WHEN it comes to studying the effects of competition on the long-distance passenger rail market in Europe, it seems there is no better place to start than the Czech Republic, where three operators are vying for business on the country's busiest inter-city route. In September 2011 incumbent operator Czech Railways lost its monopoly on the 358km line between Prague and Ostrava, the country's second largest city, when Czech travel company and inter-city bus operator Student Agency launched its RegioJet service with its distinctive bright yellow trains.
In December 2013 a third operator Leo Express entered the market with a brand new fleet of Stadler Flirt trains offering standard, business, and premium class travel.
Three years on, all three players agree that competition has grown the overall market for rail and both RegioJet and Leo Express report peak load factors regularly exceeding 90%. RegioJet expects to carry 2.1 million passengers this year and both new entrants are looking to expand their services to serve eastern Slovakia.
On the other hand, all three operators are also embroiled in a bitter price war that has squeezed margins to the bone and disputes over anticompetitive practices rumble on constantly in the background amid complaints of incomplete reforms and weak regulation.
"There had long been talk about opening up the passenger rail transport market in the Czech Republic, so the entry of private carriers on the most lucrative route was no surprise, but it happened before the state was able to prepare the proper conditions," says CD board member Mr Michal Štepán. "To this day for example, there is still no regulator of the market or a uniform tariff, let alone rules for dividing up revenue."
Both the new entrants have accused CD of engaging in a policy of price dumping in an effort to force its new competitors out of the market. "CD is charging fares at well below cost on the Prague - Ostrava route," says Mr Radim Jancura, CEO of RegioJet. "Before we entered the market CD held a monopoly on this route and it continually lost money, around €20m a year. Within a week of RegioJet launching its services CD cut its fares to a level 30% below our prices and began running more Pendolino services. This is a textbook example of predation."
RegioJet has reported CD to Czech competition authorities but it alleges that CD has refused to provide detailed financial data on the grounds that it does not calculate revenue figures specific to the Prague - Ostrava route.
Last year RegioJet hired an external expert, Takoma ATM, to carry out an audit of Prague - Ostrava train services as CD has not published any financial information specific to this route.
The audit found that prior to the introduction of RegioJet services, CD charged fares of Koruna 328-478 ($US 14.93-16.30) for the 358km journey, but prices suddenly fell by around 50% when the open-access operator entered the market. The arrival of a second private operator, Leo Express, saw CD fares fall again, in some cases to less than Koruna 100. Takoma has concluded that this pricing strategy must have resulted in losses for CD, which are estimated at Koruna 200m on standard train services, and a further Koruna 500m on premium Pendolino services.
"We calculate CD is losing €40m a year on Prague - Ostrava and fares are half what they were before we entered the market, yet the Ministry of Transport provides €13m a year towards the operating costs of CD Express services that are direct competitors with RegioJet and Leo Express," says Jancura. "We offered to take over these services and operate them to the same timetable and stopping pattern without any subsidy, but the ministry declined our offer."
In July Leo Express filed a claim against CD in the Municipal Court in Prague seeking damages for "abuse of a dominant market position in contravention of the Protection of Competition Act" and accusing CD of predatory pricing.
"CD is deliberately charging fares below cost and financing their losses on Prague - Ostrava from other subsidised routes to push competitors out of the market, says Leo Express CEO Mr Leoš Novotny. "As soon as CD succeeds in squeezing competitors out of the market it will put prices back up to at least the original level. The situation on the Prague - Ostrava route is unsustainable, and attempts by the state-owned operator to eliminate its competitors set a dangerous precedent."
Štepán points out that costs are not allocated fairly and private operators benefit from facilities that CD is obliged to pay for. "All costs for maintaining the stations on the line are borne by CD," he says. "This is the result of the state's incomplete legislation separating the operational infrastructure from the transport business. Basically we are using our own money to support the business of private carriers. We charge the state the costs of their business in terms of the demonstrable losses in long-distance transport contracts. From this perspective, liberalisation has come prematurely."
CD accuses Leo Express of having insufficient capacity in its fleet of five trains to cope with the loss of a train. The operator was recently forced to cancel a number of services after one of its trains was taken out of service for repairs following a collision with a car at a level crossing. "In that situation, we stepped in and increased the number of trains we were running to transport their passengers," Štepán says. "We even stopped at stations not usually served by our trains, even though it made us run late. We feel a responsibility for upholding the public image of rail transport, so we help the passengers of private carriers in situations when they are affected by operational errors of these entrepreneurs."
Štepán says that liberalisation means defending CD's position as a national operator, and he argues that it has been successful in this regard. "We're not subsidising the Prague - Ostrava line and are successfully competing with the private operators," he says. "They expected us to pull back and leave the route to them, and they even keep asking us to do that in the media. They feel that passengers generally only react to fare prices, and the presence of several carriers prevents them from setting prices at a level that will make them profitable because they are currently loss-making. But we are a business and behave like one. The national carrier has shown that it's not giving up its customers without a fight and it knows how to be successful in an open competitive market."
Jancura argues that the Prague - Ostrava market will not sustain three players if fares remain at current levels. "There is room for three competitors, but only if prices are 10-20% below what they were before market opening, not the 50% we see at the moment," he says. "In the most logical scenario, the operator losing the most money will pull out. RegioJet is losing Koruna 2m a year, Leo Express is losing Koruna 4m and CD is losing Koruna 40m."
All three of the competitors on the Prague - Ostrava route are looking abroad to expand their business, with Slovakia being the primary target.
Both Leo Express and RegioJet announced in April plans to launch new services between Prague and Košice in eastern Slovakia. RegioJet will also launch an open-access service next month linking Košice with the Slovakian capital Bratislava.
In preparation for the launch of new services RegioJet has acquired 45 long-distance coaches from Austrian Federal Railways and the first of 10 200km/h new coaches supplied by Astra Vagoane Calatori, Romania, is currently undergoing testing between Prague and Zilina in Slovakia.
RegioJet's Slovakian domestic services will be operated using former Belgian National Railways (SNCB) class 12 dual-voltage electric locomotives and modern air-conditioned coaches. There will be a passenger attendant in each coach and RegioJet will offer free hot drinks, wireless internet access, and newspapers. RegioJet says it expects to cooperate with incumbent operator Slovakian State Railways (ZSSK), and will sell through tickets for ZSSK services without charging commission.
ZSSK has its own plans for the Prague - Kosice route in a partnership with CD which will shave almost an hour off the fastest journey times between the Czech capital and eastern Slovakia with the introduction of Pendolino trains. The EuroCity Košican service currently completes the journey via Vsetin in 8h 21min, with an average speed of 80km/h. From next month the new SuperCity Pendolino service will cut the trip to around seven-and-a-half hours with an average speed of 95km/h, which according to CD makes it one of the fastest international trains in central Europe. The services will be operated by CD's 230km/h class 680 Pendolino EMUs, with onboard services including a bistro and passenger Wi-Fi. These trains will not be able to use tilt on the Slovakian section of the route.
"Foreign national carriers are our traditional partners," Štepán says. "Naturally, they prefer to work with reliable carriers who are able to fulfil their promises. Recently we concluded a new agreement with German Rail (DB) to operate international routes between Prague, Berlin and Hamburg and a tender is underway for the refurbishment of the coaches for these services."
CD has recently taken delivery of seven new seven-car Railjet sets from Siemens for use alongside similar Austrian Federal Railways (ÖBB) trains on Prague - Vienna - Graz services. The introduction of the new trains will cut the journey time between the Czech and Austrian capitals from 4h 45min to 4h 10min from next month, and CD anticipates a further reduction to less than four hours when infrastructure improvements on the Prague - Brno line are complete.
Competition has brought innovation, investment, and more passengers to the Czech long-distance sector and with all three players looking to expand their services into Slovakia an increasing number of passengers in central Europe will be able to choose their rail operator. But three years after competition first emerged on the Prague - Ostrava line there are still major challenges. Regulation appears weak, there is a lack of transparency about the true allocation of costs, and clarity is needed on whether the incumbent operator is offering fares below cost - a serious question if this practice is being funded by the taxpayer.
Furthermore, the current price war is harming the finances of operators and it is clear this zero-sum game cannot continue indefinitely. A more sustainable approach to pricing will need to be found soon if all three operators are to remain in the market and passengers are to continue benefiting from the diversity and enhanced service quality that has emerged in recent years.
CD calls for improved infrastructure
CD argues that one of the key obstacles to increasing ridership on long-distance services in the Czech Republic is infrastructure quality. Around 80% of the network is single track and on main lines average speeds are low compared with neighbouring countries.
"Investment in infrastructure is absolutely necessary to ensure fast and reliable passenger transport, but the condition of the network is not always satisfactory," Štepán says. "We would like to see long-distance routes such as Prague - Ceské Budejovice and Prague - Plzen modernised much sooner than currently planned. We are also convinced that it is necessary to consider increasing speeds on other corridors, including the construction of new high-speed lines. Upgrading the Prague - Ostrava line for operation at up to 160km/h with an average of 120km/h would reduce the journey time to less than three hours, not only making rail competitive with road but also domestic flights.
Štepán also calls for modernisation of the Prague - Brno line to eliminate numerous speed restrictions, which result in a journey time of around two-and-a-half hours for the 250km route. "Things will only change with the construction of a new high-speed line," he says.