company, Fortress Investment Group.
Today, Florida East Coast Railway, with more than 500 employees, operates 351 miles of track from Miami to Jacksonville and is the only railroad along Florida’s entire east coast. Ball’s legacy is a well-run, modern and efficient line with one of the top safety records in the country. Projects under way will create direct access between two of the state’s largest ports, the Port of Miami and Port Everglades (Fort Lauderdale) and the rail line — vital for the railroad’s increasingly important intermodal traffic.
This March, FECI did a surprising thing. It announced it would spend $1 billion to develop “All Aboard Florida” passenger service between Miami and Orlando, 14 round-trips daily with stops in Fort Lauderdale and West Palm Beach. The train, slated to be operating by 2014, will be the first passenger train flying the railway’s flag since 1968. The route will use 200 miles of existing track from Miami to Cocoa; the railway will have to buy 40 miles of right of way, construct the last 40 miles of track into Orlando and also straighten some curves on its existing line to enable the train to maintain speeds that will get it from Miami to Orlando in three hours. Eventually, the company might extend passenger service over to Tampa and up to Jacksonville. It won’t operate the train itself — Amtrak likely will be among those contending to run it.
There are actually two stories here. One is the passenger train initiative. It’s smartly conceived, with a desirable travel time, plenty of round trips and a limited number of stops. Since the railroad is a private company, it’s insulated from shortsighted politicians using their control of purse strings to dictate more stops than make economic sense — a big factor that would have turned the construction of a “high-speed rail” project into a milk train by the time it was extended from Tampa to Miami.
Florida East Coast believes that if ridership surveys validate its projections, passenger service could be at least a break-even proposition. If it’s anywhere near that successful, it will do more to enhance Florida’s transportation infrastructure in both the short and long term than high-speed rail ever would have done.
The second story is the broader business context for FECI. The company prefers for the moment to talk only about its due diligence for the passenger rail project, but anyone with the foggiest notion of the economics of passenger trains knows there will be a second verse to this train song.
Fortress saddled Florida East Coast with more than $600 million in long-term debt when it bought the railroad for $3.5 billion in 2007. Before debt service, the railroad operates at a profit, but servicing that debt has produced losses of more than $100 million since 2008. The kindly Wall Street types at Fortress Investment Group simply can’t — and don’t — expect to recoup their investment, plus the $1 billion to upgrade the line for passenger service, by selling train tickets to tourists and business travelers.
Will the passenger train help FECI develop Flagler’s 5,000-acre real estate portfolio and market various rights along its rail corridor? Probably. But even allowing for a long-term, patient approach by Fortress, it’s highly unlikely that a passenger train with four stops will help monetize those holdings quickly enough to generate the kind of return that an outfit like Fortress ultimately expects.
Given the nature of Wall Street investment firms, Fortress may be looking for enough visibility and leverage out of the passenger line to either find a buyer who’d break up Flagler and the railroad, or is it angling to take FECI public as it did with a Florida firm it bought earlier, Rail America?
Good luck to the passenger train. Good luck to FECI. Especially if the train catches on, Henry Flagler’s railroad could be making history again.
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