NUOVO Trasporto Viaggiatori (NTV) ran its first Italo trains on the Italian high-speed network on April 28 2012 in direct competition with the incumbent Trenitalia. Competition has benefited not only consumers, but it also forced Trenitalia to raise its game dramatically following the arrival of Italo with the result that Italy now has some of the highest quality high-speed services in Europe.
The liberalisation process took a long time in Italy and has not yet been completed. In 2001 the liberalisation directives of the European Parliament and the European Council gave European Union (EU) member states the opportunity to open the market to competition. The Italian government issued a decree in 2003 implementing European rail liberalisation but it was not until December 2006 that NTV was incorporated.
In February 2008 NTV placed an order with Alstom for 25 AGV high-speed trains. This was Alstom’s first and to date only order for its new single-deck train. After a long period of testing, AGV was finally certified by Italy’s National Safety Authority in March 2012 and a month later the first Italo train entered service.
The first four years of operation has proved quite challenging for NTV. Italy plunged into a deep recession just before NTV launched its first services. Italy’s gross domestic product dropped by about 4% between 2011 and 2015, which played havoc with NTV’s financial forecasts.
Italy’s independent Transport Regulation Authority (ART) was set up in January 2012, but it did not start functioning until the end of 2013. The lack of an effective regulator allowed Italian State Railways (FS), which owns both Italian Rail Network (RFI), the infrastructure manager, and Trenitalia, the train operator, a free hand to exploit its competitive advantage.
Nevertheless, in the first year of operation Italo carried 2.05 million passengers and earned €83m in revenue. The new entrant was still in a ramp-up phase during 2012 and the first part of 2013, because delivery of the AGV fleet was still underway.
In 2014 the total number of passengers increased to 6.6 million, while a big jump was achieved last year when Italo carried more than 9.1 million of passengers. Annual revenue had risen to €308m by 2015 compared with costs of €258m, and in the same year NTV achieved a positive Ebitda for the first time at €58m.
This important turnaround was achieved through an aggressive pricing policy designed to increase market share and a new business model. This allowed NTV to capture 26% of the Italian high-speed rail market in 2015 with a load factor of 71.5% compared with 51.7% in 2014.
At the same time NTV launched a cost control campaign and sought to improve its asset utilisation. Thanks to the actions of the former CEO Mr Flavio Cattaneo, NTV reached the breakeven point in 2015. It expects to make its first profit this year while the number of passengers is forecast to increase to more than 10 million.
The effect of Italo on the market has been impressive: the total number of passenger-km on Italy’s high-speed network increased by 65% between 2011 and 2015, while the yield decreased by about 40% during the same period.
NTV conducted a recapitalisation at the end of 2015 which changed the shareholder structure. This means that French National Railways (SNCF) has reduced its holding from 20% to just 1.4% while Cattaneo has increased his equity share. MDP Holding, owned by the three founding entrepreneurs Mr Luca Cordero di Montezemolo, Mr Diego Della Valle and Mr Gianni Punzo, remains the largest shareholder with 36.8%, followed by Intesa SanPaolo bank with 24.5%.
NTV’s cost reduction programme has achieved important savings which is allowing it to expand. During the last quarter of 2015, NTV ordered eight new Evo trains from Alstom. These trains have a higher seating density than AGV but a lower maximum speed of 250km/h (compared with 300km/h for AGV). Last summer NTV decided to buy four more Evo trains to increase its total fleet to 37 trains by 2018.
During the discussions for the purchase of the 12 new trains, NTV was able to persuade Alstom, which is responsible for maintaining the AGV fleet, to increase train availability. This allowed services to be stepped up from 48 to 56 trains per day, which in turn enabled NTV to increase the frequency of the Rome - Milan service and add Verona to its network.
NTV has also introduced connecting Italobus services in Milan, Reggio Emilia and Salerno. The bus services are totally integrated into the Italo sales and yield management system and allow NTV to expand the catchment area of its rail services.
There has also been an important decision by the Transport Regulation Authority to reduce the access charges for operation on the high-speed rail network. This is possible due to the terms of the 2007 Financial Law, which granted RFI state funding to repay nearly all of the cost of building the high-speed lines.
An important element of the revised business model was the introduction of greater flexibility in terms of the services provided. Traditionally, the interiors of trains are only changed during a major overhaul or refurbishment programme. However, NTV has broken the mould with Italo.
When services started in 2012, each AGV had one Club coach, four Prima coaches one of which was a Prima Relax quiet coach, and six Smart (economy) coaches. All the seats were covered in leather and free Wi-Fi and entertainment was offered throughout the entire train.
In 2013, one year after the start of operation, NTV realised that the profile of its customers differed from its initial expectations. The severe economic recession had forced business customers to change their travelling habits as companies tried to reduce their travel expenses. In response, NTV decided to convert the Prima Relax coaches into Smart XL which offered the same seat pitch as in Prima Class but without on board service.
NTV has since adapted the configuration of its AGV fleet to provide one Club coach, two or three Prima coaches, one or two coaches offering Comfort accommodation which is an evolution of Smart XL, and six Smart coaches. The trains are now designed so that the number of coaches offering Prima or Comfort can be adapted to meet demand.
To make these changes possible, it was important to have a very flexible and integrated IT architecture. All the front-end and back-end subsystems are integrated and outsourced to a specialist.
NTV outsourced not only the IT systems and train cleaning but also the maintenance with a 30-year global service agreement with Alstom.
So what is the future for Italo and the Italian high-speed market? Increased competition will continue to stimulate passenger growth both for the overall market and Italo. The arrival of the new Evo trains in 2017 coupled with NTV’s positive Ebitda will allow it to enter new markets such as Milan - Venice.
Competition has been very good for consumers, but there are still some weak points. Vertical integration restricts fair competition because the fact that RFI and Trenitalia are owned by FS leads to strategic and operational problems for new entrants. Examples include disputes over the positioning of NTV ticket machines at Rome Tiburtina and Bologna stations, and difficulty in finding good locations for NTV’s Casa Italo lounges and paths for its trains at main stations. NTV only gained access to the main stations of Rome Termini and Milan Central some years after the start of the operation, and in Venice it has been unable to obtain attractive departure times. Access to essential facilities was unclear from the beginning and NTV was forced to build its own maintenance depot.
The last critical point is that in Italy there is not yet a tendering process for the provision of regional services, which can lead to the risk of cross subsidies.
Nevertheless, NTV has survived the deep economic recession and the challenges of trying to compete against a much larger operator with greater resources at its disposal, and is now looking to expand. But perhaps the greatest achievement of the liberalisation of the Italian high-speed market is the increase in choice for consumers, which has resulted in lower-price tickets, higher train frequencies, and better service quality.