LAST month marked the seventh anniversary of the launch of Europe’s first open-access high-speed operator. With its distinctive bright red trains and Italo brand, NTV quickly established itself as a high-profile challenger to incumbent Trenitalia’s flagship Frecciarossa services.
With an initial investment of €967m, including €625m for a fleet of 25 Alstom high-speed trains, NTV’s shareholders took on a significant risk in their startup, which was established with the aim of taking on an established monopoly operator in a market where the regulatory structures needed to underpin a level playing field were not yet complete. Disputes over access to station facilities and train paths rumbled away continuously through the early years. In October 2013 the Italian Competition Authority ruled that FS subsidiaries Trenitalia and Italian Railway Network (RFI) had deliberately attempted to exclude NTV from the market.
Yet despite these challenges, competition quickly altered the market dynamic. High-speed ridership grew quickly as lower fares, more frequent trains and improved service quality strengthened rail’s market share, to the benefit of incumbent and newcomer alike. Rail’s share of the Rome - Milan market increased from 36% in 2008 to an estimated 80% in 2018, while air’s share has dropped from 50% to just 14%.
NTV passenger numbers swelled from 6.56 million journeys in 2014 to 12.8 million in 2017 without any additions to the train fleet. This increase in productivity brought the cost per seat down to a level below that of some low-fare airlines.
NTV broke even in 2015 and that year it laid the foundations for expansion with an order for 17 Alstom Pendolino Evo trains. A further five Evo sets were ordered in 2018 which will take the fleet to 47 trains.
In February 2018, equity fund Global Infrastructure Partners III acquired the entire share capital of the company for €1.94bn, a price which reflects NTV’s success in quickly becoming a strong competitor and stimulating growth in the rail market.
Today four routes form the backbone of the Italo network: Turin - Milan - Rome - Naples - Salerno, Venice - Rome - Naples - Salerno, Verona - Rome - Naples, and Turin - Milan - Venice. Italo has a 35% market share on these routes and the average load factor on its services has grown from 47% in 2012 to 78% in 2017.
“The high-speed market in Italy doubled between 2011 and 2018 but prices are still 40% lower than they were in 2011, which is good for all,” explains Mr Andrea Giuricin, special advisor at NTV-Italo and CEO of TRA Consulting. “There was strong growth after the delivery of the first 12 Evo trains.
The delivery of five more trains from May will support the development of the network and increasing frequencies on existing routes. Italo now has a really good opportunity for development in the Italian market. Increased frequencies means higher yields, because NTV will be able to reach more business travellers.”
“Things are not going so well for the European economy and liberalisation can help in this regard because it brings better connections and better-quality services. If you look at Milan - Rome now, the fares are so cheap that small companies can afford to make the trip several times a week. Mobility is a key factor in making the economy grow, and opening the market supports that.”
Technology is a central pillar of the Italo business model, and NTV invested heavily in IT to help differentiate its offer from that of Trenitalia. “One of the strongest elements of Italo was having a service-orientated architecture from the beginning, so with big data it was possible to manage the relationship with the customer much better,” Giuricin says. “New entrants really put a big effort into technology to improve quality because when you are small it’s only the quality of your service and your relationship with the customer that attract new business. The incumbent is in a strong position to compete on price, and we have seen that everywhere new entrants have come into the rail market.”
Another key focus for Italo has been first and last-mile connectivity. Italo has through ticketing agreements with numerous local public transport operators across Italy and has established its own feeder bus network, Italobus, which connects hubs at Reggio Emilia, Venice Mestre, Salerno and Naples Afragola with towns and airports away from the high-speed network. Italobus now serves 26 destinations and operated 1.7 million bus-km in 2018.
Another innovation, which was quickly emulated by Trenitalia, was the provision of four different classes of seating - Club, Prima, Comfort and Smart - on Italo trains. “You have to be able to reach all kinds of customers and this is a big strength of the Italo model,” Giuricin says.
Regular passengers are rewarded through the Italo Card loyalty card, which has three tiers - Ambassador, Supporter and Friend - denoting how often customers travel. Disruption metrics such as delays and complaints are recorded for each passenger in a personal profile. “This is nothing new - the aviation industry has been doing this for years - but it shows the importance given to every customer, which is something new for rail,” Giuricin says.
With the liberalisation of passenger rail markets elsewhere in Europe, NTV’s chairman, Mr Luca Cordero di Montezemolo, has made no secret of his desire to see the Italo business model extend beyond Italy’s borders, with Spain, Germany or Britain possible target markets.
“You need a lot of money to enter new markets - it cost NTV €1bn to set up its operations in Italy,” Giuricin says. “There are big risks in other countries, and you have to establish whether the market is open for real or just on paper. The Italo business model could be very positive for the Spanish market with a similar effect on prices to what we have seen in Italy.”
Mr Isaías Táboas Suárez, CEO of Spain’s national train operator Renfe, said in March that he welcomes competition, and the incumbent carrier is preparing for the arrival of new entrants on Europe’s largest high-speed network when the domestic passenger market opens at the end of next year.
“Renfe could have the ability to change, it’s big enough to fight and the company sees market opening as an opportunity,” Giuricin says. “It’s also an opportunity for the infrastructure manager, because it means they can evolve their competence, knowledge and efficiency.
“Looking at Germany, DB needs to improve, it can improve, and the arrival of competition could help that process. For the consumer and the German government, it’s a great opportunity.”
Giuricin says stability in the infrastructure charging regime is a prerequisite for successful market opening. “Access charges are a big cost for open-access operators and there needs to be clarity on what these charges will be in the future,” Giuricin explains. “Operators need to know what they will be paying in five years’ time because you face an element of instability if the price keeps changing. There also needs to be stable and clear regulation, and this is a key element. You can make the best reforms on paper, but you really have to pay attention to the details of how they will work in reality. Open-access operators need clarity on train path allocation, how they can use stations and where PSO services will operate.
“In Italy the independent regulator didn’t begin work until the end of 2013, after the arrival of Italo, which operated for a year-and-a-half in an environment where there was no proper regulatory authority overseeing the market. A regulator needs to be strong with the resources to closely analyse the market situation. They also need power over train paths to ensure it isn’t just the incumbent getting capacity on the network when it is most in demand.
“Vertical separation is easy to manage when you have a strong regulatory authority and political support for competition. The consumer in Italy is so happy that no politician would now consider going back to the situation before Italo.”
In the space of half a decade, liberalisation has delivered improved service quality, better yields and a substantial increase in ridership on the Italian high-speed network. Given the right regulatory conditions, Giuricin is convinced this story can be repeated elsewhere in Europe. “Market opening is a big opportunity because it brings private investment, additional track access revenues for the infrastructure manager, better quality, higher frequencies and lower fares,” he says. “It’s a win for the state and a win for the consumer.”