Wednesday, 1 June 2016

Ryanair for rail? Don't hold your breath

New 'budget trains' between Brussels and Paris give the illusion of competition, but in fact are designed to block new market entrants.

After 24 years in the making, today there is finally light at the end of the world's longest tunnel. Today in Switzerland the first train is passing through the monumental Gotthard Base Tunnel, carrying Germany's Angela Merkel, Italy's Matteo Renzi and France's Francois Hollande.

It will carry passengers between the German-speaking canton of Uri and the Italian-speaking canton of Ticino in an astonishing 16 minutes. It will cut the journey time between Zurich and Milan by one hour. 

Though you might expect a massive infrastructure project like this to be opposed by environmentalists, it was in fact welcomed. It will stop the daily journey of hundreds of trucks carrying goods over the Alps between Northern and Southern Europe, a journey which has been causing huge environmental damage.

It is part of the steady expansion of high-speed rail across Europe. Trains will be able to link up with Italy's impressive Frecciarossa trains, which whizz passengers from Milan to Naples in just four hours, at 360 km/h (224 m/h). New high-speed routes are coming online all over Europe.

Yet there is one persistent problem with these trains: most of them are prohibitively expensive. This is because these lines run with no competition, and can charge whatever they like. They have to recoup the costs of having built the expensive high-speed tracks, something for which they have received varying degrees of help from governments. They are still passing those costs on to customers.

Competition with low-cost air

As Merkel travels through Switzerland, today I am making my way from Berlin to my second home in Brussels. I'm moderating a panel at the European Business Summit tomorrow. June is going to be a particularly exhausting travel month, as I have to go back and forth between the two cities six times. 

When I first started the Brussels-Berlin split a year ago, my intention was to take the high-speed ICE train back and forth. It's a 6.5 hour journey (with a stopover in Cologne), which certainly eats into your day. But I did the calculation and door-to-door it's only 2.5 hours longer than flying. And I would rather sit in one place with wifi and do work for all that time than the constant moving and waiting involved in air travel. I was going to treat it as a mobile office, and I purchased a one-year 25%-off bahncard to make it cheaper.

But that didn't quite go to plan. I soon realised that even with the discount card, taking the train was about ten times more expensive than flying. The Berlin-Brussels route has an astonishing degree of competition. Easyjet, Ryanair and Brussels Airlines all do the route, and they all fly to the main Brussels airport in Zavantem. I usually pay no more than €10 for the flight.

Yes, you heard me right. €10. That's with all taxes and credit card fees. It's downright bizarre. The cheapest ticket I've ever found for the journey with Deutsche Bahn is €75 (which would be €100 without the discount card).

So, it's no wonder that today I'm heading to the airport to fly to Brussels. I will not use the train for any of my journeys this month, and when I received a letter from Deutsche Bahn this week asking whether I wanted to renew my bahncard, I declined. I would much prefer to take the train, but not so much that I'm willing to pay 10 times as much for the privilege.

Railways resist liberalisation

The problem, of course, is that while Deutsche Bahn does to a certain extent have to compete with low-cost airlines and (increasingly) low-cost buses, it does not have to compete with other railways. DB is my only option to get from Brussels to Berlin by rail. Thalys is my only option to get from Brussels to Paris or Brussels to Amsterdam by rail. Eurostar is my only option to get from Brussels to London by rail. You get the picture.

The European Union has tried to force the railways to liberalise in order to establish more competition, but the resistance from the national incumbents has been ferocious (especially from Deutsche Bahn, which wields huge influence with the German government). 

The latest attempt at reform, the Fourth Railway Package, was watered down so much by national governments that they couldn't even oblige the railway companies to truly separate ownership from the rail infrastructure managers (an arrangement through which the rail companies give themselves the lowest track access charges).

The rail companies know what is at risk. They saw what happened after EU liberalisation of the aviation sector two decades ago. The opening of the market opened the door for two incredibly disruptive new market players from the British Isles - Easyjet and Ryanair. They fundamentally transformed the European aviation sector, along with a variety of smaller low-cost carriers across the continent. Hence my €8 euro ticket to Brussels.

Fake Ryanairs for rail

But the rail companies see the writing on the wall, they know they can't resist liberalisation forever. Some are making preparations for any new disruptive entrants. 

SNCF, the French rail operator, has established a handful of 'low-cost high-speed trains' in France - most notably Ouigo, launched in 2013. In April SNCF, in partnership with Belgian rail operator SNCB, established the IZY low-cost trains between Brussels and Paris.

The news was greeted with great fanfare by the media in both countries, reflecting the huge demand from consumers for affordable high-speed rail. And indeed, the opening prices are very appealing. At their launch, the trains are offering €10 standing tickets.

But if you think those prices are going to last, think again. After all, why should they? While both Ouigo and IZY are pretending to be separate, stand-alone companies, in fact they are just differently-branded trains run by the same national railways that own the standard lines. 

The strategy seems clear. Tickets for both of these new trains can only be bought from their own websites. Their fares do not show up when you do a search on the TGV or Thalys sites. So they create a new revenue stream without eating into the TGV and Thalys profits.

The railways are even fighting EU efforts to create one-stop-shop rail ticket search engines that would show all of the brands' fares. 

As one industry insider explained to me at the European Passengers Summit last week in Brussels, the goal is to head off any potential Ryanairs of rail to come in the future. 

It isn't just that the national railways want to create fake competitors for themselves which in fact they control (and will collude with on pricing). It's also that if these companies can snatch up enough of the track access slots now, there will be few slots left for any independent player who wants to come along later.

"Right now they're just trying to take up as much space on the tracks as possible, to make sure no one else can get on them in a few years' time," the insider told me.

So far Deutsche Bahn has no such low-cost high-speed train brand, though they do have the DB-branded IRE trains, designed to compete with low-cost bus service from Brussels to Hamburg. But I'm told that they are considering following SNCF's lead in establishing train brands that appear separate from DB. Trenitalia and Renfe are also interested. And with DB hoping to start running direct Berlin-London trains through the channel runnel within a few years (please please please?), I wouldn't be surprised to see Eurostar set up a low-cost subsidiary also.

Just imagine if Ryanair and Easyjet had actually been set up by British Airways and Air France. Do you think we'd have the hyper-competitive aviation market that we have today in Europe? 

No, we would more likely be in the position of the United States, where the budget players set up by big airlines quickly disappeared in the 2000s, and flying today is much more expensive than in Europe as a result. While there are a few European budget airlines such as German Wings that were set up by big incumbent carriers, let's face it - these have not been the players driving the market change.

From an environmental perspective, one could argue that this hyper-competitive aviation market we have in Europe today is not a good development. I'll keep my opinions on that to myself. 

But what's for sure is that, as demonstrated by the first train passing deep under the Alps today, there is environmental benefit to shifting travellers to rail. Efforts by Europe's big national railways to pull a fast one on us by establishing fake budget trains would then seem to be against environmental interests. 

This should perhaps be considered by those Green politicians in the European Parliament who have resisted rail liberalisation over the past decade.