Thursday, March 18, 2010

Assessing the AVE

Today's New York Times features an article which engages in some breathless cheerleading for the high speed rail link between Barcelona and Madrid on the Alta Velocidad Española or AVE. Those quoted in the article universally praise the system:
“Since the day this train opened, I have never, never set foot on the plane again,” said Mr. Martínez, 31, a lawyer who travels between Madrid and Barcelona twice a week. “Why would anyone fly?”

...“People are very satisfied by these trains,” [said Josep Valls, a professor of marketing at the Esade Business School in Barcelona]. “This is really changing the paradigm of travel for Europe.”

...“I can get to the station 10 minutes before it leaves,” said Rafael Fernández, a logistics manager for Fujitsu who was returning to Madrid on an AVE train one day recently. “This has changed the way I travel.”
I have no doubt that being whisked from city center to city center at a price comparable to what airlines offer but without the hassle of getting to the airport and dealing with security must be pretty nice. But what I was really curious about, especially because high-speed rail is being promoted by the Obama Administration for use here in the U.S., is whether it makes economic sense. Is the system self-supporting or is it only viable due to massive handouts from the state?

Astonishingly the article claims the AVE is not only viable but profitable:
All AVE lines currently turn a profit and have easily survived price wars waged by airlines, Professor Valls said. What is more, trains require fewer employees and far less costly infrastructure than do planes.
That's interesting because another Times article last year on Spanish high-speed rail indicated they are money-losing propositions:
“High-speed rail is good for society and it’s good for the environment, but it’s not a profitable business,” said Mr. Barrón of the International Union of Railways. He reckons that only two routes in the world — between Tokyo and Osaka, and between Paris and Lyon, France — have broken even.
The profitability claim is made all the more puzzling given that the more recent article also notes that "by 2020 half of Spain’s $160 billion transport budget will go to rail travel." So in 2020 Spain is going to be spending $80 billion per year on rail and yet none of that is going to the AVE? If public funds are in fact going to the AVE then it is rather difficult to square with the claim it is turning a profit. Or perhaps the system is turning a profit now but projected to go into the deficit later? The story's author doesn't really clear this up.

Searching for more confirmation about the AVE's profitability I came across this:
[Abelardo Carrillo, director of AVE Services] explains that the AVE network is turning in an operating profit, although neither [Spain's state-owned rail company] Renfe nor Spain's Transport Ministry will disclose how much.
Given high-speed rail's exorbitant start-up costs -- a cool $22 million per mile in Spain -- it seems the key term here is "operating profit," which excludes such infrastructure investments. So yes, as long as the billions in capital costs are ignored Spanish rail generates a profit (although it is interesting the government refuses to open the books). Unfortunately, Spanish taxpayers can't ignore the additional debt the country is now on the hook for partially as a result of such spending.

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