This Week at Amtrak

FEC Depot Boca NE (Photo credit: Wikipedia)
From the United Rail Passenger Alliance:

This Week at Amtrak; Vol. 9 No. 2
Volume 9, Number 2

From the Editors…

When the parent company of a legendary railroad states its intention to operate passenger trains, it is bound to garner some attention. This week we try to find out what all the hubbub is about.

What’s all the fuss?

Last week the parent of the Florida East Coast Railway announced its intention to establish passenger train service between Orlando and South Florida. Suffice it to say, this set the world of rail travel advocacy aflutter, leading to numerous online articles, blog posts, and more than a palpitation or two. This is all the more remarkable since the FEC exited the passenger train business on July 31, 1968, thus never having become an Amtrak subscriber. Many find this hard to fathom. As historians like to point out, however, history does not repeat itself; but it does rhyme.

MORE, PERHAPS, than any other part of the United States, excepting the Great Northwest empire of James Jerome Hill, it is possible and, indeed, almost mandatory to think of Florida in terms of the personality of a truly imperial railroad builder whose equally imperial whim was the organization of a vast geography as his pleasure dome and lasting monument. Henry Morrison Flagler, a partner in Standard Oil with John D. Rockefeller who retired with an immense personal fortune in vigorous middle age and full possession not only of millions but the will to spend them grandly, was able before his death to claim Florida almost in its geographical, economic and social entirety as his own creation. Call it enterprise or call it megalomania, no Roman proconsul or magnifico of medieval Italy ever brought into being so grandiose a concept as railroading and its incidental and collateral expansion in Flagler’s Florida. - Lucius Beebe, The Trains We Rode, Volume One, Howell-North Books, 1965

The seeds of the modern era of the Florida East Coast Railway were sown toward the close of the Twentieth Century. With the loosening of Depression Era banking regulations, numerous private equity investment firms were established such as Goldman Sachs, The Carlyle Group, and The Blackstone Group. Their mission was simple: Invest their clients’ hard-earned dollars with an expectation of a return on that investment.

Fortress Investment Group was founded as a private equity firm in 1998, and is headquartered in New York City. Among their stated goals is to obtain “distressed and undervalued assets (some with limited current cash flows and long investment horizons) and tangible & intangible assets (real estate, capital assets, natural resources and intellectual property).” The expected life of these transactions is 3 to 25 years.

The Florida East Coast is much more than a railroad. There is the Florida East Coast Railway that operates 351 miles of mainline track between Jacksonville and Miami. The parent company, Florida East Coast Industries, also owned and operated Flagler Development Group, one of the premier developers in the state. Its portfolio of properties includes about 8.8 million square feet, primarily located in Jacksonville, Ft. Lauderdale, Orlando, and Miami. Flagler also provides construction, consulting, brokerage and property management services. The company also owns about 853 acres of entitled land in Florida and more than 3000 acres of Florida real estate in its land bank that are not yet entitled. It should be noted that of the listed Flagler prime property locations, Orlando is the only one NOT located on the railroad.

The FEC was acquired out of bankruptcy in 1961 by The St. Joe Paper Co., a legacy of the du Pont era. St. Joe controlled the FEC until 2000, when St. Joe distributed its Florida East Coast shares to St. Joe stockholders. The FEC became an independent public company, but this freedom would be short-lived.

The Staggers Act of 1980 removed much of the regulation overreach from earlier in the century, allowing the railroads to act as they were intended; as businesses. Since 1980, $480 billion has been invested by the nation’s railroads into their physical plant. With railroads now allowed to maximize the leverage of their franchise opportunities for growth became evident over the following two decades, especially to investment firms. All aspects of railroading, from manufacturers to railroads, themselves, have found favor once again with the money changers.

Fortress Investment Group’s initial foray into railroading was the acquisition of RailAmerica, a short line holding company, in February 2007. It would take RailAmerica public with an initial public stock offering in October 2009.

By 2007 the FEC was ripe and ready for a change. As a result of the protracted financial malaise gripping the entire state in the first quarter of that year, earnings suffered a drop of about 50%. Net income fell to $9.04 million compared to $18.7 million for the first three months of 2006. Revenue during the quarter dropped to $108 million from $136 million. This was attributed to a decline in revenue of $43.9 million in land sales, and a $7.3 million drop in railway revenue. To most, this would appear to be a distressed and undervalued asset; for Fortress, this was an opportunity.

On May 8, 2007, the Florida East Coast Industries Board of Directors unanimously agreed to a takeover by Fortress in a transaction valued at $3.5 billion. The Surface Transportation Board granted its blessing in September, 2007. Under the Fortress banner, the railroad and Flagler Development have been split apart; but remain as staples of their “Alternative Asset Management” portfolio.

So what’s next?

Flagler’s first hotel venture was The Ponce de Leon at St. Augustine, costing a then astronomical $1,250,000 and advertised as the finest resort hotel in the world. More investments followed in dizzying succession as Flagler, indifferent to considerations of profit or loss, began the realization of a vision which embraced all Florida as the playground of the nation with amenities of relaxation for every taste and purse. In 1893 he added a new dimension of splendor and costliness with the opening at Palm Beach of the incredible Royal Poinciana Hotel while the iron of the Florida East Coast was still sixty miles away at Fort Pierce. From then on resorts palatial and modest leapfrogged the railroad down the seacoast: Hobe Sound, Jupiter, Fort Lauderdale, Biscayne and Miami. - Lucius Beebe, The Trains We Rode, Volume One, Howell-North Books, 1965

The “playground of the nation” as left by Henry Flagler has grown up into an economic force within its own right, and is now the fourth most populous state in the union. The state’s Gross Domestic Product was $748 billion in 2010, also fourth in the nation. For Flagler, the goal was simple: the importation of vacationers (and their money) to enjoy the mild weather; but even Flagler realized that beautiful vistas and sandy beaches were worthless unless a means existed to transport people to them.

For Flagler’s successors at Fortress, the objective becomes a little more complicated. Certainly “considerations of profit or loss” weigh heavily on their minds. The true ultimate goal of Fortress (as with any similar investor) is to build the capital value of the investment to multiples of its original value; before selling out, either to a "buy-and-hold" investor (e.g., Berkshire Hathaway) or to the public in an IPO. Profits are merely the lever, not the goal.

Locked in the legacy of the FEC, Fortress has tangible and intangible assets, the value of which have always been dependant upon the ability or inability of access by the public. The future of publicly funded and maintained transportation is anemic, at best. As a property owner, Fortress has a unique advantage: It already owns a transportation company not dependant upon publicly-funded rights of way or traffic control systems.

How does one maximize leverage of the franchise to advance and tap into the state’s GDP? Port Everglades (Fort Lauderdale) and the Port of Miami are undertaking expansions which renew rail access. Even so, the fact remains that people really do live here. Flagler Development currently lists a nine-acre property consisting of five lots which “is currently entitled for 2.5 million square feet of mixed-use development.” Also from the listing:

Downtown Miami has become a vibrant urban center where a population of 71,000 swells to 194,000 during business hours. Within walking distance of Miami-Dade College, the New World School of Arts, American Airlines Arena, and the Adrienne Arsht Center for the Performing Arts, the property is also at the epicenter of Miami’s cultural district.

Ironically, this is the land which once was home to the FEC’s Miami passenger train station and tracks, which were razed in the autumn of 1963. With rail access being restored to the Port of Miami just north of this site, restoration of rail service to downtown becomes a real possibility. Could this factor into whatever Fortress has in mind for its modern-day version of the FEC?

Obviously, none of us here claim to know what the service proffered by the FEC will look like, or even if it will, indeed, transpire. That is not the point. What is relevant is that investors find railroads attractive again; and this adoration is growing. Generally, one needs to spend money to make money. Is a $1 billion investment of private capital justified to unlock the untapped/unrealized value of existing assets? The formula that made Flagler a success is still quite relevant. Fortress Investment Group may be just 14 years old, but perhaps it has figured this out.

Related articles

• Amtrak service along Treasure Coast on track if governor signs bill (tcpalm.com)
• Miami-Orlando rail service planned for 2014 (rail-usa.com)

Pros and Cons of moving transportation to the state level

The western front of the United States Capitol. The Capitol serves as the seat of government for the United States Congress, the legislative branch of the U.S. federal government. It is located in Washington, D.C., on top of Capitol Hill at the east end of the National Mall. The building is marked by its central dome above a rotunda and two wings. It is an exemplar of the Neoclassical architecture style. (Photo credit: Wikipedia)When the Republican controlled House of Representatives came out with their budget proposal a few months ago many called it a doomsday budget. Among the items in the budget that had transit advocates scared was the elimination of dedicated transit spending.

So far no permanent transportation budget has been passed and considering it has been years since a plan has been passed through into law and the current state of affairs in Washington I see little happening between now and when our next president whether it is President Obama reelected or the Republican candidate is elected. 

Once the election happens we might be able to see what the future of transportation policy might be in the United States or on the other hand if we continue to have two widely different political influences in Congress, we may continue on this not so lovely state of political impasse. 

For second let me play devil's advocate with my libertarian side and say what if we not only ended dedicated transit funding on the state level, but instead completely eliminated transportation oversight by the Federal government. What would happen? 

Most people looking at this either see doomsday or happy days depending on your political perspective, however like anything there is good points and bad and let me point some of them out. This is by no means a comprehensive paper on the opportunities and unintended consequences but instead a few brief talking points designed to facilitate a discussion of the future of Transportation in America. 

Pros: 

Yes boys and girls, there would be some positive that would come out of this. The most important is that there would potentially be more money available to be used on projects (although see cons also for the funding issue part). Because an entire layer of bureaucracy that costs millions of dollars to operate would be eliminated more money could be used to fund transit projects that the states want. 

In addition unnecessary regulations could be eliminated that would also lower costs on projects. One example that has become punching bag in certain circles is the Buy American Act that raises cost of procuring equipment. While I am a supporter of American made products and want to see our local industries do well, that is an economic issue that should be dealt with separately from transportation. I am sure almost everyone could point out some  needless regulation that has been implemented on the Federal level that increase the cost to build vitally important projects. 

Third, ideally the state government would look to what are the priorities for the state and fund them by that priority list. Instead of having to worry that the Federal level would not consider their project important over something else, they could dedicated their funding to that project. 

Cons: 

If there is pros, then there has to be cons and once again let me point out I am just picking out a couple of important talking points here. You could write a book on the subject which is not the intention here. 

The biggest con is the counterpoint to number three of the pro's and that's the priorities of the state government. The question, how many state legislatures are in tuned with the needs of the people in the biggest cities in that state? I think you would be hard pressed to find a state where their priorities seemed in tuned with the needs of the cities. 

Then you add the totally wacked out state legislatures like Utah. For years anti-transit forces have been lobbying to get the Utah Transit Authority put under the control of UDOT which is strictly a highway organization. The primary goal here is to take away the voter approved funding from UTA and give it to strictly high spending. So far they have not been successful. However, if the state legislature of Utah had control of transit funding considering most members are either hostile or oblivious to transit such as my former legislator Carol Spackman who is one of the latter members. 

To see what could happen lets take a look at one law that went through the Utah Legislature this year. The city of Salt Lake City passed a no-idling ordinance to reduce pollution especially during times of inversion. The legislature decided it didn't like that so their might hand decided to change the law. 

Another con would be funding itself. With the elimination of the Federal Gasoline Tax and funding mechanisms  the responsibility for funding ALL transportation in the state would fall on the state. How hard would it be for state legislatures especially in states like Washington that has a anti-tax political machine to ramp up initiatives to shoot down any tax the state tries to levy? While the Federal government has been inept at raising the gas tax most states have not been doing anything either for fear of voter reprisals. What money was allocated would quickly be absorbed into the highways with nothing left for the alternatives. 

Finally it would also mean that the states would have to take a more active role when it comes to safety measures when it comes to transportation. This could actually make costs worse as every state enacts different regulations requiring bidders to change the specifications for every state. When it comes to transit, most orders are small enough that it could have a major detrimental effect on industry. 

Conclusion: 

There is no easy answers of this is probably only the tip of the iceberg of the pros and cons to this issue. Sadly, I see little being accomplished in Washington DC over the next few months and maybe longer depending on the outcome of this years elections. 

What is clear is we need to have an effective dialogue on the future of transportation in our country. Whether it will happen is anyone's guess. 

This Week at Amtrak

System map (Photo credit: Wikipedia)I have not seen this published in a while but here is the latest copy of This Week at Amtrak from the United Rail Passenger Alliance.

This Week at Amtrak; Vol. 9 No. 1

From the Editors…

Recently, a local regional railway announced a private initiative to begin passenger train service connecting Central and South Florida. Just to be clear, we said private.

A FOX rises in the East (Coast)

A wise fellow once observed that there is nothing new under the sun. It has also been said that if one wants a new idea then one should read an old book. On March 22, 2012, Florida East Coast Industries, the parent of the Florida East Coast Railway, made a significant announcement concerning its future:

Florida East Coast Industries, Inc. (FECI), the owner of Florida’s premier passenger rail corridor, is developing a privately owned, operated and maintained passenger rail service to connect South Florida and Orlando, which will be operational in 2014. By connecting the most visited city in the United States with South Florida’s business and vacation destinations, the passenger rail project, called All Aboard Florida, is designed to serve Florida’s growing number of business travelers, as well as families and tourists traveling for pleasure. - Florida East Coast Industries, Inc.

Obviously, this is a bold move for any private corporation, let alone a railroad. At the same time, all the signs were present. How did we get here?

Henry M. Flagler, Florida’s Empire Builder

One cannot know the story of Florida without knowing the story of one Henry Morrison Flagler who, in “retirement,” changed the face of the state’s tourist identity. Flagler had been visiting Florida in the winter since 1876, but it was during the winter of 1883-84 that he ventured into St. Augustine:

Arriving in the ‘Ancient City,’ Flagler found a sleepy, almost dilapidated town of about 2,500 inhabitants. While he was charmed with the climate and beauty of the old place, he found the hotel facilities quite inferior to the accommodations he and his circle of friends were accustomed to in northern cities. - Speedway to the Sunshine, Seth H. Bramson, The Boston Mills Press 1984

Flagler recognized the potential for creating an “American Riviera” along the east coast of the Sunshine State, but this would mean building hotels and resorts. These, of course, would be useless without a means of getting there. In 1885 Flagler bought the assets of the Jacksonville, St. Augustine & Halifax River Railway. In 1895 the name was changed to the Florida East Coast Railway; and in April, 1896, the railroad was extended into what was incorporated three months later as the city of Miami. All the while, he built and/or acquired hotels and resorts, many of which are still famous: The Ponce de León Hotel, the Royal Poinciana Hotel, and the Palm Beach Inn (later renamed the “Breakers”).

Like many magnates of his day, Flagler had his own share of overreach embodied by the Key West Extension, also known as the railroad that went to sea, which was completed one hundred years ago this year, in 1912; Flagler would die the following year.

Florida’s never ending boom and bust cycles

The decade after Flagler’s demise was one of (mostly) prosperity. The nation as a whole reveled in the post war euphoria, and the Florida land boom certainly did not hurt the fortunes of the railroad. By 1926 the entire railroad had been double tracked, and numerous other physical improvements had been engineered and installed. Traffic to South Florida was so intense the Seaboard Air Line established its own route to Miami, completed in 1927. Even so, what goes up eventually does come back down.

A massive hurricane in September, 1926 destroyed 60 miles of coastline, leaving 220 dead, over 6000 injured, and basically ending the land boom. The malaise of the Great Depression gripped the FEC, and the hurricane of Labor Day, 1935 wiped out the Key West Extension. The FEC had already been in receivership since 1931. In 1941 the FEC went from “receivership” to “reorganization,” slipping control from the Flagler heirs to the du Pont family.

The traffic increase of World War II did help the FEC’s fortunes. Since its chief rival had its own line to Miami, the Atlantic Coast Line’s bonds with the FEC became stronger. As the FEC became the ACL’s gateway to “America’s Playground,” the ACL moved to acquire the FEC in 1944. The ACL and the du Pont family never could see eye-to-eye, and the FEC became a holding of the St. Joe Paper Company, a Florida company which was a subsidiary of the du Pont estate.

A strike in 1963 by the clerk’s union spiraled into the loss of all union positions at the FEC. As a result, the FEC became the first railroad in the nation to have two-man operating crews and extended crew districts, something the rest of the industry would not have for two more decades.

In more recent years, the FEC was acquired by Fortress Investment Group in 2007, which also owns RailAmerica, a short line holding company. RailAmerica’s headquarters was moved to the same building in Jacksonville as the FEC; but the companies are independent. The recent slowdown in the construction industry has had a negative impact on the quarries of South Florida, once a large source of revenue for the railroad.

As anyone here in Florida can attest to, when times are good they are VERY good. But when times are bad, well, hang around here long enough and the practice of tightening one’s belt becomes second nature. The FEC knows this practice only too well.

Florida FOX

In our essay of September of last year, This Week at Amtrak documented the history of Florida’s forays into fast trains. Perhaps the most eye-catching of these iterations was the Florida Overland eXpress proposed in 1996. What was suggested then, and continues to be suggested, was a highway-railway such that the fast train would closely parallel the extant rights-of-way of major highways. For example, the latest surge was the Tampa-to-Orlando section which would have been built on the existing property of Interstate 4.

The Orlando-to-Miami section had two possible routings: Following the Florida Turnpike, or cutting East and aligning with Interstate 95. All of these latest iterations, known as Florida High-Speed Rail, went back on the shelf in early 2011.

Gene is the Man

To say that Eugene Skoropowski is no stranger to passenger trains would be a gross understatement. For this reason alone, the following news flash gained our undivided attention:

The Florida East Coast Railway has announced that it has appointed Eugene Skoropowski to senior vice president of passenger rail development. Skoropowski will report to Jim Hertwig, FEC president and CEO, and will be based out of Orlando, Florida. He will assist in the anticipated development of passenger service over the FEC between Jacksonville and Miami, which has been under consideration for several years.

Skoropowski is well known in the railroad industry for his successful management of California’s Capitol Corridor passenger rail service in partnership with Amtrak, the state of California, and Union Pacific. The 170-mile route has become the fastest growing intercity passenger route in the country. He spent the last two years as a rail consultant with international engineering firm HNTB. He has also served as director of rail projects at Fluor Corp., where he worked on passenger rail developments in Florida, Montreal, Paris, London and Amsterdam. - Trains.com, the online news page for Trains Magazine, March 5, 2012

There is one other salient qualification not mentioned in the Trains résumé: Mr. Skoropowski was the project director for the Florida Overland eXpress in 1996. Suffice it to say he has a very firm grasp of the landscape here.

What exactly the FEC has in mind should become clear in the following weeks and months, but we do get an idea from its press release:

The All Aboard Florida passenger rail project will connect South Florida to Orlando through a 240-mile route combining 200 miles of existing tracks between Miami and Cocoa and the creation of 40 miles of new track to complete the route to Orlando. - Florida East Coast Industries, Inc.

Between Cocoa and Orlando is State Road 528, which is also known as the “Bee Line” and is mostly a toll-road. This is the right-of-way which would have been utilized for the I-95 variant of the FOX. It is not much of an exercise of the imagination to see I-95 replaced with the FEC. It is also likely that the intended terminus would be Orlando International Airport, the same as FOX and later plans. There may be a current Environmental Impact Statement still in place for this option. If SR 528 is not part of the plan, then there is at least one other uninterrupted right-of-way between the Orlando and the East Coast.

Improved intrastate rail service has been on the wish list since at least 1982. With plans and revisions of plans came the nagging question: Who will pay for this? The use of public monies has been tried repeatedly, and has failed just as many times. The FEC is betting that private capital can be raised and used in conjunction with existing infrastructure to accomplish what three decades of public policy could not. The potential payoff is very real; currently over 50 million people traverse between Central and South Florida every year.

Missing, along with the public dollar, is another phantasm of political railroading: There is no reference to High-Speed Rail. The projected travel time for Orlando to South Florida is approximately three hours. This is exactly the type of high-performance rail transportation which could find its niche in the transportation market. Most important is the following railroad rule number one:

PROTECT EXISTING FREIGHT CAPACITY--the new passenger service will not affect freight capacity in the rail corridor, thereby supporting Florida’s role in international commerce and allowing more intermodal freight movements. - Florida East Coast Industries, Inc.

With the current dredging and rail access restoration at the Port of Miami, the freight channels must be kept clear. By the FEC taking the initiative and overseeing the entire operation, passenger and freight, they can make such guarantees.

For its entire life, the Florida East Coast Railway has had to fight for its life. Even when things seemed at their bleakest, it has found a way to make it through as an independent entity. It was Henry Flagler’s vision to open up the East Coast to tourism and industry. His successors are closely following in his footsteps. Hopefully the FEC will once again show the way for the rest of the industry.

Related articles

• Miami-Orlando rail service planned for 2014 (rail-usa.com)
• Local Business Plans Miami-Orlando Train Line (miami.cbslocal.com)
• Treasure Coast train stations on hold until railway service agreements are finalized (tcpalm.com)
• Amtrak service along Treasure Coast on track if governor signs bill (tcpalm.com)
• Amtrak: Liability protection needed before passenger service could come back to Florida's east coast (tcpalm.com)