FEW major stations embody the spirit of passenger rail liberalisation in Europe more than Prague Hlavní Nádrazí. Every hour, and within minutes of each other, a black Leo Express EMU, yellow RegioJet locomotive-hauled train and silver Czech Railways (CD) Pendolino depart for Ostrava in the eastern Czech Republic. On the other side of the station, a former German Rail (DB) DMU operated by Arriva forms an open-access suburban service for Benešov. While incumbent operator CD remains by far the largest player, this already-diverse landscape looks set for further change with the liberalisation of the regional rail market.
The open-access operators argue that the opening of the long-distance market on selected routes has driven a surge in ridership on the Czech network in recent years. Between 2006 and 2011, the year RegioJet launched its first Prague - Ostrava services, passenger traffic remained more-or-less static, ranging from 6.5 to 6.9 billion passenger-km. However, the arrival of competition on the country’s premier inter-city route also marked the beginning of a dramatic upswing in patronage, from 7.3 billion passenger-km in 2012 to 9.5 billion in 2017. According to the Ministry of Transport, ridership between the Prague Metropolitan Area and the Ostrava region tripled in five years, while the average fare price has fallen sharply.
Liberalisation has coincided with favourable economic conditions. The Czech Republic has experienced continuous GDP growth since early 2014 and GDP increased by 4.5% in the first quarter of 2018. Employment is at a record level, with unemployment among the lowest in the European Union at just 3.3%. In November 2017 the OECD forecast that strong economic growth will continue through 2018 and 2019, remaining above 3%.
These factors helped CD to achieve record ridership in 2017, with passenger numbers increasing 1.8% to 174.7 million and volumes rising 5.1% to 7.78 billion passenger-km. CD says growth was also driven by the introduction of new rolling stock, improved international services and competitive pricing.
Mr Jirí Nálevka, commercial director for Arriva Transport Czech Republic, worked for CD between 2009 and 2014, witnessing dramatic changes in the market. “RegioJet focussed on the comfort and onboard services, and CD had to react to that - a direct competitor forced them to improve,” he explains. “The average yield didn’t fall much, because a lot of CD passengers had been using special offers, so the standard fare tariff wasn’t used much.”
The arrival of a new operator also brought the railway positive media coverage. “Before the entrance of RegioJet, television news would report the negative experiences of passengers, but nobody really cared about the development of rail,” Nálevka says. “Suddenly it became an issue for journalists and they started to focus on what had improved. At CD we saw that ridership suddenly increased, not just between Prague and Ostrava but on other trunk lines.”
Another factor in the Czech passenger rail renaissance has been CD’s focus on the development of long-term partnerships with incumbent operators in neighbouring countries. In 2012 CD signed an agreement with Austrian Federal Railways (ÖBB) for the joint operation of a regular-interval two-hourly service on the Prague - Brno - Vienna - Graz corridor using Railjet trains. A further agreement on the operation of Prague - Hamburg services was signed with DB in 2014.
“From the perspective of the incumbent these projects really helped a lot, because CD, in cooperation with its partners, succeeded in stabilising the rolling stock deployed on these routes,” Nálevka says. “They had prepared a consistent, uniform product, and that really helped a lot because the product for the passengers became predictable. This was a key milestone because it ended the situation where coaches were provided by different operators with different levels of service. Some trains had Wi-Fi, others didn’t, there were differing levels of pricing in restaurant cars, and variations in additional services such as children’s play areas. This issue was overcome.”
Nálevka argues that the arrival of competitors on international routes forced CD to refine its offering and achieve consistent service levels. “This is the big advantage of the new entrants, because they operate their service without any cooperation partner, so it’s up to them to define the product, and it’s easy to maintain consistency if you are the only one responsible for your offer. CD realised that Regiojet offers a uniform, standardised product across all of its services and therefore they somehow had to change how they provided their services.”
Through its partnerships with DB and ÖBB, CD has achieved common standards for onboard services on international routes and these improvements are testament to the successful conclusion of often-complex negotiations. “These discussions are really exhausting and take a long time to reach a compromise,” Nálevka says. “The agreements are major milestones and they have contributed to significant growth. Defining the product is a big hurdle to overcome - if you can get past it, you can succeed.”
Nálevka says the steady enhancement of services over the last five years has been key to building rail’s market share. “This was a continuous improvement, not a one-day miracle,” he says. “As a passenger I can see there has been a constant focus on developing service standards. None of us believed when RegioJet first appeared that it would cause growth in the market - we thought that CD would lose share to new entrants, so that was a big surprise.”
Having launched its Prague - Ostrava services with five-coach trains in September 2011, RegioJet is now operating trains of nine coaches or more. “When you have seat occupancy of 70-80% you can survive with very low pricing and still be profitable,” explains Regiojet public relations manager, Mr Aleš Ondruj. “The starting fare for Prague - Brno is €4 - it’s like buying a coffee and getting a free train ticket.”
The arrival of open-access has also given smaller towns direct services to Prague. “The Ministry of Transport was very reluctant to allow CD to introduce new services and stops, because if they are unsuccessful it’s very difficult to withdraw them,” Nálevka explains. “In this context, RegioJet began serving Havírov, which previously had no direct service to Prague. CD started to operate direct services to Opava, and it was also a great success. Leo Express started to serve Suchdol nad Odrou and Studénka, which are small towns with medium-sized or large cities nearby. This kind of innovation is an additional reason for the growth in the market.”
RegioJet carried 4.7 million passengers on its long-distance trains in 2017, an increase of 1 million compared with 2016. The launch of Prague - Vienna services in December 2017 helped to stimulate further growth in the first quarter of 2018, with passenger numbers climbing 30% year-on-year. In combination with the Prague - Brno - Bratislava services, the Vienna trains give RegioJet nine trains a day in each direction between Prague and Brno, one of the country’s most important domestic inter-city routes. A 10th service will be introduced on the Prague - Brno corridor on June 9, when RegioJet will add a fourth daily return train between Prague and Bratislava.
Vienna and Prague collectively attract 13 million international visitors a year, and RegioJet says its new connection between the two capitals has tapped into this huge tourist market, with around 60% of passengers on the route coming from other countries. “We have started to become very active in China, the United States and Japan to address non-European customers directly,” Ondruj says. “This is a step towards creating a global sales environment and we’re also looking to add RegioJet trains to global distribution systems such as Amadeus.”
Ondruj says RegioJet now has a 40% market share on Prague - Ostrava and 60% for Prague - Košice (Slovakia). “We expect to see the same trend on Prague - Brno and we’re achieving enormous passenger growth on this route,” he says. “CD is also carrying more passengers, so the arrival of open-access operators has had a very positive impact on the entire sector.”
Regiojet currently has 150 coaches in its operational fleet with a further 70 coaches in storage awaiting overhaul. It also has 16 new coaches on order from Astra Vagoane Calatori, Romania, two of which are now in service.
RegioJet is also investing in new traction, and two new Bombardier Traxx MS2E electric locomotives were introduced in May with two more due to enter service by the end of the year.
Like Leo Express, RegioJet is eyeing opportunities for international expansion. “You can’t limit yourself to three markets, and we’re looking at Budapest as a natural prolongation of existing services,” says Ondruj. “We’ve got a license to operate in Poland, and this could be an extension of our Ostrava services. Warsaw could be considered a natural destination for us.”
Leo Express is also expanding, and is moving forward with plans to launch a new service from Prague to Krakow. In January the operator submitted track access applications to the Czech Office for Access to Transport Infrastructure (ÚDPI) for services from Prague to Berlin, Wroclaw and Vienna as part of the process for an Economic Equilibrium Test. Leo Express will receive three new six-car EMUs from CRRC later this year.
Arriva operates open-access commuter services from Prague to Benešov as well as long-distance trains from Prague to Trencín and Nitra (Slovakia) using former DB class 628 regional DMUs. Despite the use of basic rolling stock and operation of just two return services a day, Nálevka says the Nitra service is proving popular. “It seems that on international routes passengers are more flexible in terms of their travel arrangements and they prefer a direct service to one with connections,” he says. “Between Prague and Nitra we offer a lower standard and charge higher prices than CD, but have the advantage of running direct. The fare with ZSSK and CD is 20-30% lower, but we have plenty of custom. That’s the effect of a direct service.”
While the opening of the long-distance market has been widely hailed as a success, it has not been without challenges. The early years of liberalisation were defined by a vicious price war, which is still the subject of legal battles between the incumbent and the new entrants. Leo Express alleges that CD cut prices to below cost by slashing fares for Prague - Ostrava - Košice Pendolino services by 60% when the new operators entered the market, cross-subsidising the losses from other sources. In March the Supreme Court overturned a December 2015 ruling by the Prague Municipal Court that CD had not engaged in predatory pricing in a move which forces the court to examine CD’s accounts. RegioJet is also suing CD for loss of revenue resulting from alleged predatory pricing.
In April 2016 the European Commission carried out inspections at CD offices, and in November 2016 DG Competition launched an investigation, which is expected to conclude soon.
Another emerging challenge for the passenger sector is capacity. Research carried by the Ministry of Transport 10 years ago concluded infrastructure capacity would be sufficient to meet short-term requirements, but demand has far outstripped these projections. “Infrastructure is overloaded, there is no free capacity left for additional passengers,” Nálevka says. “This is the flip-side of the renaissance in passenger rail transport. The state has a long-term strategy to shift traffic to rail, but people have started switching to the train and the government isn’t ready.”
The OECD recently recommended that the Czech government should consider increasing infrastructure investment, taking advantage of the fiscal surplus, falling debt-to-GDP ratio and the availability of EU funds. Accelerating the implementation of infrastructure projects could generate a win-win by helping to sustain economic growth while providing the additional capacity now needed on core routes.
A key focus for all of the passenger operators is the renewal of the long-distance and regional public service obligation (PSO) concessions. The direct award concessions for the operation of all main line PSO services in the Czech Republic granted to CD in 2009 expire at the end of 2019 and discussions on the future operation of these services are now well underway. “There are two routes for development,” Nálevka explains. “The first is that all contracts will be renewed with CD. The second approach is that the PTAs will try a new operator. This doesn’t mean that CD will disappear, but it might lose 5% of the market. It’s really up to the politicians. Direct award is legal, and it’s up to them which way they choose.”
Regional PTAs may be permitted to award concessions for a limited number of services to CD’s competitors, but the challenge of obtaining suitable rolling stock at short notice means the advantage lies with the incumbent.
“CD’s strategy is to delay the signing of contracts for as long as possible,” Nálevka says. “If contracts had been awarded two years ago, we would have been able to buy new trains for December 2019. But if the contract is signed in mid-2019 we will have no time to procure rolling stock and we would need to deploy an interim fleet for two years. As we don’t have that rolling stock here, we would need additional capex.”
In April, Arriva, RegioJet and Leo Express submitted separate offers for the operation of long-distance PSO services, but the political situation means it is unclear when a decision will be reached. The country is still awaiting the formation of a new coalition government, seven months after a general election split the Chamber of Deputies between nine parties. “A new government will probably be formed in July or August, so we have lost eight months at a critical time,” Nálevka says. “From this perspective CD holds the best cards. From our perspective, it’s essential that the state makes a brave decision to make some changes.”
Another significant hurdle facing the new entrants is the proposal for a so-called National Tariff, a distance-based integrated fares system applicable across the entire network which will be recognised by all operators. The tariff is due to come into effect next year.
“If you want to tender, you need to know what the National Tariff is, and the National Tariff isn’t developed yet,” Nálevka says. “And they have just found out that they will need to amend the legislation, and it will take another year. So by admitting they need a National Tariff the government has effectively postponed market opening by three-to-four years.”
While ridership growth continues and the economic outlook remains sunny, political uncertainty clouds the horizon for the Czech passenger rail sector. Nevertheless, market opening has helped to revive the fortunes of the Czech passenger sector, and operators will be looking to sustain this positive trend with continued innovation.