Undersea Tunnel Sought to Connect Helsinki and Tallinn

Helsinki and Tallinn, the capitals of the Baltic Sea countries of Finland and Estonia respectively, have agreed in principle to build an undersea rail tunnel connecting the two cities. The 80-kilometer rail link will be the first major rail connection between Finland and the outside world, but it is equally important for Estonia, making it practical for Tallinn residents to work in Helsinki. Already, thousands of people make the daily commute from Tallinn to Helsinki despite a 2-hour ferry ride. The reverse trip is also a popular day trip for Helsinki residents, who may see sights or visit restaurants in Tallinn, then drink beer to pass the time on the ferry ride home. The tunnel, which is hoped to be complete in 2030 at an estimated cost of €13 billion, will effectively bring the two cities closer together.

The proposed tunnel lends more weight to another rail project to connect Tallinn to Poland by way of the two countries in between, Latvia and Lithuania. This would make Finland more readily accessible from the other countries of the European Union, largely taking away the current commercial perspective that Finland is effectively an island that must be approached by sea or air. In the live music business, for example, this could result in more tours visiting Finland and more Finns traveling to music festivals across Europe.

It would be a bit of an exaggeration to say that all this is on the drawing board, however. Only preliminary studies have been done and it will take at least two years of detailed engineering studies before funding can be sought for construction. Once funded, the construction itself would take at least several years, as you would expect for a project of this scale.

I am always encouraged to see plans for high-speed rail being placed underground, as in the case of the Talinn-Helsinki tunnel. I believe the future high-speed rail network must be mostly underground for safety and efficiency reasons. A tunnel is protected from weather events, for example, and it provides the shortest route between two points.

Low Oil Prices Boost Hotels

Low prices for energy, particularly oil-based fuel, are good for the economy in general but are particularly good for the hospitality sector. Energy costs represent a significant part of the cost structure of a hotel, most notably for climate control in winter and summer, so lower energy prices reduce the cost of operating a hotel. At the same time, low prices for fuel make people more willing to travel, particularly by car and airplane, and that results in more customers at the hotel. E-forecasting.com in its latest monthly HIL index is projecting a boost of 0.2 percent in the hotel business, largely on the basis of the decline in energy prices in December. This follows a series of upward moves in the HIL previous months. E-forecasting.com says the HIL is a leading indicator that is four to five months ahead of changes in business results at U.S. hotels.

Answers in Chipotle Report

The earnings report from U.S. restaurant chain Chipotle Mexican Grill hints at answers to two of the questions customers have been asking. The more important question of the two is why Chipotle can’t change its slapdash food preparation approach. Chipotle’s financial results point at the answer to this. Revenue at Chipotle was down 15 percent as customers stayed away following three highly publicized disease outbreaks originating in the restaurant chain. Profit, though, was down 45 percent. When a business’s profit falls faster than its revenue, this points to the fixed costs of the business. These are the costs the business must bear regardless of the number of customers. If profit falls three times as fast as revenue, this is a business that has an unusually high proportion of fixed costs for the restaurant sector. To make a profit at all, Chipotle must bring in as many customers as it can, regardless of its ability to handle the workload. To put it another way, Chipotle has to force its customers to wait in long lines and push its food-assembly workers to work an unnaturally fast pace to make a profit at all.

The unfortunate other side of this effect is that Chipotle will fail spectacularly when consumer tastes change, something that inevitably happens within a matter of years in the fickle restaurant business, all the more so in restaurants like Chipotle where the novelty factor is intrinsic to their appeal. A decline in traffic of one third would not be a drastic change from the customer’s point of view — you would be waiting in a shorter line, but still waiting in line — but it would have the restaurant chain operating at a loss. Any adjustments Chipotle might make at that point to return to profitability, such as raising prices, closing stores, or reducing the quality of the product, would further erode revenue in what would likely be a downward spiral. Chipotle’s suggestion that heavy spending on food safety will wipe out its profits in the current quarter suggests that this downward spiral may have already begun.

The other big question was whether any of the official investigations into Chipotle’s operations have turned up anything. A criminal investigation in California may have turned up something about actions in other states, because we now know that a California criminal investigation of a single location in Simi Valley has turned into a federal investigation by the Department of Justice. Chipotle says it received the first subpoena in the federal investigation last week. The documents sought by the subpoena hint that investigators suspect a company policy directed toward covering up problems with food quality.

Chipotle ultimately probably cannot fix its quality problems because slowing down food assembly enough to fully control the process would mean giving up the high volume that it requires to turn a profit. I believe Chipotle can fix all its other quality problems, but it is easy to see why management turns a blind eye to the actual problem that it faces. There may not be a solution that allows the company to stay in business.

This Week in Bank Failures

The United Kingdom will hold a referendum on leaving the European Union, though the voting date has not been decided. While an EU exit would boost the U.K. economy in other areas, London would lose its place as an important European banking center, though it would remain an important global banking center. An EU exit could also put the United Kingdom in a stronger position the next time a euro zone crisis erupts. The potential for a United Kingdom exit is a hotly debated topic with substantial opinions from multiple countries in favor and opposed.

In Portugal, authorities say they can now proceed with the sale of Novo Banco and the liquidation of assets of the failed Banco Espírito Santo in spite of a series of legal challenges surrounding the split of assets between the two banks. The remaining issues will take years to decide in court, but realistically, the sales cannot wait until every single legal question is answered.

Proportion and Snow Removal

I don’t imagine that the big weekend storm qualified as a blizzard based on the conditions I saw in my town, but we did get two feet of snow. It ended before dawn Sunday but the cleanup has taken more than one day. People who have gone out today tell me the roads are narrow and icy. Some side streets are plowed so narrowly there isn’t room for two cars to pass. Some icy patches are the length of a tractor-trailer. Roads will improve as temperatures rise above freezing every day this week, but that’s happening for the first time just now. For those who have that option, the easy thing is to stay home until more melting occurs. More than a few workers between Virginia and Connecticut are working at home today.

The difficulty in clearing two feet of snow is surprising to some people. It’s just snow, right? What could be so difficult about it? This reaction is an indication of how poorly humans are equipped with a sense of proportion. Intuition suggests to many people that clearing two feet of snow should be about twice as hard as clearing two inches of snow. It’s a case where intuition misleads.

It’s easy to see how far off this kind of intuition can be when you consider that part of snow removal is simply transportation, or carrying the snow from point to point, even if those points are just ten steps apart. The work of transporting snow is proportional to the weight of snow that has to be carried between two points. But wait. With more snow, some of it has to be carried farther. A snow pile is not a point, but is a heap that spreads out in proportion to the amount of snow added.

When you try to create a physical model of snow removal and look at it mathematically, it is easy to see that some parts of the work are proportional to the snow depth, some are proportional to the square of the snow depth, and some are fixed (for example, you might retrieve the same shovel from storage regardless of snow depth). Put it all together, and two feet of snow might be about ten times as much work as two inches of snow.

That kind of physical model assumes you are working efficiently, but efficiency comes more easily with work that is familiar. Around here a two-foot snowfall occurs about once every eight years. It will never be routine work. Any miscalculation from the unfamiliarity of the work adds to the effort.

It shouldn’t be too surprising, then, if it takes days to get roads in good order after a two-foot snowfall or if corners are cut along the way. It helps that the snow came late in the season. If the cleanup is a bit messy, it’s a temporary problem. All but the larger snow piles will melt away within a few weeks.