THE opening of Britain’s Liverpool and Manchester Railway in 1830 marked several firsts in rail history. It was the world’s first inter-city line. It was the scene of the first widely reported passenger fatality. And it was also the first where all trains were hauled by the track owners. Previous lines had seen competition between operators, leading to the drivers of horse-drawn passengers trains and steam-pulled coal trucks having fisticuffs on the tracks. Two centuries later, the question of whether train and tracks should be operated by the same firm still simmers across Europe.

That is because new EU rules, enticingly called the “fourth railway package”, will force all state rail firms to open their tracks to rivals from next year. It means a “tectonic shift” for the industry, argues Leos Novotny of LEO Express, a rail startup based in Prague. And it comes at a time when commuters are particularly grumpy about trains. In France three months of labour strikes at SNCF, the state rail firm, have made millions late for work every week and chaos marks Britain’s railways after an abortive timetable change on May 20th. In Germany, Deutsche Bahn, the state rail giant, once looked up to as a paragon of quality and efficiency in Europe, is increasingly under attack in the country’s press for its dirty, late trains.

The new rules are the culmination of a decades-long effort by the European Commission to boost competition. This began in 1991 when it forced rail operators to produce separate financial accounts for their track and train-operations units. As part of its latest reforms, the commission wanted to introduce a strict separation of the two businesses. However, under pressure from some state rail operators—in particular Deutsche Bahn and SNCF—it compromised. Only an internal “Chinese wall” is needed to separate the functions.

Even so, the coming changes are radical. The “market pillar” of the reforms will force state rail firms to open their tracks to competition. From 2019, anyone will be allowed to run services on profitable routes using “open access” rights. And from 2026, private companies will also be able to bid for public-service contracts on lines that require state subsidies to operate.

The experience of countries that have already opened up to competition is that it cuts costs and hammers down fares. In the Czech Republic, for example, new operators have achieved costs per seat kilometre that are 30-50% lower than those of the state operator. Passengers are benefiting: the average ticket price from Prague to Ostrava has fallen by 61% since 2011, when the state rail firm lost its monopoly. Greater liberalisation is also associated with rising passenger numbers and an ability to get by on lower subsidies (see chart).

Competition is also spurring innovation. Many firms are adopting yield-pricing strategies used by budget airlines to increase the utilisation of their trains and to cut costs per seat. To keep customers from defecting to rivals, some are attaching other travel services to their own in order to differentiate themselves. Deutsche Bahn, which does already face some private competition, now offers e-bike hire as well as train tickets in some German cities. On June 22nd Italy’s state rail firm launched an app called Nugo through which travel services from 50 other companies, including ferry and car-sharing rides, can be bundled into the firm’s tickets.

As for the newcomers, they come in three main types: state rail operators from other countries; bus companies looking to diversify, such as Germany’s Flixbus; and private rail firms that have started from scratch, a category which includes LEO Express. A few of them are simply copying the business models of incumbents but with much lower costs. Some, such as NTV-Italo, an Italian startup, behave more like full-service airlines, with four classes of service instead of two and loyalty schemes. That has forced its rivals to up their game.

Fiercer competition could not come at a worse moment for some of the continent’s biggest state rail firms, which are already suffering from dire financial problems. Worst of all is SNCF, which has a towering debt pile of €47bn ($54bn). The fourth package will mean it will lose the monopoly it has long held on France’s tracks. It is doing well on high-speed and commuter routes but its regional trains and rail-freight businesses are faring badly. Rail unions, which have been striking against reforms to end their members’ right to a job for life, will make it hard for SNCF’s bosses to react to change in the industry, notes Yves Crozet of the University of Lyon.

Deutsche Bahn will face far more competition from private operators after the fourth package takes effect. It has so far struggled to compete with newcomers. Profits have been squeezed; worries about its credit-worthiness are rising. A decade of cost-cutting has produced a steady fall in punctuality, quality and customer satisfaction. The number of late trains has increased by 30% since 2009; Germans are among the least satisfied with their railways in Europe. In 2016 the firm needed a €2.4bn bail-out from the German government to keep its investment plans on track.

The entry of more rivals is intended to encourage such firms to become leaner. It is also forcing them to diversify abroad. Trenitalia, Italy’s rail giant, has done so very recently, into Britain. Ernesto Sicilia, chairman and managing director of its new British unit, says that his firm is moving into the country in order to replace contracts lost at home as liberalisation bites. Yet the strategy has risks. NS, the Dutch state operator, has expanded abroad so rapidly that it now attracts criticism from politicians at home for carrying more passengers each day in Britain than in the Netherlands. Yet passenger numbers have in fact disappointed in recent years on many of its British franchises, and it is worried about possible losses. Deutsche Bahn lost money on its Scotrail franchise last year and needed a £10m ($13m) bail-out from its parent.

With their backs against the wall, state rail firms are not above using questionable tactics. Some have been found guilty of using their control over the tracks to win unfair advantage over private operators. Last year Spanish competition watchdogs fined Deutsche Bahn and Renfe, Spain’s state rail company, over €75m for collusion in the country’s rail-freight market. The same year NS was fined €41m for using data it had as an infrastructure owner to unfairly win a rail contract in Limburg, a Dutch province. Meanwhile, last October, Lithuanian Railways was fined €28m for going as far as removing a section of track on a cross-border link with Latvia to make life harder for a rival train operator. Rail startups also accuse various national champions of hogging the best rail slots, of engaging in predatory pricing and of pursuing vexatious litigation against them to push them out of the market.

But many newcomers, including Radim Janèura, founder of Student Agency, another bus company, from the Czech Republic, are hopeful that the fourth package will overcome many of these problems. The rules strengthen the regulators’ powers to prevent anti-competitive behaviour, rather than acting in retrospect when complaints are made, as now. And the Luxembourg Protocol, a new set of global rules on rolling-stock leasing, will make it easier for startups to finance new trains, says Howard Rosen of the Rail Working Group, a trade body.

Ticket to ride

New entrants have often found it easier to take market share in smaller countries, where state rail firms do not have as much financial muscle as in larger states. And bigger companies, such as Flixbus and Student Agency, are less easily pushed around. Flixbus found it easy to request the track slots it wanted from Deutsche Bahn, says Jochen Engert, its chief executive—possibly because the incumbent feared a backlash from Flixbus’s legions of customers (the firm controls over 90% of Germany’s bus market).

Smaller outfits may be too financially weak to take advantage of the reforms: LEO Express, for all Mr Novotny’s optimism about the coming changes, has lost money since its founding in 2010. And the high costs involved in starting a new railway firm mean that it will take time for the full benefits of competition to be felt by EU passengers, says Lorenzo Casullo of the OECD, a think-tank. Europe’s railways are on a long journey, but commuters will surely be better off down the line.

Source: economist
European state rail firms face scrappy new competitors