Hyperloop – The economics make it unfeasible

Hyperloop - Elon Musk SpaceXElon Musk is a pioneer – first with Paypal, then Tesla and SpaceX and Hyperloop is his new concept to make transportation efficient. Hyperloop is the word making the rounds on various news websites, blogs and twitterverse. Some have heralded Hyperloop as the next great invention and the general buzz seems focused on re-thinking and re-inventing the traditional transport model. However, I see things a little differently.  The Hyperloop model sounds exciting but I just don’t think it’s feasible from an investment perspective.

Now, don’t get me wrong – I thrive on new technologies and any new model that improves quality of life. But underlying every great product or service are the economics of sustenance. In order to ward off competitors and maintain your market share you need adequate cash flows. According to the paper published on SpaceX website, Hyperloop claims a payback in 10 years at ticket prices around $20.00. I just don’t think that’s even remotely accurate. The main flaw is that Hyperloop estimates its market share at 100%. Furthermore, there are a variety of other factors that the paper hasn’t taken into account:

  1. Competitive response – what will be the response of regional airlines and trains be to this new mode of transportation?
  2. Switching costs, hesitation, apprehension – we are skeptics and creatures of habit.
  3. Maintenance i.e. operating costs, taxes and other outflows which are not taken into account.
  4. Legal and political costs, land costs etc.
  5. Let’s not forget ET3 – a similar venture, patented by Daryl Oster, i.e. there are already competitors in the same space as Hyperloop.
Hyperloop - Cost Structure

Figure 1

Based on the data and cost structures provided in the Hyperloop paper, I created a quick model to see what it would take in order for Hyperloop to be successful. Unfortunately, all signs point to an unlikely venture. First in terms of cost for the SF/LA loop – Hyperloop estimates 6 Billion USD (costs broken down in Figure 1).

According to the model the investment will need more than 10 years to recoup. Infact, it just doesn’t seem like a feasible project in pure NPV measures. The assumptions for the model are straightforward (Figure 2):

Hyperloop - DCF Model Assumptions

Figure 2

Based on the assumptions above, the estimated CFs below are assumed to be straight revenues i.e. I have not accounted for expenses, taxes and any debt rates. The initial market share for Hyperloop is a generous 20% with a 5% increase every year. The ticket price remains at 100$ comparable to current airfares and train fares in the region. The investment horizon of 10 years falls well short of break even. Based on a discount rate of 8% and perpetuity growth rate at/around the rate of inflation and ignoring population growth rates in the SF/LA corridor (which could be minimal) – Hyperloop just isn’t a feasible project (Figure 3):

Hyperloop - DCF Model NPV

Figure 3

So there, you have it. Sorry to burst the bubble but unless Hyperloop scales across multiple corridors in both the East and West coasts, I don’t see it happening. However, the engineer in me would love to see this happen – revolutionary wouldn’t begin to describe the transformation it would bring to everyone’s lives.

Please feel free to download the model, change assumptions and run sensitivity analyses to reveal other outcomes – Download Model.

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  • Ghalib J

    This is one of the classic ahead of its time ideas that won’t be economically feasible until the cost of materials comes down tremendously. What the pure data-driven model is missing though:
    1) Having a reliable, cheap and incredibly fast mode of transportation should in theory make the potential number of fares get hiked up (I have no idea what it would be, I’m sure someone’s going to run market research on this in the near future). Just as an example, the number of fares supported by the high speed rail that Cali’s building is supposed to be on the scale of 100 million instead of the 7 million cited by the Hyperloop team.
    2) The mode of transportation (minus the upkeep required) being based on renewable energy instead of fossil fuels should have a quantifiable effect on air quality/potential healthcare savings

    I really truly don’t think this was meant to be a viable alternative in the near-term, simply an idea that shows how outdated Musk thinks the high speed rail technology is. Good article – enjoyed reading it.

    • ajays

      Both the parameters – number of fares and CFs from saved energies are subjective. Agree that its certainly not an alternative in the near term (however you define near term), but the paper deems it otherwise. Additionally the discount rate is laughably low for a venture along these lines. Its created so much buzz I wanted to debunk some myths from a non-technical perspective. Thanks for reading G.

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