How to launch a new passenger train operator

Despite more than two decades of European legislation aimed at opening up the rail market to facilitate access for new entrants, the hurdles remain formidable, as Sven Gossel of prospective German open access player Trans Metropolitan Railway explains.

Sven Gossel is Managing Director of München-based Trans-Metropolitan Railway Lines GmbH. This article is based on his presentation to the Amadeus Rail Innovation Forum in Praha on June 13.

A year ago, when I started working on this latest venture, the standard reaction from everyone I spoke to was: 'are you mad? Are you insane? You are trying to launch a rail company?'

Yet I still see an opportunity in the rail sector. In preparing our initiative, we took a long hard look at the travel market, and the individual factors that influence modal choice. We see more than 20 factors influencing the decision an individual takes about which mode of transport he or she chooses for a given journey.

Yet even after that initial survey, we are not under any illusion about how difficult it is to enter the rail market. In competitive terms, we could say that the rail sector is broadly where the airline industry was in 1995, in terms of liberalisation and non-discriminatory access. Despite all the efforts of the European Union Agency for Railways and the provisions of the Fourth Railway Package, it is still extremely difficult to be a new entrant. ERA does not have all the powers that it needs, and unfortunately there is still a lot of homework for policymakers to do in terms of market opening. Today, the mechanics of the market still make it extremely difficult to compete against a big incumbent like DB or SNCF.

Devil in the detail

Testing, authorisations and approvals remain something of a nightmare, we must admit. How can it be that safety authorities still expect to certify for fire safety using a live fire? Or that the specified dimension of the grains of sand used for adhesion differs between Belgium and Germany? National Safety Authorities seem to require as much paperwork as possible, and they are not in a position to understand their customers' needs.

This is especially true for new entrants, for whom the experience of an NSA working with a large incumbent is not relevant. In short, ERA's executive powers overall remain too weak, and the industry is a long way from coming close to standardised products that would reduce barriers to entry in the passenger market.

A brief 'back of the envelope' comparison with the airline sector could perhaps illustrate why new entrants to rail find it so hard. In Europe, an airline can wet lease an Airbus A320 for approximately €300000 per month. This could, given some reasonable assumptions about occupancy and yield, generate up to 180 'point to point' legs carrying around 150 passengers per flight in that month, resulting in perhaps €5m of revenue for the airline.

By comparison, the outright acquisition cost of a new high speed trainset is around €30m, with a seating capacity of say 650 people. If those passengers yield €32 per journey on average, monthly revenue for the operator would be around €2m, less than half that of the airline. To compound matters, the mobile hardware in rail is more expensive to procure and less interoperable than in aviation. This poses an inherent challenge for private rail operators: any potential supporting investor will immediately ask how you can drive up that revenue base, and how easily can you get more use out of your most expensive asset?

The answer of course is through sales, sales and more sales. Yet newcomers often face huge hurdles in accessing distribution channels, especially through indirect channels. While the travel industry's aspirations to create a 'rail GDS' are welcome, the risk here is that such tools are unable to differentiate sufficiently between the different operators' propositions. That in turn mandates that the operator invests heavily in its own website, and in directing traffic to it. This is already a sub-optimal start point for a new entrant.

In a market where state-backed entities often enjoy a market share of up to 90%, the margin for error for private competitors is extremely small; recent examples of abortive open access initiatives include Locomore in Germany. Among the reasons for failure are launching operations too early, having too little working capital and insufficiently detailed market research. In a nutshell, emotional start-ups do not work!

Trans Metropolitan will have spent two years preparing for market entry in 2018. But our philosophy will be clear: we are an IT company with transport on the side. In a market full of supertankers, we intend to be a speedboat.