European train operators step up rail services

[John Ashworth]

European train operators step up rail services

Train firms keen to seize opportunity presented by deregulation of European passenger services, but profit margins are tight

Philippe Jacqué
Guardian Weekly, Tuesday 27 December 2011 13.59 GMT

On 11 December Thello, a subsidiary of the Italian state rail operator Trenitalia and France's Veolia-Transdev, started running a night train between Paris and Venice. The same day the new privately owned Austrian operator, Westbahn launched a service between Vienna and Salzburg, via Linz.

Two days later Nuovo Trasporto Viaggiatori, Trenitalia's first private competitor, took the wraps off its new, high-speed Italo units. In early 2012 NTV's 25 trains will start running from Turin or Venice down to Naples, via Milan and Rome. The company's two main shareholders are Luca di Montezemolo, chairman of the board at Ferrari and until recently Fiat, and Diego della Valle, the head of Tod's, which makes leather goods.

All these firms are keen to seize the opportunity presented by deregulation of rail passenger services in Europe since Brussels opened up cross-border traffic to competition in 2009. Some countries have already taken this process further. But to succeed, Thello, Westbahn and NTV, much as Virgin Trains some years ago in the UK, must deploy new business models to establish a position and draw consumers away from incumbent operators. The key factor is the ability to invest, with a colossal initial outlay.

"Originally we aimed to develop, in partnership with Air France, an alternative service to Thalys on the Paris-to-Brussels line. But the financial risks were too great," says Albert Alday, the head of Thello. "It was too risky to buy rolling stock that could almost only be used on one line. If the project had failed, what would we have done with the stock? Our partners decided to cut their losses."

So Thello decided to start on a smaller scale. "With the Paris-Venice service we aim to fine-tune our organisation and offer our customers a good quality product to boost brand credibility. We want to show that competition is possible and push the authorities into opening up more of the French market," Alday adds.

Instead of purchasing its rolling stock, Thello, with a workforce of 30, subcontracts as much as possible. "We hold the licence to operate the rail service and take charge of the running and safety of our trains. We rent the locomotive off an SNCF subsidiary. The carriages belong to Trenitalia. LSG, a Lufthansa subsidiary, handles the service on the trains themselves," Alday explains.

Over and above investment, the management of operations is crucial. "Fixed costs are very high in this sector," says Didier Bréchemier, at the strategy consultants Roland Berger. "All the companies pay the same rates for using the track or for safety. It is really difficult to achieve differentiation on the basis of price. Apparently, the only solution is to target a few particularly profitable market segments, such as business travellers."

Thello is a case in point. "We wanted to offer very attractive prices, but we had to drop the idea when track-access charges [in France] went up by 25% in the spring. It was just no longer possible to offer really low prices," Alday says.

Virgin Trains in the UK displays the same concern for profits. The top priority is services, according to Tony Collins, who heads the 3,000-strong rail company which has operated six routes on the west coast main line from London to Scotland since 1997.

The company uses publicly owned [Alstom Pendolino] rolling stock but has to pay the cost of maintenance. "Not being an incumbent operator we are completely dependent on our revenue. If we don't attract enough custom – ranging from business people to students – with our services, we will have to shut up shop," Collins explains.

In this business the operating margin ranges from 2% to 4%. In the UK the east coast main line, the alternative route connecting London to Scotland, was operated from 2007 onwards by National Express. But after two years the company went bankrupt and the route was nationalised. Such profit margins make NTV's approach look even more daring. Instead of renting its rolling stock, the Italian company has opted to invest more than $1.3bn in equipment and maintenance, on a route that is certainly promising but competing head-on with a well established incumbent.

"To attract passengers we are going to offer several price ranges. The higher the price of the ticket, the greater the bundled services," says Giuseppe Sciarrone, the head of NTV. "We have given ourselves three years to break even. If it takes longer … things will be very difficult."

This article originally appeared in Le Monde