The Minister, who was in Leeds on Friday to speak at a Northern Powerhouse transport conference, suggested the system could provide a high-speed link between airports and city centres.
The revolutionary transport concept, made famous by tech billionaire Elon Musk, uses an electric motor to accelerate an electromagnetically levitated pod through a low-pressure tube, which could theoretically reach speeds of up to 670mph with no air resistance.
Asked at the conference whether the UK should be investing in new technologies such as hyperloop, Mr Grayling said: “It is potentially fantastic technology, but I think it is also about how you use that technology. I can see hyperloop providing a very good high speed ‘airport to the city centre’ type service.
“The issue I always say is that, in order for hyperloop to work in some of our more complicated systems, it is not just about the technology itself, it is about how you manage the flow of people onto it.
“If you imagine Manchester Piccadilly or Leeds station at rush-hour, and you are trying to get people into pods of 20 people to travel to all kinds of destinations, I am not yet convinced that it is a technology that can replace our conventional railways, and our conventional city-to-city links.”
Last year, Sir Richard Branson’s Virgin Group suggested the system could eventually cut journey times from Edinburgh to London to 50 minutes.