Business Monday

FECI’s Mike Reininger: Big expectations for Brightline’s success

The new Brightline fast train would eventually take passengers from Miami to Orlando.
The new Brightline fast train would eventually take passengers from Miami to Orlando. ALL ABOARD FLORIDA

Brightline hasn’t picked up a train passenger yet or even announced what fares will be when it does, but its former boss says the passenger train service won’t lose money during its first full year in operation.

Mike Reininger is executive director of Brightline’s parent company Florida East Coast Industries. Until March, he was the CEO of All Aboard Florida, which will operate Brightline.

“We expect that we will be break-even or profitable in 2018,” he told WLRN’s Sunshine Economy.

The privately funding passenger trains are expected to begin running between new stations near the downtowns of Fort Lauderdale and West Palm Beach late this summer. That’s a slight change from earlier this spring when it anticipated starting in July. Trains will come to downtown Miami in early fall, according to a Brightline spokeswoman. The previous time line had trains rolling into Miami in August. Trains going north and then west to Orlando International Airport have been delayed up to 30 months, according to Reininger.

The second phase of Brightline’s plans — West Palm Beach to Orlando — is where the opposition has been concentrated. Treasure Coast lawmakers introduced legislation that would require additional state regulations for the type of high-speed train service Brightline wants to operate through their communities. Brightline argues that much of the proposed state legislation duplicates federal rules, which it already follows. Among the new requirements of the legislation would be for high-speed rail operators to build fences around their tracks.

The Treasure Coast counties of Martin and Indian River have sued over the federal government’s handling of environmental impact studies as part of the approval to allow Brightline to issue $1.75 billion of private activity bonds if it decides to. While Brightline won’t say how this opposition has delayed its service to Orlando, the original estimated schedule was for it to begin in 2019. The company isn’t committing to a schedule to connecting with Orlando, but Reininger said, “We are fully committed to this.”

Here are some excerpts of a recent conversation with Reininger.

BRIGHTLINE 1000049 JAI (1)
Michael Reininger on Oct. 18, 2016 in Miami. At the time, he was president of All Aboard Florida. He is shown with a rendering of the finished project. José A. Iglesias jiglesias@elnuevoherald.com

Q: Describe the scope of this project.

A: We’re introducing a new alternative form of transportation that we think ultimately will change the way people think about the proximity of things and also change the way they go about doing some of the most important things of their daily lives. Whether it is for business travel or leisure travel, we’re creating a new way for them to think about how they get around in their life.

Q: Take us back to that moment that you acknowledged this asset that Florida East Coast Industries has had for decades could be turned from cargo traffic to something that is more consumer-oriented.

A: Almost from the moment that passenger service stopped on the Florida East Coast Rail line, conversations began about how do we get it to come back. In the late 1960s, passenger rail in America pretty much died a natural death. New interstate highways and big cars and cheap gas killed it.

But over the last 20 years or so, there’s been an increasing push around how we take advantage of trains as a way to move people around in the way that is so common elsewhere.

As a company, we came to the realization that the biggest population centers in Florida are Central Florida and Southeast Florida. People move about heavily in those in that corridor. We already had possession of a [rail] corridor and billions of dollars of infrastructure that had been put in place over about 120 years.

That gave us a real head-start in developing a solution that could provide a newly considered passenger rail system that would move people back and forth between those important population centers.

Q: What were the considerations that gave you the confidence to say now’s the right time to take advantage of that century-long investment?

A: When we look around the world, we saw that where you have big population centers that are between 250 and 350 miles apart, you can offer train service as a way to move people that is faster than driving, much more convenient and comfortable than driving, and significantly cheaper than flying. When that happens, train travel quickly becomes the preferred mode of transportation for city pairs that fall into that zone, [which is] exactly what we have here in Florida.

We also see that traffic is broken. No matter how much you love your car, you don’t love it when you’re stuck in traffic. And when you look at important demographics like millennials — to an ever-increasing degree, they’re looking for alternatives to private automobiles for the way they get about.

So we had this convergence of things that that gave us confidence that the time was right and that we had a leg up on being able to deliver something.

Q: What are you expecting in the first year or so of this southern leg, from West Palm Beach to Miami?

A: First of all, we’re introducing a new product. It really is first of its kind in the United States in the format that is being presented. We expect that it will take us 24 to 30 months to get to its full potential.

But in the first phase between Miami and West Palm Beach, we fully expect that 3 million-plus passengers will be taking our train service. Ultimately, with the addition of Orlando as the fourth stop in the system, we believe that we will exceed 5 million passengers annually.

Tri-Rail already is carrying more passengers than we project between Miami and West Palm Beach. So in that regard, we actually think that our targets are somewhat conservative.

Q: Who’s going to be riding Brightline?

A: We have built the product specifically targeted for the needs of three different types of customers. First, there will be business travelers. That’s one important business segment for us.

Secondly, leisure travelers. Millions of people come to visit Florida every year and many of them come here without cars or they come here from places that make driving an inhibition for them.

And then lastly, residents who travel for all kinds of reasons associated with their daily lives [such as] visiting friends and family or going to an event in a nearby city or a doctor’s appointment. That is a different group of customers who are traveling for different reasons. We’ve tried to address their needs [like] everything from how much luggage they’re carrying to who they’re traveling with directly, with a product in the station and onboard the trains.

Q: When you talk about introducing a new product, passenger train travel is not a new product. What gives you that confidence to describe Brightline as a new product?

A: People have been traveling by train for hundreds of years, but broadly speaking, people’s first thought when they think about transportation in the United States is still the car and second, the airplane. So in that context, our mission is to change your behavior.

Q: How confident are you that you’ve addressed or will have addressed all of the safety concerns when it comes to vehicular roadway crossings as well as marine industry concerns regarding the bridge over the New River in Fort Lauderdale?

A: For sure, safety is the very top of our priority list. First, because it’s obviously the right thing to do. But, second, we’ve invested a lot in this new business and our new business depends on it. If we can’t reliably and safely move passengers back and forth, we won’t have any customers, and we won’t have a business, and this will all have been for naught.

I can say with confidence that we have covered all those bases because we have been deeply engaged with all of the regulatory authorities, principally the Federal Railway Administration, from the beginning on this. We have designed and are constructing what will be the only railroad in America that is fully compliant with all of the absolute latest and most strict safety requirements that exist in the rail industry today.

Q: How about those marine industry concerns regarding that pinch point of that singular drawbridge over the New River?

A: When we first announced our project, there was understandably some concern by the marine industry that we were somehow going to change the dynamic of the interface between the railroad and the marine industry that has been in place for a long time.

But through a very productive dialogue, we’ve come to a terrific place where we’ve instituted new rules through the United States Coast Guard for when and how the bridge will be operated.

We’ve installed new technologies for how the boaters can communicate with the bridge, including a tender at the New River Bridge in Fort Lauderdale. And we very recently completed a very large scale renovation and repair exercise on the New River Bridge to upgrade and modernize its operations so that we can with confidence say that it is in as new condition as it can possibly be.

That’s important because that’s what underpins safe and reliable operation of the bridge and as long as the bridge is operating according to the rules safely and reliably then the coexistence between the marine industry and the rail industry will be as it always has been, a very productive relationship.

Q: Is there room in the passenger rail market in South Florida for Brightline and for Tri-Rail?

A: There’s absolutely room for both. Brightline and Tri-Rail provide two different services. Commuter [rail] is oriented toward an everyday use primarily for shorter distances. Brightline is targeted as an alternative to express and intercity services that connect from downtown to downtown. The longer the distance, the better the service offering for what we have.

Q: So when you point out that Tri-Rail ridership already is larger than your expectations for Brightline, are those Brightline riders entirely new to rail transit?

A: Most of our riders will be converting from car drivers to train riders.

Q: Should we then look at traffic volumes on Interstate 95 to see how successful Brightline is?

A: There’s no question that we would be alleviating traffic from I-95. The reality is traffic is not likely to stop growing. So what we’re doing is improving the traffic situation on I-95.

Q: Everybody wants to ask you about fares.

A: We have a philosophy and a strategy around fares that is driven by this behavior change, which is to get you out of your car. In order to do that, we believe that we have to have a fare structure that approximates what it cost you to drive your car today. What you’re going to see is the ability to take the train for what it costs you to drive your car those comparable distances.

Q: The IRS mileage rate is 53.5 cents per mile. Between Miami and Fort Lauderdale, that would be $15 round-trip.

A: And in that general neighborhood is an important clue as to where we’re going to be.

Q: Will Brightline be profitable its first full year in operation?

A: Our first full year won’t be until 2018 because we’re starting service here in 2017. We expect that we will be break-even or profitable in 2018.

Q: And that is based upon the fare structure that you’re going to announce plus that ridership number of 3 million or so getting to 3 million... What does the operating cost to keep those trains running and maintaining the tracks and the safety features look like?

A: For Brightline, it’s an important part of the profit and loss of the enterprise. We believe we have a very efficient operation here. No. 1, the nature of the corridor that we’re traveling on makes it a very efficient operation.

No. 2, we’ve invested in facilities and technologies that are meant to mitigate operating costs. Whether it’s the diagnostic technology that we have on the trains or the quality of the trains, [is] an investment in capital upfront in order to mitigate the need for continual investment from an operating perspective. That’s the important thing to note about our business.

When you look at publicly subsidized transportation services, those are businesses that are really built around the idea of maximizing ridership rate. Their objective is to get as many butts in seats as they possibly can at the lowest individual no cost per ride. The higher number of riders is central to that proposition.

Q: And what’s central to that proposition is it’s a monopoly. There is no competition.

A: But taxpayers subsidize it. Therefore, you want to get the costs as low as you can. The way to do that is to serve as many people as you possibly can.

Our business is optimized around revenue and expenses as opposed to ridership. For every product, there are a [certain] number of people who are able and willing to pay for that particular service.

For us, because we’re not subsidized, we don’t have the backstop of the taxpayer to cover our costs. We’re focused on finding the right number of the right riders who are willing to pay the fare for the service that we’re offering them that will make us profitable.

Q: And for that first year, as you build up, it’s roughly about 3 million riders in those seats at the fare structure that you will announce in order to be profitable?

A: If we get to 3 million riders with the fare structure that we expect, we are going to have a very robust business that will have ample opportunity to expand throughout the state. We think we’ll have a model that we will have learned from that will have applicability elsewhere outside of the state of Florida.

Q: Does your profit forecast include the interest you’ll have to pay on the bonds?

A: Absolutely. We’re a stand-alone company.

Q: The first tranche of borrowing that All Aboard Florida did was $405 million.

A: Those are those are just regular capital markets bonds.

Q: With about a 12 percent interest rate. You have not issued any of the private activity bonds. As you look at your planning and the capital investments necessary to complete the rail to all the way to Orlando, do you anticipate issuing private activity bonds?

A: We are considering a number of options for properly capitalizing the second phase of the project. One of the primary options that is available to us are these private activity bonds. We haven’t made the decision, but it is one of the leading options.

Q: Some of the criticism about those private activity bonds has focused on the fact they are tax-exempt bonds, which are normally the types of bonds that are issued by government entities. Brightline is not a government entity, so it doesn’t have a taxpayer backstop. However, there is an implied public subsidy because they’re exempt from taxes.

A: That, in my view, is patently wrong. The private activity bonds would not be available to us as a private company if the money weren’t being used for a public purpose. In this case, we’re making private investment into public transportation infrastructure.

If we weren’t using private dollars to do it, the need would exist for public dollars to do this very same thing. If this were built as a public-sector entity, it would generate exactly $0 of taxes as a result of its operation.

Because we are investing private dollars, we are a taxable entity. The economic output from our project generates almost a billion dollars a year in total tax revenue as a result of the investment that we’re making. No taxpayer is on the hook for a dollar as a consequence of private activity bonds.

The resulting economic output, including tax revenue, which gets generated by the investment far exceeds the amount of taxable income that would come from the debt. So if we don’t make the investment on a private sector basis, how much tax income has been generated? $0.

Q: The Brightline project has been split into two phases. Phase one being the southern leg — Miami up to West Palm Beach. Phase two is from West Palm Beach up to Orlando International Airport. The three counties that the second leg will first go to on its way to Orlando have been vocal in opposing that expansion. Does this pit transportation interests from Central Florida against transportation interests in South Florida?

A: Between the four cities that our service will connect, something like 95 percent trips are taken on the roads. There’s no lack of agreement between Central Florida and South Florida as to the importance of what we’re doing.

Q: The lack of agreement is concentrated along the Treasure Coast.

A: There are a few people that don’t see the world the same way that we do and who have taken much more of a ‘not in my backyard’ kind of attitude toward this. It’s a bit ironic because we’ve got a railroad that’s built on private property and that has been in continuous operation on that private property as a railroad for 120 years. It predates the existence of the places that some of the opponents of the project are from. And if it wasn’t for the railroad, those places may never have come to exist. It’s not unexpected.

Q: As you split this into two phases of the project, have you had second thoughts about that second phase to Orlando?

A: No, not at all. We absolutely believe in the importance of the project and the business opportunity that the project represents.

Q: No chance that the train doesn’t eventually go to Orlando?

A: We are fully committed to this.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.

Michael Reininger

Job title: Executive director, Florida East Coast Industries

Age: 56

Experience: Extensive background in creating and delivering new, large-scale hospitality and transportation businesses and real estate developments. Before joining the Brightline team in 2012, he was managing partner for the Union Station Neighborhood Company in Denver. While there, Reininger led the planning efforts and delivery of the redevelopment of Denver’s Union Station as a model transit-oriented urban center; integrating multiple forms of public transit with new multiuse real estate development.

He also managed the development of several major projects in his 12 years with subsidiaries of The Walt Disney Co., including the creation of the Disney Vacation Club, the resort component of Disneyland Paris and Disney Cruise Line. He also was executive vice president and chief development officer for AECOM and senior vice president of creative services and corporate marketing for the St. Joe Company.

Education: Bachelor of architecture, design specialization, from Texas Tech University.

Personal: Married, with a daughter in college.

About Brightline

Brightline expects to have intercity passenger rail service connecting Miami, Fort Lauderdale and West Palm Beach, with future service to Orlando. Brightline is the only privately owned, operated and maintained passenger rail system in the United States.

About Florida East Coast Industries

FECI is one of Florida’s oldest and largest full-service commercial real estate, transportation and infrastructure companiesm headquartered in Coral Gables. Henry Flagler first established a predecessor company in 1892, which became a pioneer in the development of Florida’s eastern coast. Today, FECI is the parent company to distinct business lines, including Flagler, a full-service commercial real estate company and All Aboard Florida/Brightline. FECI is owned by private equity funds managed by affiliates of Fortress Investment Group, LLC. Website: www.feci.com.

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