By Joris D’Incà, Partner, and Jean Pierre Cresci, Partner
After the widespread deregulation of the markets for intercity buses in continental Europe, a new class of low-cost competitors is putting pressure on the traditional rail business.
Low-cost intercity bus operators are offering tickets on highly utilized routes for a fraction of train prices and eating into rail’s market share.
By offering the same or a higher level of comfort than trains, they are pulling the rug out from under the incumbent, long-distance railroads. Oliver Wyman analysis shows that, with aggressive marketing tactics, a smart route network, and large seating capacities, newcomers in northern Europe have been luring up to 20 percent of customers away from railroads in a short period of time. Germany deregulated its long-distance bus industry in 2013. Finland followed in 2014, and France is deregulating this year.
Consider the Hamburg-to-Berlin route. German rail company Deutsche Bahn offers weekday service about every 30 minutes, and the trip takes 1 hour and 38 minutes. The standard price for a one-way ticket is EUR78. An intercity bus company offers service less frequently, every 75 minutes, and the trip takes longer, 3 hours. But the one-way fare is just EUR7. In response, the rail company offers some deeply discounted tickets at EUR19, but that’s still more than double the price of the bus ticket. Further, some new, more aggressive bus companies are slicing fares even lower on the routes where they compete.
Buses are not just for low-income people. Passengers include middle-income people and even business customers seeking savings on comparable, if not superior, service. This is especially true for routes between cities poorly served by train (with low-speed service, limited frequencies, and limited on-board comfort) where buses can more easily offer superior value.
Overall in Europe, where very high speed rail is fairly well-developed, we expect two different competitive situations. On routes operated with very high speed trains, rail operators will benefit from a huge travel time advantage (300 kilometer-per-hour trains vs. 100 kilometer-per-hour on average for bus). Rail companies can also deploy economic models that will likely limit their market share erosion, such as a low-fare offering from France’s SNCF called OUIGO. But on traditional routes, where buses will be able to propose comparable, if not superior, offers on price and comfort, expect railways’ market share erosion to be much more significant.
An OW survey of passengers shows that while rail still wins on comfort and enjoyment, buses win in areas that rail should have the advantage. Passengers surveyed view buses as more innovative and service-oriented than rail, and a better value, considering the quality of service for the price.
Attempts by rail companies to retain customers with isolated price reductions, promotions, and tactical countermeasures had limited impact on market share erosion. Such customer retention efforts are unlikely to be sustainable and successful for the long term.
First, buses are structurally much cheaper and more flexible to operate than trains. The cost per seat is usually at least 50 lower. Railways won’t be successful competing purely on price. Further, by neglecting to improve their offering for so long, some rail operators left themselves vulnerable to competition.
Rail companies must make use of their strength in the face of bus competitors, which are increasingly international and have learned from their past mistakes (such as competing purely on price, as they did initially in Germany.) Rail companies have national and dense networks, strong brands, loyal customer bases, committed staff, and a network of train stations that are perfect points of departure and destinations.
Remember the lesson of low-cost airlines in Europe. When threatened by low-cost operators in the 90s, traditional European airlines didn’t immediately perceive that they were facing a major change of paradigm in their industry. This new type of airline introduced new ways to operate aircraft, and also changed customers’ expectations and behaviors though disruptive offerings (such as buy only what you need.) Several traditional airlines disappeared, unable to understand and adapt to this new business environment.
If rail companies want to prevent their own demise they must act resolutely and quickly. Rail companies must rethink their product and service offerings and adapt their business designs, pulling several levers:
- Drastically reduce prices.
- Make traveling by train simpler. Improve the entire mobility chain, from door to door. Eliminate superfluous barriers such as the physical purchase of tickets or the lack of information for customers.
- Align product offerings (and cost) to different type of clients and what they are actually willing to pay for. Don’t just engage in tactical measure on prices.
- Rescale. Adjust capacity and drastically cut costs to improve competitiveness. But still invest in enriched offerings.
- Position yourself in the low-cost intercity bus market. Maintain a presence on routes where trains are not competitive and remain in close contact with clients
- Transform the culture. Strengthen the focus of all employees and processes on both market and customers, and become more agile when dealing with competitors.
- Control the whole journey chain.
The development of low-cost buses highlights the difficulties for rail companies to anticipate and manage disruptions in their market.
Other trends, such as driverless passenger cars, car-sharing or mobility integrators will also have major impact on the mobility market. Even though this is a long way off, rail executives must set the direction today for investment cycles of 10 years, 20 years, or longer.
Rail companies are facing an uncertain future, a novel situation for them during the past 30 years. But if they understand these trends, anticipate associated risks and opportunities, and fundamentally change their business design (lower cost, better service, more mobility solutions), they can maintain their strong position in the mobility market.
Joris D’Incà is a partner with Oliver Wyman’s transportation practice, and he is based in Zurich. Jean Pierre Cresci is also a partner with transportation practice and he is based in Paris.
This article was written by Joris D’Inca from Forbes and was legally licensed through the NewsCred publisher network.