Eurailspeed Parallel Session A.1 Alessandro Guiducci Associate Partner KPMG Advisory, Roma 1
Consumer & Industrial Market Influence of low cost air companies on the demand for high speed rail eurailspeed 2005 Parallel Session A.1- Which market for high speed rail?
Introduction This presentation refers to a study committed by UIC to Kpmg in 2003 about the influence of low cost air companies and long distance coaches on the demand for passenger rail services in Europe With this study, the International Union of Railways wanted to analyze a the Low cost phenomenon, understand the industrial dynamics behind it and map out the competition, in order to define the actions the Railways should take in the face of such competition A database has been created specifically for the project, containing ning all of European air services (divided into Full Service Carriers FSC and d Low Cost Carriers LCC), and railway services (high speed trains HST and night trains) The database provides the chance to compare total frequency and frequency by time slot, voyage duration, airports (stations) involved, for each domestic and international route. Moreover, on 73 routes (those for which more specific studies were carried out) comparative data on prices and total travel times are available 3
The Low Cost Air Companies The LCC were born in the United States and, in last years, they are generating a great development also in Europe. The LCC are products with standardized characteristics, following three main drivers: 1. Lower Costs: : lower unit costs, up to 50% compared to traditional carriers: higher plane productivity, secondary and regional airports, higher flight crew productivity, one-type aircraft fleet, focus on direct sales (90% on the Internet) 2. Cash Generation: : effective system of revenue management by flight: maximization of load-factors by flight with very low initial fares which rise as the flight fills up (early booking), constraints in terms of cancelling or changing flight, passenger name, etc, and always with administrative tive fees to pay, additional sources of revenue, in particular subsidies from f airports 3. Market Positioning: : clear differentiation from Full Service Carriers: only point-to to-point traffic, no competition between LCC, route selection, aggressive marketing and communication, simple price structure, «success generates success» 4
Positioning of LCCs in Europe The airline sector in the EU 15 countries is fragmented into 173 companies, 26 of which are LCC Outside of the countries where the LCC phenomenon was born (Ireland and UK), Belgium and Germany show significant levels of LCC penetration. The presence of LCCs is most developed on international routes The American experience shows that Europe still has the possibility of achieving significant further growth, but at the same time that it may prove hard to go beyond certain market share thresholds EU 15 Average United Kingdom Sw eden Spain Portugal Netherlands Italy Ireland Greece Germany France Finland Denmark Belgium Austria Penetration of Low Cost Companies (versus FSC) UE 15 (% seats, September 2003) US Averag e 25% Europea n Average 19% Domestic International 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 5
Low Cost and High Speed Train competition The level of overlapping between High Speed and Low Cost networks s in Europe is low. Low Cost Companies operate flights on only 60 of the 7.209 (city to city) routes operated by High Speed trains Full Service Carrier 4.058 3.066 275 665 54 6.874 Low Cost Carrier 1.458 733 6 International Domestic 2 1 1 4 12 3 24 3 2 1 4 1 2 AT BE DK FI FR DE IT SW UK High Speed Train 7.209 Source: Database KPMG 2003 Although the impact is negligeable on an overall basis, it is clear that there is a higher number of overlapped routes in Germany and France 6
The Market Targets LCC s s selling conditions are almost standardised (early booking and internet) and focused mostly on the young leisure travellers segment and on a lesser degree (in case of companies such as easyjet) ) on junior managers/business travellers.. On the other hand, HST targets are differentiated and their commercial strategies are (and must be) different Ryanair - focuses mostly on young people and leisure-travellers Average journey time Airport / Station accessibility RYANAIR EASYJET HST Short/Average Average Variable Low Average High easyjet - focuses mostly on young people and leisure-travellers travellers,, and also on business clients able to plan in advance HST - focus on all kinds of passengers Daily frequency of lights/trains Importance of internet booking Prices Early booking encouragement Rigidity in commercial conditions Comfort and service (on board) Average Haute Short/Average High High Average Average Haute Short/Average High Average/High Average High Low (But increasing) Short/Average Low Short/Average High 7
Actions The railways operators reaction to the Low Cost phenomenon must be based on the realisation that there is no competition between different route networks, but only local competition played out on each specific route Possible actions to monitor the phenomenon and fight the effects of competition can be broken down into four main categories: Airport monitoring Differentiating from LCC Marketing by route International rail sales strategy 8
Actions: airport monitoring The rail sector will find itself genuinely at risk if a LCC with the characteristics of the easyjet model enters and develops in a domestic market If we discount the hypothesis of the acquisition of a LCC already operating in the market (i.e. the failed deal between easyjet and Deutsche BA), the easiest way to enter a domestic market is through the airports: currently 180 European airports have direct relations with LCCs Preferential access to airport operations may become a further competitive c disadvantage for rail companies, which have to face growing costs s for rail slots It is difficult to imagine a global action undertaken by rail operators, other than the continuous monitoring of the issue and constant dialogue d with airports and local authorities The possibility of involving the European Union and the national authorities to guarantee equal competition conditions must be carefully evaluated 9
Actions: differentiating from LCC HST and LCC have different business models. One (railway) uses a «capillary network» model, the other (LCC) works on selected route «niches».. Moreover, HST develop mostly in the domestic market while LCCs prefer international routes A 360 action doesn t t seem to be either productive or possible, considering that rail offer is not just an offer by route but above all a network offer: Trying to instinctively replicate the low cost model does not seem a possibility, because it possesses fixed characteristics, that are e not suitable to a rail operator with a very segmented and differentiated target market; Sales through Internet, for example, cannot substitute other distribution channels, but only supplement them. 10
Actions: differentiating from LCC (2) Encouraging travellers to book early can be productive in order to increase load-factors and revenues by train on routes which need support, but it is not an universally applicable strategy Prices, which are generally competitive in comparison with average LCC prices and are above all transparent from a customer point of view, can be used for marketing and communication purposes as an important strength (and not a weakness): Prices on a LCC route may vary greatly according to load-factor level reached by each specific flight; The prices indicated in the promotions are before airport taxes (which are often higher than the price itself); If the flight is either cancelled or changed, significant administrative costs are charged. 11
Actions: marketing by route Selective actions by route are differentiated according to the competitive c context. A comparison by route of the conditions offered by the train, FSCs and LCCs in terms of frequency, total journey time and price gives an idea of current and future positioning of LCCs FREQUENCY LENGHT PRICE origine destination Train FSC LCC Train FSC LCC Train FSC LCC The table shows, as an example, comparative data relating to certain routes of the french domestic market We can truly talk about price competition only in a few cases Paris Bordeaux 1.50 1.20 3.13 3.13 58.90 125,41 Bordeaux Paris 1.27 1.21 3.18 3.18 58.90 125.41 Paris Lille 1.39 1.04 33.70 Lille Paris 1.37 1.03 33.70 Paris Marseille 1.22 1.67 0.26 3.10 3.21 3.18 76.25 130.22 52.11 Marseille Paris 1.12 1.63 0.26 3.10 3.21 3.25 76.25 130.22 83.20 Paris Toulouse 0.81 2.01 0.55 5.32 3.14 3.10 73.90 205.53 83.12 Toulouse Paris 0.67 2.04 0.53 5.34 3.14 3.13 73.90 205.53 116.10 Paris Nantes 1.21 0.34 2.09 2.51 49.10 207.31 Nantes Paris 1.25 0.32 2.11 2.51 49.10 207.31 Paris Nice 1.31 1.73 0.83 6.12 3.25 3.28 100.80 222.31 76.91 Nice Paris 0.99 1.73 0.86 5.58 3.28 3.29 100.80 222.31 104.50 Paris Lyon 1.41 0.96 2.09 3.21 54.20 109.68 Lyon Paris 1.34 0.99 2.11 3.21 54.20 109.68 Paris Rennes 1.71 0.40 2.28 3.00 46.60 203.29 Rennes Paris 1.71 0.37 2.41 3.00 46.60 203.29 * Average trains/airplanes per hour *Average journey time average price in for one week booking in advance one way (train: Price competition; potential competition of the LCC: low The journey s shortness excludes LCC presence The LCC positioning will be dangerous as frequency increases The train has a high journey time; the LCC with Aéris already have a concrete advantage The limited train journey time does not favour the development of the air travel on this route The train, compared to the LCC, has a long journey time The limited train journey time does not favour the development of air travel on this route The limited train journey time does not favour the development of air travel on this route 12
Actions: international rail sales strategy International sales strategies of rail operators are moving towards a global and integrated vision of supply. The pricing process illustrates the current trend: TCV Tarif Commun Voyageurs The sum of international tariffs (until country borders) calculated on the price/km for each country Examples: CISALPINO PDM Prix de Marché Division of the territory in market zones, according to competitive context, and total prices calculated on the basis of the sum of the price for each zone. Difficult when, for example, there are national prices/km and international market prices. Examples: : ARTESIA Rail operators commercial strategies must focus on valorising the service offered by the national and international networks and on the development of consumer loyalty in order to achieve maximum network exploitation However, the development of LCC, especially on the international market, will force, at least in certain cases, the integration of the network strategy with specific and differentiated route based strategies 13
Presenter s s contact details Dott.. Alessandro Guiducci KPMG Advisory +39 06 809711 aguiducci@kpmg.it www.kpmg.it The information contained here is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2005 KPMG Advisory, the Italian member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Italy 14