The Discount Airline Model Is Coming for Europe’s Railways

(Bloomberg Businessweek) -- With ever more passengers opting for low-cost carriers such as Ryanair and EasyJet, Europe’s old-guard airlines have been shaken to their core—forced to slash prices, stick passengers with fees for everything from baggage to beer, and in some cases even declare bankruptcy. Soon, rail operators such as France’s SNCF and Germany’s Deutsche Bahn AG could face a similar shake-up as Europe pushes for competition in passenger train service. Lower fares could attract “millions of new passengers,” says Jacques Gounon, chief executive officer of Getlink SE, the company formerly known as Eurotunnel that manages the English Channel Tunnel. Getlink already runs a car-and-truck shuttle through the tunnel and is considering a discount high-speed service that would challenge Eurostar International Ltd., which now offers the only high-speed passenger service through the tunnel, with fares often topping £400 ($510) for a London-Paris round trip. “We’re convinced the demand is there” for a lower-priced alternative, Gounon says.

The European Union has ordered countries to open all commercial train services to competition by 2020—and experience says that’s likely to have a dramatic effect. The introduction of rival passenger rail carriers on routes such as Prague-Ostrava has helped ridership almost double in some cases, while ticket prices have plunged. FlixMobility GmbH, which offers low-cost bus connections across Europe, recently started high-speed train service on two German routes, with fares as low as €10 ($11). Greater competition could spur increased use of Europe’s 9,000-plus kilometers of high-speed track, much of it underutilized. The Channel Tunnel, for example, operates at only 58 percent of capacity.

Some newcomers have already made impressive debuts. In 2012, Italo SpA, a startup led by former Ferrari NV boss Luca Cordero di Montezemolo, began high-speed service from Milan to Rome. Today it serves 17 cities up and down the peninsula with spiffy red trains, easy-to-use online booking, and frequent service. It now controls 30 percent of Italy’s high-speed rail market, carrying some 13 million passengers last year, up from 6 million in 2014.

Italo’s lean cost structure—it outsources maintenance of its trains, for example—helped it undercut fares of state-controlled operator Trenitalia, which slashed fares in response. Fares on routes where Italo operates have fallen an average of 41 percent, while ridership is up an average of 80 percent, according to a study by Andrea Giuricin, an economist at the University of Milano-Biccoca. And Italo has put the squeeze on Ryanair and EasyJet, which have stopped flying between Rome and Milan as Italo and Trenitalia offer dozens of departures each day for as little as €40 round trip. In February, shortly before a planned stock market listing, Global Infrastructure Partners, a New York investment fund, agreed to acquire Italo for €2 billion.

In Austria, the Czech Republic, and Sweden, the introduction of rival operators on a handful of routes, such as Vienna-Salzburg, has had a similar effect, with traffic increasing as much as 92 percent and fares falling as much as 42 percent.

Some state-controlled operators are shoring up their defenses against potential low-cost rivals. SNCF, for example, runs a discount service called Ouigo, which serves more than a dozen cities along the same tracks as the country’s TGV high-speed trains. But the giants can stumble when they venture abroad. In June, Deutsche Bahn abandoned plans to begin Frankfurt-London service after it encountered regulatory troubles, including delays in gaining access to Belgian tracks also used by Eurostar. Getlink says the French government has maneuvered behind the scenes to protect the monopoly of Eurostar, controlled by state-owned SNCF.

Getlink hasn’t decided whether to pursue its own cross-channel service, but estimates it could turn a profit with fares at least 25 percent below Eurostar’s. To avoid incurring steep fees charged by central-city stations, Getlink is considering a line from Charles de Gaulle airport in Paris to Stratford in East London. Because passengers would have to take local trains to reach the outlying stations, total travel time would be about 50 minutes longer than Eurostar’s two-hour-and-20-minute service, with an extra €18 or more for commuter rail tickets. Unlike Eurostar, there’d be no cafe car, and the trains would be economy class only. A study by consulting group Roland Berger projects annual ridership of about 4 million for the service. About half of those passengers would defect from Eurostar, the study says, but a new service would spur overall growth, giving a boost to Eurostar as well.

Getlink’s approach mirrors the Ryanair model of bare-bones transportation to secondary airports, but it may not be suitable for high-speed rail. Ryanair attracted passengers by flying to vacation destinations that previously had little or no scheduled airline service. “It was as much about convenience as price,” says David Bentley, a U.K.-based analyst at the CAPA Centre for Aviation.

Italo at first operated mainly from suburban train stations and struggled to attract customers until Italian regulators ordered that it be given access to center-city hubs, Giuricin says. Rather than skimping on customer service, it’s wooed business customers with extras such as free espresso and newspapers. And it helped that Italo has been led by di Montezemolo, a wealthy aristocrat with deep connections to the country’s political and economic elite. He and partners such as Diego Della Valle, chairman of luxury leather-goods purveyor Tod’s SpA, raised about €1 billion to launch the company. “You have to enter with a lot of money and be very strong to be competitive,” Giuricin says. “Otherwise the incumbent will kill you.” —With Christopher Jasper

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net

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