Yesterday, Trudeau announced the consortium that would be responsible for the 2 year co-development phase of the Alto project, a high-speed rail (HSR) project connecting Toronto to Quebec City that has been decades in the making.

Federal spending during this initial phase could surpass $4B, with funds to go towards design, environmental assessments, securing land corridors, and more. The development phase should culminate in a final investment decision before the end of the decade.

A feasibility study of the proposed ~1,000 km Quebec-Windsor HSR line completed in 2011 indicated a total project cost of ~$21B, or $21M per km (2009 dollars). Assuming 2.5% inflation over 15 years, it’s reasonable to expect a figure closer to $30M per km, or nearly $30B, when all is said and done.

It’s early days, and Canadian infrastructure projects are notorious for overruns on both time and cost, but given the scale of this new rail service, we took a deeper look at the companies that should be directly impacted.

All builders to benefit from high-speed rail

AtkinsRealis (ATRL) is the obvious winner here as a core member of the winning consortium, and should get meaningful backlog support through the remainder of the decade from the initial $4B federal spend.

As the lead on the initial design work there will be key project risk though, and given how the market is valuing the company today, there’s minimal room for error.

WSP Global (WSP) should be in a good position too, despite its consortium losing the initial bid. These projects are simply too large for one firm to handle, so there should be meaningful subcontracting opportunities for the company given it has knowledge on the proposal already.

While ATRL will take most of the pie, WSP could take any subcontracting work and leverage it for future transit opportunities worldwide.

Aecon (ARE) could be a sneaky winner as the project progresses to construction despite not being a part of the winning consortium, as the group lacks a pure-play civil construction firm.

It’s rare for companies like ATRL to self-perform all civil works and ARE has a track record in transit, with projects like Montreal’s $5B REM light rail construction under its belt.

Stantec (STN) could get involved in the initial design work, specifically in environmental impact assessments which represent a sizeable part of its book. These contracts would be smaller than those mentioned above and unlikely to really move the needle, but would represent high margin business in Stantec’s fastest growing segment.

Winners & losers in the transportation industry

CN Rail (CNR) currently owns the majority of the lines VIA Rail’s services run on today. As passenger traffic is shifted to a dedicated HSR track, CNR will lose revenue from VIA’s usage fees (immaterial), in exchange for freed up capacity in its busiest shipping corridor… a great trade.

The route is key for both domestic and international freight shipments and was made less efficient by passenger traffic.

A separation between the shipment of people and goods would serve to reduce operational complexity and increase availability, meaning measures of efficiency like average train speed and through dwell (hours trains sit in yards instead of moving) should improve.

Small improvements in these numbers could yield large impacts to financial performance given CNR’s scale. There could be some one-time gains as well, should the company monetize some inactive lines or lease segments of it out to support the Alto project.

Not bad for a company trading below its historical average valuation, though it’s likely too early for impacts here to be priced.

Air Canada (AC) is arguably the most directly threatened by HSR, given short-haul flights between Toronto/Ottawa/Montreal are the current norm for business and government travel.

Today, the VIA rail carries 4M riders per year between Quebec City and Toronto. To reach the estimated 17M underpinning the Alto project, a significant portion of this air travel (and highway travel) will need to be captured.

Studies of global HSR implementations show they take a significant bite out of short-haul flight traffic when travel times are shorter than 5 hours (as much as 70% for trips under 3 hours!).

Given that domestic flights represent over a quarter of AC’s passenger revenue, the potential impact is meaningful (though only a portion of that could be challenged by the Alto project).

AC appears to be taking the proactive approach, by being a part of the winning consortium instead of fighting the project. Apart from any economic interest the company may have in the future, it can also influence development.

Even if short-haul flights migrate towards HSR, Air Canada can integrate the offering into its own. Instead of a connecting flight from Montreal to Toronto before an international trip, the first leg could be a HSR connection.

The result would likely be a shift in strategy for AC towards more international travel, which comes with better economics.

The way AC’s fleet has developed over the past years would suggest they already see this coming, as its small to mid-size aircraft fleet is shrinking while its mainline fleet continues to expand.

Bonus: Infra funds could get in on the action

Brookfield Infrastructure Partners (BIP-UN) is our honourable mention, as it could get involved on the financing side as the project matures. BIP has the capital and expertise to take the role of financial or operational partner, with a sizeable transport portfolio already (including some North American rail operations acquired in 2019).