A business model for a profitable transit system

Mass transit systems are vital to a city and the overall health of the economy. After all, if the NYC Subway shut down, 5.1 million people every day would either not be able to get to work, would be delayed in far-worsened traffic, and/or would have to spend significantly more money on transportation. This would have obvious effects on private business.

Metro systems, with massive passenger throughputs, low friction steel-on-steel rails, and electric propulsion, are tremendously efficient and are by far the greenest way to move about an urban area. However, the cost of building and maintaining complicated infrastructure such as metros is tremendous.

Is the idea of a profitable metro system just a pipe dream? Read on to find out more.

First, we have to define profitability. Metro systems have two major types of costs:

• Operational costs, from day-to-day activities. This includes labor, maintenance, fare collection, and cleaning.
• Capital costs, from major investments. This includes renovations, expansions, new technologies, and new lines and stations. 

For instance, Amtrak's Acela line, the only high-speed line in existence in the USA, recoups all operational costs (from fares), but not capital costs, which are funded through a variety of government subsidies.

Hong Kong's MTR system is probably the most notable modern model of a system that makes a profit on both counts. MTR is now privatized, although the government remains a major shareholder. MTR uses a rather innovative funding model. In essence, they act not only as a transit operator, but also as a real estate company, raking in billions of dollars (US) of profit annually while still operating a highly modernized network and covering most capital costs. They do so by developing the land around their transit hubs, building their own homes, offices, stores, and even a series of shopping malls. After all, if they are providing the trip to the destination, why not make money off the destination itself?

This isn't actually a novel business model, even in the USA. Back in the days when Los Angeles had the most extensive streetcar network in the world, private operators of transit systems often developed land along the corridors. Costs of building and operating these networks have ballooned since most systems were either dismantled, sabotaged, or taken over by the government following the explosion of private automobile ownership in the 1950s.

But how important is it actually that metros make a profit for the operators? After all, the economic benefit for the city and economy from an efficient transit system are tremendous. Without an effective transit system, many major cities would suffer huge hardship both in total business and tax collections, so it is usually worth the investment. Still, state and city budgets in the USA are in tremendous distress. So why isn't the CTA, for instance, acting as its own developer for some of it's Transit-Oriented Demand properties to make up for long-term shortfalls in the budget, rather than trying to cash out quickly by selling the land?

One common argument against privatization is that if transit companies were fully privatized without the government holding majority ownership or at least enforcing standards, there would be less motivation to provide "good" service. After all, running a clean, fast, and efficient transit system itself is an expensive proposition in the USA in 2011, so there is more incentive to focus on the profitable arms of business, while leaving the actual transit part to languish.

I'll talk more about this tension and its relationship to Public-Private Partnerships (PPPs) in my next post.