Brightline goes Virginal. What price Virginity?Written by David Peter Alan, Contributing Editor
Last month we reported on the impending demise of the Brightline brand for privately operated passenger trains in Florida, and the takeover by Virgin, at least as far as the public face of the venture is concerned (William C. Vantuono’s initial report on Nov. 16 and this writer’s article concerning the company and its branding on Nov. 26). There have been new developments lately: an initial public offering (IPO) for stock, and the prospect of an additional station near the giant Disney World theme park. The situation facing incumbent management may also be worse than we reported then.
At that time, we reported on the venture’s financial picture, which did not look good. On Nov. 23, Jeff Ostrowski reported in the Palm Beach Post that passenger revenue continues to lag far behind losses: “The regulatory filing shows that the rail service continues to lose money, posting a loss of $87 million for the first nine months of 2018. And passenger revenue of $4.8 million through the first nine months of the year lags far behind the $23.9 million that Brightline had projected for the full year of 2018.” Ostrowski noted that management statements intimated that there were about 160,000 riders during the third quarter of this year, but added: “Even if the IPO is successful, Virgin Trains will need billions more to pay for its ambitious expansion plans. Virgin Trains reportedly seeks to raise $100 million from investors in its stock offering.”
There may also be payments between shareholders in the venture, as Ostrowski noted in his report: “In another aside, Virgin Trains reports that Brightline has been paying hefty sums to its parent company, Florida East Coast Industries. The rail service is on the hook for rent payments that include $98,000 a month for the parking garage in downtown West Palm Beach, $23,000 a month for the station in West Palm Beach and $15,000 a month for [right-of-way] in West Palm Beach. That’s $1.6 million a year in rent just for the Palm Beach County facilities.”
Virgin Trains USA, LLC has filed a 192-page S-1 document with the Securities and Exchange Commission (SEC) for the IPO, which can be found on the SEC web site, www.sec.gov. Virgin Group would issue Virgin Trains USA common stock. The SEC requires a “quiet period” after such a statement is filed to prevent investors from getting a mistaken impression about the company, so management could not comment about many of the issues discussed here. Still, a review of the document itself raises a number of concerns.
There are no percentages of ownership listed, so we do not know officially how large a stake Virgin Group has in the Brightline venture, or how much Virgin Group paid for it, if anything. We have learned from a source close to the deal that Virgin’s share is about 3%, a small amount, but we also can reasonably expect that Virgin Group would exercise a great deal of power concerning the venture, since it will control the brand, which is the “public face” of the railroad. A venture in which Virgin Group holds a 20% share is bidding to retain the franchise to continue operating the Intercity West Coast service in Great Britain when its current franchise expires next April. In that venture, bus operator Stagecoach Group holds 50%, while French railroad SNCF holds the remaining 30%. The trains would remain “Virgin Trains” and not be known as “Stagecoach Trains” or “SNCF Trains,” so Virgin’s 20% could be the proverbial tail wagging the proverbial dog. That could happen in Florida, too, as incumbent Brightline managers will continue to operate the trains, but under the “Virgin Trains USA” brand.
The new U.S. venture is positioned as an “emerging growth company” (S-1 statement at 13 and 44), so the disclosure requirements are reduced. Still, it has disclosed a lengthy litany of risks that a prospective investor could assume (at summary pages iv-v and pages 14-15 and 19-45) . One such risk (noted at page 37) is: “Though we believe that we will be able to raise sufficient funds to complete the North Segment, the Tampa Expansion and the Vegas Expansion, we have not yet secured such debt financing and there are no assurances that future sources of capital will be available at our desired timing, on favorable terms, on a timely basis, or at all or will be sufficient to meet our needs.”
The “Vegas expansion” refers to the recent acquisition of XpressWest, a company that would build a new high-speed rail (HSR) line between Las Vegas and Victorville, Calif. It has not been determined how riders in the Los Angeles area would get to Victorville without an automobile.
The document also lists a number of “other corridors” where Virgin Trains USA claims that it could establish similar services (at 5 and 73). This list includes the Texas Triangle of Houston, San Antonio and Dallas, with Austin (and, presumably, Fort Worth) between Dallas and San Antonio. It also includes a route between Charlotte and Atlanta; and a portion of the current route of Amtrak’s Crescent between New York and New Orleans, over which there has not been a second daily frequency since the mid-1970s. The list sports a number of state-supported corridors over which Amtrak operates trains: Chicago – St. Louis, Los Angeles – San Diego, and Portland – Seattle – Vancouver. Last but not least, it includes Amtrak’s Boston – New York – Washington, D.C. Northeast Corridor (NEC). It does not mention how Virgin could acquire right-of-way along any of these routes to operate corridor-level schedules (especially enough to compete with Amtrak’s NEC) on any of these prospective routes.
Based on Brightline’s plans and reports, management’s model for establishing new passenger railroads is an experiment: building the lines in highway rights-of-way. This writer has cautioned against this practice (in other media outlets, not here), because of the cost and difficulty of connecting from the highway to population centerss. The planned Tampa expansion and Vegas expansion may be different, though. They involve point-to-point service, with no intermediate stops, except possibly a Disney Station between Orlando Airport and Tampa. There is no indication whether or not there would be a Lakeland stop between Orlando and Tampa (Amtrak’s Silver Star stops there), but historically there were no stops between Las Vegas and San Bernardino on the Union Pacific’s City of Los Angeles (1936-71) or between Las Vegas and Barstow on Amtrak’s successor, the Desert Wind (1979-97). Management believes that the train could offer tourists an experience on the way to and from Las Vegas that they could not get elsewhere, and they are correct about that. Will that experience attract enough of them to make the line profitable? Time will tell.
Even if this model succeeds for Tampa and Las Vegas, it is unclear that it would succeed in the other corridors that Virgin wishes to operate someday. Land may be plentiful in Texas, but the proposed Texas Central HSR line is only slated to have a downtown location in Dallas. The Houston terminus would be located at the intersection of two highways, several miles from downtown. It appears that it would be much more difficult to establish that model on a more-crowded corridor like Chicago – St. Louis or Portland – Seattle – Vancouver, and effectively impossible in the region served by Amtrak’s NEC and the Pacific Surf Line corridor between Los Angeles and San Diego.
The SEC document claims that taking a Virgin train would be less-expensive for riders (at 8 and 71) than Uber (whose rates are often competitive with conventional taxis, rather than with public transportation) or airline travel (although long-distance passengers from Orlando might be able to get a through fare connecting from a flight to Orlando from a point further South like Miami Airport). Ostrowski commented on the competing mode of automobile travel: “Driving from Miami to Orlando costs about $100 in gas and tolls (20 gallons of gas at $2.50 a gallon, plus $25 each way for tolls on Florida’s Turnpike). For a solo traveler, that’s comparable to what Virgin Trains USA says will be a $100 average ticket cost between Miami and Orlando. Travel with a family of four, however, and the arithmetic changes: Virgin Trains’ cost balloons to $400, while the car costs the same $100.”
What nobody else mentioned is the cost of taking an Amtrak train. The lowest adult fare for a trip from Miami on Train 98, the Silver Meteor, which leaves at 8:10 in the morning, is $38.00 for mid-January. The Amtrak trip currently takes slightly more than five hours, two hours longer than the Virgin train is expected to take, and Virgin would also offer multiple frequencies each day. The seats on Amtrak are more comfortable, and the Amtrak station is relatively close to downtown Orlando, but the inconvenience of the single daily departure may outweigh those factors (the Silver Star takes more than seven hours for the trip, so it is probably not an option for most customers). We do not know for certain how Disney customers would get to the park from the Virgin station at the airport, but Disney could run connecting shuttle buses. It would be relatively easy to expand the service currently available on the “Disney Magical Express” airport buses operated by Mears Transportation.
The SEC document includes a map (at 3 and 79) that shows a new “Disney Station” west of the Orlando Airport station, which would be part of an eventual expansion from Orlando Airport to Tampa. There is no mention of such a future station anywhere else in the disclosure statement, and a local Disney spokesperson knew nothing about it, referring this writer to corporate communications in California, which did not return our inquiry.
Most important to the relationship with Virgin, the Intellectual Property provisions of the statement (at 85-86) address the license that the railroad has obtained for the use of Virgin’s brand, name, logo and “certain other intellectual property” that is not specified. The railroad does not have an absolute right to the brand within the U.S., only a right of first refusal outside Florida and the Vegas expansion. Until the end of 2022, the railroad will pay Virgin “the greater of a fixed fee and a percentage of our actual gross sales,” although the promised fee or and percentage are not disclosed. The royalty payments will not be based on net profit, after expenses are deducted from gross sales. Beginning in 2023, a percentage of gross sales on other routes will be added. Virgin also has the right to appoint one member to the corporation’s Board of Directors (Id.). The license will run for a 20-year term, with two possible renewal terms of ten years each.
This information could change an expectation from our last report. At that time, it appeared that Virgin Group was investing in Brightline, had purchased a minority position, and included the Virgin brand and associated intellectual property as part of the deal. Given the statement on Page 85 of the prospectus, it now appears that Brightline has given Virgin a small position in the company, as well as a promise of royalties for Virgin’s trademarks and other intellectual property associated with the “Virgin Trains USA” brand. It now seems likely that incumbent management courted Virgin Group as an “angel” whose reputation would be enough to convince potential investors to buy in, and Virgin drove a hard bargain. We do not know the details of the transaction from available information, but if Virgin did not pay a large amount of cash (or, indeed, any cash) for its position, incumbent management continues to face a deadline at the end of this month for a large bond issue and could still be in trouble.
Management does not seem concerned about this. In August, Brightline was approved to go to market with $1.75 billion in private activity bonds for qualified institutional buyers through the Florida Development Finance Corporation, but that sale has not yet occurred. The par value, $600 million, was used for capital improvements in the region where the trains are now operating, and a source close to the deal said that the offer was oversubscribed. The other $1.15 billion is earmarked for construction further north and to Orlando Airport. The bonds will mature in 2024, and the Fitch rating was BB–. The bonds can be called at par five years from now, so we will know much more at that time. If all goes well for management, Virgin trains will be rolling into Tampa and Las Vegas by then.
Despite the risks that management disclosed on the SEC statement, it expects healthy ridership on both the Florida service and the Las Vegas trains. That includes a forecast of 6.6 million riders per year when the Orlando Airport expansion is open for service, along with an additional 2.9 million when the Tampa expansion begins to run, for 9.5 million riders (at 2). It also predicts 11.3 million annual riders on the Vegas expansion by the last quarter of 2023 or the first quarter of 2024 (at 3). Again, time will tell if these forecasts become reality.
Whatever else the future may bring, for the next 20 years, and possibly the next 40, the bold and colorful Brightline brand and logo will disappear. In all likelihood, it will never come back.
Some managers and advocates have asked this writer about the reason for concluding in the previous article that Brightline failed. It has nothing to do with whether or not trains eventually roll into Orlando Airport, Tampa, Las Vegas or Victorville. Those trains may run someday, and it seems that everybody in the advocacy and management communities is hoping for that outcome. Whether or not Virgin Trains USA operates over these or other new routes, Brightline trains will never run north of West Palm Beach, and nowhere beyond the distance covered by Tri-Rail, its neighbor to the west. The Brightline brand is about to die after less than a year of operating life. It was literally in its infancy, and it deserves a proper requiem and appropriate mourning.
The reason for Brightline’s failure has to do with the way businesses see their brands. Investors and customers view a company’s brand as the “public face” of that company. There are various components to the brand: trademarks, trade dress, marketing and promotion strategies and the like. A brand is a valuable asset, and companies fight hard to protect their brands. Here, Brightline sold, or perhaps even abandoned, that valuable asset. The company’s fortunes will now rise and fall based on Virgin’s decisions, more than on decisions made by incumbent managers, even if they keep their jobs.
Virgin has a small minority position, but it will control the railroad’s reputation before the public, including customers and potential investors. Virgin may not even have spent any cash for that position, and will extract substantial fees for the use of its brand. In addition, Virgin will derive any benefit that would come if the operation is successful. Incumbent management still has decision-making authority, and must still absorb any downside risk. Virgin has the reputation, and would enjoy any upside reward if the passenger trains do well. If not, Virgin could blame incumbent management and pull out (at 23).
From the information contained in the document filed with the SEC, it seems that management courted Virgin and its new brand. It appears reasonable to assume that management did not believe that the Brightline brand had what it takes to bring in the money needed to complete the new railroad to Orlando Airport and beyond, and to promote it in such a manner that it would draw sufficient revenue to make enough profit to meet the company’s financial obligations or expectations.
While this writer still might ride a Virgin Trains USA to Orlando Airport and maybe to Las Vegas someday, it would not be correct to call Brightline a success, because that bold and snappy brand is about to be thrown into the dustbin of history.
What a shame!
David Peter Alan practices intellectual property and business law. He is also an advocate for train and rail transit riders at the New Jersey and national levels, and he enjoyed his rides on Brightline.