August 31, 2014 7:00 am JST

JR Tokai's maglev project sees boost from healthy shinkansen business

TOMOHIRO ICHIHARA, Nikkei staff writer

JR Tokai's maglev train is tested on a special track in Yamanashi Prefecture, southwest of Tokyo.

TOKYO -- Central Japan Railway (JR Tokai) on Aug. 26 filed with the transport ministry for approval to build a magnetic-levitation train line between Tokyo and Nagoya, by 2027.

     For the next six trading days, JR Tokai's stock fell due to concerns that this maglev project will weigh on the railway operator's finances. JR Tokai has revised up its total construction cost estimate by 93.5 billion yen ($892 million) to 5,523.5 billion yen. The money will be spent to build what the company calls the Chuo Linear Shinkansen line, which will first link Shinagawa Station in Tokyo with Nagoya, and later Osaka.

      But JR Tokai is optimistic about financing the project as its Tokaido Shinkansen bullet train, the company's primary revenue source, is doing good business.

Enjoying the ride

The maglev line is unprecedented in scale as a fully private construction project. JR Tokai will cover the entire construction cost of 9 trillion yen for the Tokyo-Osaka line. These trains will float about 10cm above a U-shaped guideway, held aloft and propelled forward by superconducting magnets, and reach speeds of more than 500kph.

     The 93.5-billion-yen increase in the budget is from a decision to introduce new technology for non-contact power supply to the train's air-conditioning and lighting equipment.

     Over the course of the 13 years expected to build the first part of the line, this budget increase translates into about 7 billion yen in additional annual costs. This appears to have been enough to make investors uneasy.

     JR Tokai President Koei Tsuge, however, remains unfazed.

     "Our long-term debt is decreasing, and our operating profit is running well above previous estimates," Tsuge said at an Aug. 28 press conference in Tokyo. He expressed confidence in the company's ability to generate sufficient revenue to handle this cost overrun.

     Tsuge's confidence is based on the solid earnings of shinkansen operations, even since the consumption tax hike in April.

     The Tokaido Shinkansen's cumulative passenger traffic this fiscal year, as of Aug. 28, is up 2% year-on-year. The growth was due to brisk demand among business professionals, who account for 60-70% of all passengers.

     A revision to the timetable in March has made it possible to expand hourly departures of Nozomi trains -- the fastest service -- to 10, which has expanded overall capacity.

      "The financing plan for the project was based on reasonable cost and revenue estimates," said Masaharu Hirokane, an analyst at Nomura Securities.

     The company initially projected its total passenger traffic in fiscal 2014 to remain unchanged from the previous year at around 155 million.

     The company's transportation services carried a record number of people last year, which was marked by some big events along its railway lines, including theshikinen sengu rebuilding of Ise Grand Shrine in Mie Prefecture near Nagoya, which only happens once every 20 years, and Tokyo Disneyland's 30th anniversary.

     In contrast, this year lacks such big-ticket draws to increase JR Tokai's passengers, except for the shinkansen's 50th anniversary on Oct. 1. Essentially, the growth in the train operator's passenger numbers reflects the fundamental strength of demand for its services.

Very long journey

The future maglev line would be the world's first maglev to use superconducting magnets. Travel time between Shinagawa and Nagoya would be just 40 minutes. On the current nozomi shinkansen, this is about 90-95 minutes. The maglev would travel from Shinagawa to Osaka in just 67 minutes, compared with 145 minutes currently for the fastest shinkansen.

     The company has estimated that total revenue from the Tokaido and maglev shinkansen lines would be 5% more than the current revenue from the Tokaido Shinkansen, when the maglev service between Tokyo and Nagoya opens. This revenue would grow 15% when the line is extended to Osaka, as the route would siphon off passengers from airlines.

     But the construction will be a long, highly challenging process. 

     JR Tokai plans to start construction as soon as it gets the green light from the transport ministry. But the current construction boom due to the 2020 Tokyo Olympics is causing a labor shortage and driving up the price of construction materials.

     Work on some parts of the line, which will tunnel for long distances through mountains, will pose formidable technological challenges.

     Tsuge stressed the importance of steady revenue flows from the current shinkansen until the maglev line between Tokyo and Osaka is complete in 2045. JR Tokai's three-decade journey to finish the mammoth project has only just begun.

 

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