India joins the high-speed club

India joins the high-speed club

Last year a new country entered the HSR ‘club’. Dr. Andrea Giuricin gives us his analysis of India’s business model 

Across Asia, many important infrastructure developments are changing the face of the continent – none more so than the new high-speed rail project in India, one of the fastest growing economies of recent years.

The Mumbai-Ahmedabad Bullet train project could be an important tool to increase the productivity of the economy, connecting two important areas of the country in an efficient way.

‘We have to ensure that in India also the bullet train runs with the same quality and parameters which it runs at in Japan’. This is one of the statements which supported the decision to develop this important project.

Initial phases

When a country starts a new project, it has to reference the major success stories. But is it possible to copy and paste a business model? And what is the best business model for the high-speed rail in India? The quality and parameters of Japan are really impressive in terms of punctuality and of course the rich history of high-speed rail going back to the 1960s.

At the same time, when we analyse the price of a ticket in Japan, some would doubt that the same parameters could be applied to a country like India.

The yield is the revenue per passenger kilometres and it is a proxy of the price of the ticket.

The Indian economy and Japanese economy are really different in terms of development. India is growing very fast, but it is very far from the level of Japan.

In terms of Gross Domestic Product per capita at PPP level (the same purchasing power parity), India has a level six times lower than Japan. The data of the World Bank underlines that the level is also very different from a country like Italy.

Why is GDP per capita at PPP level so important for high speed rail?

This is a key factor to take in consideration when the prices of the tickets are chosen by the Government or by the market.

In fact, the price could be decided by the market as it is in the airline sector or could be chosen by the Government (in the case of HSR this is normally decided by central Government).

There are two main questions that the policy makers have to raise:

  • What sort of price can passengers afford?
  • What is the price of tickets for the high-speed services in different countries?

The next graph considers the price of HSR services in different parts of the world for a passenger that travels 1,000 kilometres.

In the case of the Chinese HSR, the price of the ticket is decided by the central Government, but the revenues taken in by the train company don’t recover the cost of the service (maintenance, access charge or electricity cost).

In the Italian case, where there are two competitors in the market with Italo-NTV as the private operator, the price of the ticket is very low.

In this case the company is profitable and the EBITDA margin in 2017 was around 35 per cent positive. Also, the State Owned Entreprise, Trenitalia, has a positive EBITDA margin of around 30 per cent. The private railway company was sold in the first part of 2018 to a US infrastructure fund for $3 billion (including debt).

After some difficult years, the company had a turnaround thanks to a series of decisions made by the former CEO, Flavio Cattaneo, which helped to make Italo profitable. The decisions involved a reduction in costs as well as a clear strategy of increasing the productivity and a more aggressive pricing strategy.

This strategy gave benefits not only to the private railway company that reached a load factor close to 80 per cent in 2017, but also helped the consumers that had a seen strong decrease in prices.

The benefits were clear because since the beginning of the competition, the average yield in the HSR sector, where Italo operates, decreased around 40 per cent while the demand in terms of passengers-kilometres had an increase of 90 per cent without the construction of new HSR infrastructure.

These impressive results in terms of demand and price were obtained in spite of the Italian economy suffering through a recession which saw GDP in 2017 drop to two per cent below 2011 levels. In Spain, Renfe has a small profit, but the price of tickets are 40 per cent higher than in China and Italy, while the Thalys (international high-speed services between France, Belgium, Netherlands and Germany) has a big profit but the price of the use of the train for the consumers is three times higher than in Italy.

And in Japan? If we analyse the data, it is clear that JR East has a very high average ticket price, three times higher than Italy or China.

In Japan, JR East makes a big profit, similar to Italo-NTV, but the railway company also develops a real estate business, while in Italy the RU is concentrated on the rail business. Is there the same opportunity in India?

If we take one of the most important parameters, the price of the ticket, this is where India is most different to Japan.

Could the Indian consumer afford a much higher price of ticket? Or could the Indian Government subsidise a lower price of the ticket?

Or is there a way to change the business model to allow for competition on the same infrastructure to push the cost for the railways companies down and to transfer this reduction of costs to passengers?

Dr. Andrea Giuricin

University Milan Bicocca, Adj.Prof. Purdue University, University Southern California, Prof. at UIC, Visiting Professor at China Academy Railway Sciences, Senior Rail advisor for the World Bank, Consultant for Managing Director of Italo-NTV and companies as KTX-Korail and HSR in Spain, France, China, etc.

2019-03-01T11:20:27+00:00 March 1st, 2019|Magazine, March 2019|