21 January 2020 Share:

Will the liberalisation of the railway sector in Spain bring low-cost train travel?

In this article:

  • Expected train ticket price: The fourth rail package in Spain will be implemented towards the end of 2020. One expectation is that this will lead to a reduction in prices.
  • Spanish train companies interested in bidding for the railway liberalisation sector: The pace and scale of this may vary, depending on the methods used, the speed with which the new players develop new offers, and the form their involvement takes.
  • Situation and problems of the railway industry in Europe: One obstacle to be overcome in the liberalisation of the railway sector is the issue of how the new capacity will be financed, in addition to the vast initial investment, which could have the effect of reducing the number of participants.
  • Strategies for new rail network competitors in Spain
  • Final considerations on the effects of the deregulation of the rail network in Spain
  • The long-distance train travel market, according to McKinsey, generates an income of approximately 2.5 billion euros per year, with profit margins (EBITDA) of between 20 and 30 per cent. The fourth rail package is part of a systematic effort on a grand scale to deregulate the commercial long-distance rail travel market within the EU. It is hoped that this will not only make competition more dynamic in the market at a European level, but that it will also change the competitive environment at a European level.

The Spanish opening process is especially attractive thanks to the scale and quality of its infrastructure (Cinco Días, 2019), particularly in terms of high-speed routes, although the deregulation extends to the entire network. In addition, the perception of Renfe’s AVE service is very positive, and a large number of companies are looking into ways of becoming involved in the deregulation.

Expected train ticket price

The Economist refers to research by the University of Gothenburg in Sweden (the first European country to fully separate out its rail network in 1988). There, the cost of operating train services fell by 10% during the decade after deregulation. In countries such as Austria, the Czech Republic and Italy, there have been price wars: by 2018 the average cost of a ticket between Prague and Ostrava had fallen by 61% since the state company lost its monopoly in 2011.

In Italy, Italo-Nuovo Trasporto Viaggiatori SpA entered the market previously dominated by the established company Trenitalia Spa. In only four years, both doubled their share of traffic on the Rome-Milan route, at the expense of the airlines, while railway ticket prices fell by 30%.

Spanish train companies interested in bidding for the railway liberalisation sector

The deregulation process and the selection of companies began in July, with companies having until 31 October to submit their bids for the AVE service, and the names of the companies or consortia that would compete with Renfe being announced during the first two weeks of December. Nevertheless, there are already some indications of how the situation will develop.

According to ABC (linki extreno si es posible al artículo), among the 41 companies listed in the Special Railway Register (link externo REF), a total of 29 hold a licence to carry passengers. The list includes companies such as Acciona, Alsa, Ferrovial, Globalia, Avanza, Caf, Arriva and Ilsa. The only international player to hold an operating licence and a safety certificate so far is the French company, SNCF, although there is speculation that the privately-owned German and Italian companies, Deutsche Bahn and Italo-Nuovo Trasporto Viaggiatori (NTV), are also interested in entering the market. However, not all of these companies will begin competing within a year and a half. A few of them, such as Alsa, Globalia, Acciona and Ilsa, have confirmed their intention to do so, while others are still looking into the possibility.

They add that the rail transport market is complex and limited, and that sources within the industry say that when the liberalisation of the railway network is actually implemented, the market for passengers will be split among a small number of companies. The companies who are interested are seeking partners in order to be able to ensure a successful entry into the train travel sector. SNCF, for example, has already announced that at first it will only compete on AVE’s major routes: those that have large volumes of traffic. The route between Madrid and Barcelona, and the lines between the capital city and the regions of Valencia and Andalusia are attracting the greatest attention.

Setting up as a train service operator can cost up to around 400 million euros. Apart from the licence fees, it is necessary to factor in the setting up of a fleet of trains, as Renfe has already announced that it will not be hiring out its assets.

Potential obstacles to the liberalisation of the railway sector

One issue that could risk slowing down the pace of investment is that of funding. Writing in the Expansión newspaper, the Project Finance expert José Christian Bertram, notes that the liberalisation of the railway sector will require substantial financing of rolling stock for the operators. (Incuir palabra seguros de caución y un link interno al artículo [Include the phrase surety bond insurance and an internal link to the article]) Finance arrangements could be hampered by the mobile nature of the equipment assets to be financed. This mobility makes it difficult for investors to benefit from real guarantees, and adds to the doubts surrounding the capacity to enforce security rights according to where the asset is located. In addition, it produces unpredictable scenarios in the event of possible instances of insolvency. All these factors have an influence on the enthusiasm of investors and on the conditions of any possible finance that operators could obtain for rolling stock.
With the aim of creating a uniform system of financing, an international accord was brokered under the auspices of UNCITRAL, the 2001 Cape Town Convention, in relation to international guarantees on elements of mobile equipment. This Convention works as an “umbrella” which so far covers three distinct protocols: one applying to the aviation industry, another to the aerospace industry, and a third to the railway sector. Both the Convention itself and the aviation protocol have been ratified by Spain, but the railway protocol has yet to come into effect, nor has it yet been ratified by any state other than the signatories. In Bertram’s opinion, the liberalisation of the railway sector within the European Union presents a unique opportunity for Spain to ratify the protocol and to allow an improvement in the financing conditions for the new operators’ rolling stock.

Strategies for new rail network competitors in Spain

Entering a market already dominated by a single operator is no easy matter. McKinsey recommends a series of general strategies for new operators in the rail travel industry:
In relation to the selection of markets and routes: evaluate and prioritise the most attractive lines and the most important routes within them, using a point-by-point strategy, potentially expanding during a second phase, and also taking into account the possible reaction from established players (such as a reduction in fare prices).
Business excellence: among other things, develop customer relations models to attract and retain loyal customers by offering a brand with a distinctive value proposition and by making use of digital channels as a low-cost method of reaching new customers.
Cost / saving leadership: begin with an asset-light model in order to reduce financial and operational risks, as well as maintenance costs. In addition, take advantage of a new (non-legacy) costs base which will support profit margins during the expansion phase.
Access to railway stations and lines: access, and ensure a presence in, the main stations in growing hubs, and seek reductions in railway station and track tariffs.

Final considerations on the effects of the liberalisation of the railway sector in Spain

The process of rail network deregulation in Spain is expected to go ahead; however, given the nature of the market and the dominant position of RENFE, new operators should proceed with a degree of caution. All the evidence seems to suggest that although new players will enter the field and costs to the consumer could be reduced, this will take time. Nevertheless, we can expect that if there are moderate reductions in fare costs, they will strengthen the appeal of train travel—and that the sector will be in a better position to compete with the airlines.