Open access passenger rail competition in the Czech Republic
Zdeněk Tomeš n
, Martin Kvizda, Monika Jandová, Václav Rederer
Department of Economics, Faculty of Economics and Administration, Masaryk University, Brno, Czech Republic
a r t i c l e i n f o
Article history:
Received 25 August 2015
Received in revised form
13 January 2016
Accepted 10 February 2016
Keywords:
Competition
Railways
Czech Republic
Open access
Liberalisation
Vertical separation
a b s t r a c t
This paper analyses open access passenger railway competition in the Czech Republic between 2011 and
2014. This competition emerged when the major railway connection between Prague and Ostrava, which
was operated only by the incumbent, was entered by two private operators, RegioJet in September 2011
and LEO Express in January 2013. Theoretical studies and experience from other countries suggest that
this competition should lead to a price war, intensive market dynamics and product differentiation. The
findings from the market development on the Prague–Ostrava route are broadly consistent with these
predictions. The open access competition has led to an intensive price war with 2nd class tariff declines
reaching 46%. Innovative marketing and selling strategies have significantly increased the spread of
prices, and price discrimination and yield management techniques are used extensively. All operators has
been unprofitable on the line, leading to financial stress and accusations of predatory pricing on the part
of the incumbent. The quality of service on the line has increased substantially with standardisation, new
on-board services and higher frequency. The average number of seats per train has declined significantly,
and new operators have been able to win 55% market share from the incumbent. Service frequency is
higher but is strongly concentrated during rush hours.
& 2016 Elsevier Ltd. All rights reserved.
1. Introduction
Open access in international passenger rail transport has been
permitted in the EU since January 2010, including the right to
carry domestic passengers, provided that the primary purpose is
to serve international passengers and that doing so would not
threaten the financial equilibrium of public service obligations
(Nash, 2010). As a result, several international open access connections
have emerged; however, their scale is limited and many
of them are commercial brands of the national rail incumbents. In
national rail passenger markets, public policy varies throughout
Europe. Some countries do not allow open access at all, some do
but have not seen actual entry, and in a few European countries,
commercial open access has emerged (IBM, 2011). Currently, the
UK, Germany, Sweden, Italy, Austria, Slovakia and the Czech Republic
are the European countries with operating open access
service (European Commission, 2013). There is, however, an important
difference between open access entry in the UK, Germany
and Sweden and open access in Italy, Austria, the Czech Republic
and Slovakia. The open access entry in the UK, Germany and
Sweden has taken place in niche markets, avoiding direct full-scale
competition with the incumbent (Deutsche Bahn in Germany and
a franchise holder in the UK). These entries have typically been
low-scale, targeting small, neglected market segments and usually
competing with lower prices/lower quality strategy (Griffiths,
2009; Séguret, 2009; Fröid and Nelldal, 2015). However, recent
open access entries in Austria, Italy, Slovakia and the Czech Republic
have varied. In all these cases, new entrants have challenged
the incumbent on the most important railway connection
with the highest-density passenger flows in the country. These
entries have been full-scale with intensive price competition and a
clear aim of winning substantial market shares from the incumbent
with lower prices and comparable/better service quality.
These entries have resulted in intensive price competition and
widespread accusations of responsive predatory pricing on the
part of the incumbent. Because these new open access entries
began recently, there is only limited and preliminary research on
the impact of this new type of open access on market development
(Croccolo and Violi, 2013; Cascetta and Coppola, 2013; Beria
et al., 2014; Bergantino et al., 2015 for Italy and Tomeš et al. (2014)
for the Czech Republic).
This paper aims to enhance this knowledge, focusing on the
Czech Republic, where in September 2011 and January 2013, two
private operators entered the major railway connection Prague–
Ostrava, once operated solely by the incumbent. At present, there
is a unique situation in which three open access passenger operators
compete on the same line. Because empirical evidence
about the impact of open access entry on railway markets used to
be scarce, simulation and theoretical studies were used to model
Contents lists available at ScienceDirect
journal homepage: www.elsevier.com/locate/tranpol
Transport Policy
http://dx.doi.org/10.1016/j.tranpol.2016.02.003
0967-070X/& 2016 Elsevier Ltd. All rights reserved.
n
Corresponding author.
E-mail addresses: tomes@econ.muni.cz (Z. Tomeš),
kvizda@econ.muni.cz (M. Kvizda), jandova@econ.muni.cz (M. Jandová),
rederer@econ.muni.cz (V. Rederer).
Transport Policy 47 (2016) 203–211
them. Their results were used to assess possible impacts of open
access competition on the development of railway markets in
academic and political discussion. Therefore, it is important to
determine whether the actual impacts of open access competition
on railway markets accord with the experiences of other countries
and with the predictions of theoretical and simulation studies. The
paper aims to analyse the impacts of open access competition on
the development of the rail market on the Prague–Ostrava line. We
have concentrated on analysing price development, market share
and product differentiation. The paper is organised as follows.
Section 2 provides a literature review, Section 3 describes the
development of competition on the Prague–Ostrava route, Section
4 analyses market development, Section 5 discusses the findings,
Section 5 addresses policy implications and Section 6 presents the
conclusions.
2. Literature review
Two types of open access competition can be observed in
contemporary Europe. The first type is competition in niche
markets, which has operated for many years in the UK and Germany.
The second type is more recent; it is typically by head-on
entry on the principal railway route and can be observed in Austria
(2011-), the Czech Republic (2011-), Italy (2012-), Slovakia (2014-)
and Sweden (2015-). In the following paragraphs, we review experience
with these open access entries.
The experience in the UK is reported in Jones (2000), who
states that the concept of open access competition was suppressed
in the UK to avoid threatening the financial validity of franchises.
The open access entry is strongly regulated, and a potential open
access operator must prove that it will generate new traffic and
will not only steal customers from existing franchised operators
(ORR, 2011). As a result, open access competition in the UK is
present on routes London–Hull, London-Bradford and London–
Sunderland, linking these cities with London by direct connections
that were previously lacking. The benefits of these niche market
open access entries were reported as lower fares for customers
(11–32%), new direct service, increased service quality (Griffiths,
2009), and higher frequency of service (Temple, 2014). The disadvantages
can be identified as higher operating costs, questionable
impact on revenues due to decreased fares and shorter-length
trains. The share of open access competition accounts for 0.1% of
passenger journeys and 0.6% of passenger revenue in Great Britain
(Griffiths, 2009). Generally, open access competition in the UK has
so far focused on niche markets that have been neglected by the
franchise holder (Preston, 2009). However, the situation may
change because the regulator ORR approved new direct services
from Blackpool to London on the West Coast Main Line, to be
provided starting in 2018.
Germany has a sharp division between regional and long-distance
passenger transport, with the former subsidised and often
tendered and the latter unsubsidised and left to open access
competition. Despite the full liberalisation of long-distance rail
transport, the market is dominated by Deutsche Bahn, with market
share over 99% (Deville and Verduyn, 2012). From 1994 onwards,
there were approximately ten entries of new operators
against DB (Séguret, 2009); however, the majority failed, and only
two operators are surviving in niche markets (European Commission,
2013). The reasons for unsuccessful entries of new private
operators against Deutsche Bahn were suggested as high infrastructure
charges (Link, 2004), hidden integration of long-distance
and regional transport (Séguret, 2009) and discrimination against
new operators by Deutsche Bahn (Nigrin, 2014).
Sweden has allowed commercial open access on its entire
network; however, due to low commercial attractiveness, it is not
widely utilised. Open access operates only on two lines in the
south of the country. Operator Öresundståg entered the Gothenburg–Malmö/Copenhagen
line against the state incumbent
by differentiating its product (price, comfort, frequency), and the
incumbent was forced to leave this regional market (Anderson,
2012). During the competition between 2008 and 2010, the
market share for trains increased from 21% to 28%, and the
competition seems to have stimulated demand due to more departures
and fare diversity, including many inexpensive tickets
(Fröid and Byström, 2013). The second open access operator is
Snälltåget, which has been serving the long-distance route
Malmö–Stockholm since 2010 and in summers also Malmö–Berlin.
Due to this entry, there was a sharp decline in ticket prices
(Snälltåget, 2015). However, according to the European Commission
(2013) Snälltåget does not have any significant impact on
the Swedish rail market. The frequency of Snälltåget between
Malmö and Stockholm is 1 or 2 pairs of trains per day (Snälltåget,
2015). The more dedicated head on entry occurred in March 2015
when MTR launched its services between Stockholm and Gothenburg
against the incumbent SJ, starting with four services
per day and planning to increase them up to eight per day (Barrow,
2015).
Italy was the first European country to have open access entry,
on the major high-speed line Milan–Firenze–Rome–Napoli in April
2012. Cascetta and Coppola (2013) stated that as a result of open
access competition, prices decreased by 31% in the first year, and
ridership increased significantly. Croccolo and Violi (2013) claim
that the new competitor has not eroded the traffic of the incumbent;
however, it generated new traffic because of reduced fares,
improved quality, increased frequency and diversification of service.
However, the new private competitor is still unprofitable and
accuses the state incumbent Trenitalia of anticompetitive behaviour
in the areas of predatory pricing and infrastructure capacity
allocation (Bergantino et al., 2015).
In Austria, open access competition began in 2011 when the
main railway connection Vienna–Salzburg began to be operated
by the private company Westbahn alongside the state incumbent
ÖBB. As a result of open access competition, there was a decline
in prices and an increase in the frequency of connections (Komárek,
2014). ÖBB reacted by responsive price cutting. The
Westbahn was claiming problems with the infrastructure entrance
due to vertical integration of ÖBB (Westbahn, 2013). The
Czech Republic has had open access since September 2011 with
two operators and since January 2013 with even three operators
competing. Tomeš et al. (2014) presented the first results of the
open access competition in the Czech Republic, documenting
significant price declines, infrastructure capacity pressures and
benefits for customers. The impact of open access competition on
customers' perceptions was presented in Jade et al. (2015), and
Chmelík (2015) analysed determinants of a modal split on the
Czech railways routes. The impact of passenger rail liberalisation
on regional transport in Central Europe was presented by Taczanowski
(2015). Open access passenger rail operations in Slovakia
started in December 2014, where the operators from the
Czech Republic began competing against the state incumbent,
effectively connecting its open access operations in the Czech
Republic and Slovakia. The immediate result was a decrease in
prices and increases in service quality and frequency of connections.
These empirical results provide some initial experiences
with the impacts of open access entry on the development of
railway markets. However, these experiences are only preliminary
because the head-on market entries have only operated
for a few years; as a result, there could hardly be definite conclusions
based on them.
Limited previous practical experience with open access entry
has stimulated theoretical and simulation work designed to
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211204
predict the results of on-track competition. Preston et al. (1999)
simulated possible effects of head-on competition on the busy
intercity line in the UK with the aim of predicting its impact on
market development. The authors analysed four possible scenarios,
including cream skimming, head-on competition, product
differentiation and niche entry. Their results show that the
emergence of some competition was likely but would not enhance
economic welfare unless it led to cost reduction and/or
product differentiation. The competition was sustainable only in
the case of low infrastructure charges, and the benefits to users
were usually lesser than the loss of the producer's surplus. While
cream skimming (duplication of only the most profitable services)
resulted in a large transfer of benefits from producers to
customers, operators were usually able to remain profitable. Regarding
head-on competition, intensive price competition led to
drastic falls in the incumbent's profits. The resulting situation
benefits passengers due to higher frequency and reduced costs
but is likely to lead to a price war and the final withdrawal of one
competitor from the market. Consumers benefit greatly from this
scenario; however, the total impact on welfare is negative. Product
differentiation and/or niche market entry may be more
sustainable scenarios. Johnson and Nash (2012) followed up on
this study and modelled the impact of open access competition
on the long-distance international route with a strong domestic
market. Its result indicates that open access competition brought
benefits to consumers but diminished the incumbent's profits,
and moreover, it was difficult for new entrants to attain profitability
unless their costs were significantly lower than those of
the incumbent.
Ivaldi and Seabright (2003) constructed a theoretical model of
head-on open access competition, and based on their prediction
that due to the economics of density, there is a high probability of
price wars to win competitors' customers because the marginal
costs of additional transport are less than the average costs. This
is expected to lead to unsustainable competition because unless
competitors have the same cost curves, one will be forced to
leave. As a result, both competitors will seek ways to soften the
impacts of competition by differentiating their products (different
services, non-changeable tickets, no interconnections). The
incumbent is expected to resort to responsive aggressive pricecuts
not only to avoid repulsing the newcomer but also to protect
its connecting traffic. Railway networks with a high share of
connecting traffic will therefore be prone to a stronger response
from the incumbent and intensive price wars. Additionally, it is
likely that the incumbent will use predatory pricing or that the
newcomer will claim it as a defence against legitimate but vigorous
competition.
These studies have common ground regarding merits and
disadvantages of on-track competition. They predict benefits to
customers in the form of lower costs, higher frequencies and
better service. However, these gains are insufficient to compensate
for the losses of operators (especially of the incumbent) in
the form of lost profits. The economies of traffic density are diminished,
and in many scenarios, on-track competition results in
an unsustainable price war with the final withdrawal of one of
the competitors. Additional problems include strains on infrastructure
capacity and concentration on peak times and major
destinations with neglect of off-peak times and smaller destinations.
Based on these papers, the desirability of open access
competition on railways is questioned. Specifically, these studies
predict the following outcomes on the market in case of head-on
competition:
 Price competition. The entry of a new operator triggers an intensive
price war in the market. The operators are motivated to
win additional passengers by means of attractive price
strategies because the cost of additional traffic (if there is
available capacity) is low.
 Market share. The high fixed and low marginal costs give rise to
economies of density in passenger railway transport. Thinner
traffic flows together with falling prices are the reason for the
predicted unprofitability of operations in the open access regime.
The weaker operator will be forced to leave the market.
 Product differentiation. To escape the pressure of intensive
competition, the operators will resort to product differentiation,
seeking to offer various services to improve the possibility of
price discrimination and to escape direct price competition
from competitors.
3. Development of competition on the Prague–Ostrava line
The liberalisation of passenger railway transport in the Czech
Republic used to be very slow, and until recently, the entire market
was dominated by the incumbent České dráhy (ČD). This situation
changed recently when two new private operators entered the
Prague–Ostrava line. These entrances resulted in a unique case of
open access competition among three operators. This chapter
chronologically describes the gradual development of open access
competition in the Czech Republic in the period 2011–2014.
3.1. Before entries of private operators
The Prague–Ostrava route is the busiest railway line in the
Czech Republic with the highest density of both freight and passenger
traffic (Fig. 1). Prague is the capital of and the largest city in
the Czech Republic with approximately 1.4 million inhabitants,
and it is an administrative, cultural and commercial centre of the
country. Ostrava is the second-largest agglomeration with approximately
0.8 million inhabitants and the centre of the northeastern
industrial region, and there is extensive traffic between
these two cities.
The high density of railway traffic on the Prague–Ostrava line is
determined by the fact that the direct highway between Prague
and Ostrava includes a long roundabout route via Brno. Therefore,
the railway has a strong competitive advantage over the road on
this particular line. Specifically, the length of the last bus line was
402 km, and the journey took 5 h and 20 min; in comparison, the
railway route is 356 km and has a travel time of 3:05. Furthermore,
frequent congestion is typical of the road highway Prague–Brno–
Ostrava, and air service is marginal, which further increases the
competitiveness of rail.
České dráhy is the state-owned railway incumbent operator in
the Czech Republic. České dráhy was the only operator on the
Prague–Ostrava line until September 2011. It operated two classes
of service on this line: standard Intercity (IC) service and luxurious
Supercity (SC) service. Intercity service was provided by a great
number of different rolling stock and therefore was typified by
uneven and unpredictable quality. In contrast, Supercity service
had the fastest and most comfortable trains in the Czech Republic,
and service was provided by new and standardized Pendolino
trains. SC, which offered short travel times and high quality service,
targeted high-income customers. Its timetable was based on
regular tact intervals with almost no adjustments for peak days
and hours. České dráhy did not introduce any special rates or
discounts on this line, and fares were calculated according to the
national tariff system. Despite the rigid approach of České dráhy to
marketing and advertising, its trains on the Prague–Ostrava route
were distinguished by high occupancy rates.
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211 205
3.2. The entry of RegioJet and LEO express
RegioJet (RJ) is a private passenger rail operator that operates in
the Czech Republic and Slovakia. The mother company of RegioJet
is Student Agency, a very successful bus operator which managed
– with its standardized quality and aggressive pricing – to push
many small bus operators out of the market. The company currently
dominates intercity bus market in the Czech Republic.
However, the incumbent railway company proved a much more
difficult opponent than small bus operators. The first rail service of
RegioJet was launched in September 2011 with trains consisting of
used carriages purchased from Austrian Railways. After being
modernised, it was comparable in quality to the ČD Intercity service;
however, its purchasing and operating costs remained relatively
low. In response to the rigid marketing of ČD, RegioJet
profiled itself as a fashionable operator, offering high quality and
customer-focused service for lower prices than those set by ČD. In
particular, RegioJet enhanced quality standards on the line by introducing
new on-board services, such as free refreshments, silent
sections and children's sections, free Wi-Fi and free seat reservations.
RegioJet attracted many customers by guaranteeing a high
and stable quality of on-board services, which contrasted sharply
with the IC trains operated by České dráhy.
Having overcome the initial shock, ČD began to cope with the
challenge by both improving service quality and setting a new
tariff policy. ČD has gradually standardized the quality of IC trains,
introducing silent and children's compartments and improved
catering in its dining cars, and has introduced in SC service wi-fi,
newspapers and refreshments, all free of charge. To ensure consistent
quality of IC trains, ČD also began replacing its rolling stock.
In reaction to RegioJet's yield management pricing strategy, ČD
adjusted its fares in accordance with peak and off-peak demand,
and its rates quickly fell by 30%. In return, RegioJet filed a complaint
with the Office for Protection of Competition (UOHS), arguing
that ČD had been loss making on this line even before the
price decrease and that its price cutting should therefore be interpreted
as predatory pricing. Based on the suspicion that ČD had
allegedly abused its dominant position through predatory pricing,
UOHS subsequently initiated proceedings against České dráhy in
January 2012. Nevertheless, UOHS has neither delivered any decision
nor taken any measures yet, stating as justification that due
to the unclear structure of ČD's costs, it is difficult to prove whether
the incumbent's prices were set under operating costs. In
addition to disputes over pricing, restricted approach to some
essential facilities was another obstacle for RegioJet in the first
months of its operation. Despite the vertical separation of infrastructure
and operation in the Czech Republic, ČD remained the
owner of railway stations and washing plant facilities and restricted
RegioJet's access to some of them.
LEO Express is another private open-access operator that entered
the Prague–Ostrava route. In contrast to RegioJet, its owner
had no previous experience in transport, and the launch of LEO
Express service was accompanied by a series of problems. Consequently,
its startup date was repeatedly postponed, and LEO Express
entered the line in January 2013 with new suburban electric
multiple units utilised for long-distance service. LEO Express intensified
competitive pressure by further reducing prices. Because
LEO Express was the last to enter the market, it experienced difficulties,
including in attracting customers on this competitive
market. LEO Express was also disadvantaged by the fact that it
owned only five multiple units without any operational reserves,
which compared with the much bigger and flexible fleets of RegioJet
and České dráhy caused problems in accommodating peak
demand and resolving occasional breakdowns.
The passenger railway transport in the Czech Republic between
Prague and Ostrava has undergone rapid development, which has
led to a unique situation: competition of three operators on the
same line, providing service without public subsidies. In addition
to quality improvement and a decline in tariffs, product differentiation,
innovative marketing strategies and legal disputes can
be observed. There is a close connection between open access
competition in the Czech Republic and emerging open access
competition in Slovakia on the Žilina–Košice main route, which
began in December 2014. All three Czech competitors have entered
this route against the incumbent Slovak Railways, connecting
its open access in the Czech Republic with the open access in
Slovakia (Prague–Ostrava–Žilina–Košice).
4. Market development
Open access competition had a profound impact on the development
of the passenger railway market on the Prague–Ostrava
Fig. 1. Main railway passenger lines in the Czech Republic.
Source: own elaboration based on SŽDC map.
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211206
route. We attempted to measure and analyse this impact, concentrating
on price competition, market share and product
differentiation.
4.1. Methodology
Regarding price competition, we sought to calculate the impact
of open access competition on the average prices for 1st and 2nd
class. Because there is a plethora of tariffs, we have chosen those
tariffs that were comparable for all operators and used by a majority
of customers. We have chosen the 4 most common tariffs
(regular fare, in-time booking, loyalty fare and in-time booking
together with loyalty fare). According to our estimates, these tariffs
cover approximately 85% of all the prices on the market. We then
calculated the weighted average of these prices to obtain the indicator
of average prices on the market. The weights were calculated
as shares of used tariffs among customers.
Another task was to calculate the estimated market shares of
the competitors. We began by calculating the total seat capacity on
the line from timetables, average number of coaches and average
seat capacity of coaches. We continued by adding the average seat
occupancy for every operator. RegioJet is publishing this indicator,
and it is possible to calculate it for LEO Express based on its data
on total revenue and revenue per passenger kilometre. The most
difficult task was calculating occupancy for ČD because it refuses
to disclose these data. We were able to utilise our own customer
survey for 2013 and ČD press reports to calculate these occupancies
for 2010 and 2013.
Lastly, we analysed product differentiation on the line, concentrating
on changes in service quality, travel times, choice of
departure times and frequency of service.
4.2. Price competition
The entries of private competitors triggered an intensive price
war on the Prague–Ostrava route. We collected data and calculated
average prices on the market and their spreads. The average price
was calculated as the weighted average of the prices of all three
competitors. We distinguished prices in the 1st and 2nd classes
and with and without customers' loyalty cards. We monitored the
period between September 2010 and 2014, and the average price
of the most common ticket (2nd class without loyalty card) fell
after the entry of RegioJet from CZK1
495 to CZK 404, after the
entry of LEO Express fell further to CZK 278, and dipped as low as
CZK 268 in September 2014. Therefore, the total drop in the price
of the most common ticket between September 2011 and September
2014 was 46%. In the following graph, we document the
development of average prices on the market and their spreads
(Fig. 2).
A long-term decline in average prices can be observed. Operators
occasionally tried to increase prices in some market segments;
however, pressure from competition quickly pushed prices
back down. There was a convergence of average ticket prices with
and without loyalty card, perhaps because as operators faced
growing competitive pressure, there was less room to offer better
prices to their loyal customers. The variability of prices remained
high throughout the entire period because private competitors
introduced the strategy of yield management through on-line
booking, and prices became more dependent on occupancy of the
trains and reservation dates. There was a significantly smaller
decline in prices in 1st class compared with 2nd-class tickets.
First-class service constitutes approximately 15% of the capacity
and 20% of the revenues of the market. However, the average price
in this segment stagnated in 2011–2013 and dropped slightly in
2014. However, the spread of prices increased enormously. In
September 2011, the average price in this category was CZK 748,
with spread of prices from 659 to 859; however, in September
2014, the average price was CZK 643 with price spread from CZK
295 to 999. This smaller price decline (À14%) can be explained by
different passengers being served by the 1st and 2nd classes.
Second class is used by price-sensitive customers (typically students)
who value new high-quality service; however, low price is
their main priority. First class is preferred by business travellers
who are more sensitive to quality and supply of additional service
and less sensitive to price. Therefore, 2nd class is typified by intensive
price competition, whilst 1st class is marked by competition
in quality. The significant drop in prices led to problems with
profitability for all three competitors. The prices on the Prague–
Ostrava route fell to CZK 78 (EUR 2.8) for 100 km, which is lower
than the average in the Czech Republic, and far under the levels in
Western Europe. All the competitors are struggling to reach the
break-even point; however, due to low ticket prices, diminished
economies of density, high costs of rolling stock and increasing
demand for quality on the route, it will be hard for any operator to
attain profit under these conditions.
RegioJet and LEO Express have been unprofitable operating the
Prague–Ostrava route, and they specified their losses in their annual
reports (Table 1). České dráhy declined to officially disclose
the data for the Prague–Ostrava route and claimed that they were
slightly profitable on the Prague–Ostrava line; however, it is not
possible to verify this claim from the annual report because ČD
published data on revenues and costs for all passenger traffic in
the Czech Republic without any separate specification of the
Fig. 2. Average price of basic (2nd class) one-way ticket on the Prague–Ostrava route (in CZK; weighted average of all operators).
Source: own calculation.
1
Czech koruna.
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211 207
Prague–Ostrava line. However, it is extremely improbable that the
incumbent's statement about the profitability on the Prague–Ostrava
line is true. ČD has a 66% share of public subsidies in its total
operating revenue and much higher unit costs than private operators;
as a result, it can hardly achieve profit on this unsubsidised
line when both more cost-efficient private operators
are heavily unprofitable. The public claim by České dráhy is
probably motivated by public relation considerations and by ongoing
investigation of competition authorities regarding its predatory
pricing.
4.3. Market shares
Before the entry of private operators, transport capacity on the
Prague–Ostrava route comprised 23 return trains per day, consisting
of 15 ČD IC trains and 8 ČD SC trains. After RegioJet entered
the route, there was an upward trend in the number of trains per
day, reaching 40 return trains per day in 2013. Exposed to growing
competitive pressure, ČD began reducing the numbers of trains in
its IC service in 2014, and therefore, the number of connections
dropped slightly that year (Fig. 3).
The higher frequency of service was accompanied by a decreasing
number of seats on an average train. ČD had operated
long IC trains (8–12 coaches) on the Prague–Ostrava when it was
the only operator. RegioJet began competing with shorter trains
(3–5 coaches); however, after successfully winning customers in
2012–2014, RegioJet began adding coaches, and ČD IC service began
to shorten its trains. ČD SC and LEO Express have fixed seat
capacity; therefore, they cannot so flexibly react to changes in
demand (Table 2).
The impact of open access on transport capacity is visible.
There is more daily service; therefore, passengers have a wider
choice of departure times and can choose among the services of
three different operators instead of the one that previously
provided service. However, these benefits for passengers come at a
price: The capacity of an average train decreased with an increase
in unit costs.
Furthermore, we sought to estimate the market shares of the
operators. To obtain data on the operators' performance is difficult
because the operators are declining to provide information due to
competitive pressure and the ongoing investigation by competition
authorities. Therefore, we had to estimate market shares from
total capacity and estimated average occupancy. RegioJet and LEO
Express have been publishing their train occupancy rates in their
annual reports, and RegioJet announced occupancy rates of 80% for
2011, 85% for 2012, and 92% for 2013. LEO Express announced 50%
occupancy for 2013. ČD has not officially published its occupancy
rates for 2013; therefore, we had to estimate them. Occupancy
rates for ČD in 2013 were estimated on the basis of our own
consumer survey and additional information on market development
on the route, and we estimate that both services SC and IC
have an estimated load factor of 40%. In 2010, ČD was still relatively
open, and it stated (České dráhy, 2010) that the average
occupancy rate of ČD SC service was 60%. The occupancy rate of ČD
IC service in 2010 can be inferred from a report of the Ministry of
Transport (2010) and stands at 40%. Therefore, ČD seems to have
stable occupancy rates; however, it has been reducing its number
of coaches and amount of service under competitive pressure.
Taking together transport capacity and operators' average train
occupancy rates, we estimated transported passenger-kilometres
on the Prague–Ostrava route (Table 3).
Based on these estimations, we estimate that the total market
on the Prague–Ostrava route grew by 40% between 2010 and 2013.
The new operators were highly successful in both winning ČD
customers and attracting new customers to rail transport by setting
lower prices and offering better quality. These new customers
were former car users and completely new travellers because bus
and air transport on the line had been negligible. It is possible to
calculate estimated market share from the estimated transported
volumes and to compare it with market share estimations from
other sources (Table 4).
The Ministry of Transport is compensating for lower tariffs for
students and pensioners. Operators are required to offer these
better tariffs, and the Ministry compensates them for the price
difference. From the total amount of compensation, it is possible to
calculate the operators' shares of the discounted tickets market,
which nevertheless may not precisely reflect the entire market
because of the following reasons. Firstly there is no guarantee that
the share of students and pensioners is the same across all three
operators. Secondly, both České dráhy and RegioJet were accused
of manipulating the numbers of students and pensioners in order
Table 1
Revenue and profits of operators in 2012–2013 (in millions of CZK).
Source: own elaboration based on annual reports of ČD (2013), RegioJet (2013), and
LEO Express (2013).
2012 2013
Revenue Profit Revenue Profit
České dráhy (ČD)a
19 500 À517 19 900 À1 795
RegioJet 246 À76 318 À93
LEO Express 7 À76 158 À159
a
The data for the entire Czech rail passenger network.
Fig. 3. Number of return trains on the Prague–Ostrava route (number of trains per day).
Source: own elaboration.
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211208
to increase compensations. Also LEO Express published its own
estimation; however, it did not include ČD IC service and may be
biased in favour of LEO Express. Thus, we believe that our estimation
of market shares is the most reliable.
4.4. Product differentiation
Before private operators entered the market, service on the
Prague–Ostrava route was clearly divided into two commercial
categories of ČD–SC and IC service. SC service once had luxurious,
fast and standardized trains targeting high-income customers,
whereas IC service was offered on a plethora of different types of
trains with variable quality and standards. The entrance of private
operators changed the market situation completely. RegioJet positioned
itself as a fashionable operator with standardized service
high above the quality of ČD IC service. LEO Express, disadvantaged
by being last on the market, had to offer further innovations
in services, especially in marketing, catering and online
reservations; however, the highly competitive and price-sensitive
market forced it to essentially rely on the strategy of offering low
prices. ČD had to react to the challenge of new operators and thus
substantially increased the quality and standardisation of its IC
service. IC service is also the only service on the route without
compulsory advance seat reservations. Both private operators initially
tried to compete with ČD IC service by offering higher
speeds and shorter journey times (they were unable to do so
against the faster ČD SC Pendolino service). However, the intensive
price war and unused capacity made LEO Express reconsider its
business strategy, and in 2014, the company again began calling at
medium-sized stations to reach additional passengers, although
this actually resulted in an increase in journey time (Table 5).
The fastest service on the route was ČD SC service, which has
the advantage of tilting Pendolino trains capable of achieving
higher travel speeds. The higher frequency of open access service
did not influence travel times significantly because long-distance
passenger trains have the highest priority in the allocation of
timetable slots in the Czech Republic. However, open access
competition is increasing congestion on this crucial line with
effects on the travel times of regional and freight trains (Tomeš
et al., 2014). The open access competition is also affecting the
timetable structure. Comparing departures from Ostrava before
private operators entered the route in 2010 with the situation in
2014, a different distribution of departure times can be observed
(Fig. 4). There was a significant increase in peak time departures
and a reduction in off-peak times (especially reduction of night
trains). The open access competition changed the structure of the
timetable from former regular tact interval (introduced by the
incumbent) to demand-derived timetable (induced by open access
competition).
5. Discussion
The theoretical models predict a price war as a result of headon
competition with a significant decline in market price. That
phenomenon occurred on the Prague–Ostrava line after the new
private operators entered it. Notably, the new private operators
seemed to be surprised by the swift and resolute reaction of the
incumbent in improving its service and especially in reducing its
prices. Both private companies have accused the incumbent of
predatory pricing, but the case still has not been resolved by the
competition authorities – if an affirmative decision is rendered, it
could lead to legal proceedings against the incumbent. Unfortunately,
being understaffed and having little experience with
competition in the network industries, the competition authority
is poorly equipped to resolve these cases; there is a clear need for a
specialized regulator.
Theoretical studies further predict that unless competitors have
the same cost structure, one of them will be forced to withdraw
from the market. The present situation is such that all the operators
operate at a loss, and none shows any intention of leaving the
market. The incumbent, which is highly dependent on public
subsidies, can hardly afford to leave the crucial railway market and
disclose its weakness. The annual reports of RegioJet and LEO
Express reveal that their direct costs of operation are probably
covered by revenues but not costs of invested capital. However,
rolling stock from Prague–Ostrava may have little alternative use;
consequently, there could be significant challenges to redeploying
it or selling it elsewhere. As long as operation is covering variable
costs, they may have incentives to remain in business.
Another question is why new private operators on this line
have chosen a strategy of head-on competition. It is noteworthy
that the new private operators did not choose the strategy of
Table 2
Total capacity on the Prague–Ostrava Route.
Source: own calculations based on timetables and zelpage.cz (ŽelPage, 2015).
2008 2009 2010 2011 2012 2013 2014
Average Number of Coaches Per Train 9.3 9.6 8.9 7.2 7.3 7.0 6.7
Average Number of Seats per Train 501 485 465 408 353 336 333
Total Daily Capacity (Number of Seats) 11,024 11,159 10,687 12,649 11,282 13,437 11,650
Table 3
Estimation of transported passenger-kilometres per day (in millions).
Source: own calculations from total capacity and average occupancy rates.
ČD SC ČD IC RegioJet LEO Express TOTAL
2010 1.1 1.9 – – 3.0
2013 0.7 1.2 1.6 0.7 4.2
Table 4
Market share estimations.
Source: own; Ministry of Transport (2013); LEO Express (2013).
ČD SC ČD IC RegioJet LEO Express TOTAL
2010 Our estimation 37% 63% — — 100%
2013 Our estimation 17% 28% 38% 17% 100%
Ministry of Transport 50% 35% 15% 100%
LEO Express 25% — 45% 30% 100%
Table 5
Average journey time from Prague to Ostrava (hours).
Source: own elaboration based on timetables.
2010 2011 2012 2013 2014
ČD SC 3:04 3:05 3:05 3:12 3:08
ČD IC 4:01 3:55 3:44 3:48 3:46
RegioJet 3:43 3:42 3:36 3:31
LEO Express 3:16 3:31
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211 209
cherry picking, duplicating only the most profitable service (rush
hours, Fridays, Sundays). There are three interconnected reasons
for their choice. First, it is difficult to organise peak time service
only due to the necessity of circulating train units. Second, the
marginal costs of running additional trains during saddles are low
due to low infrastructure charges. Finally, the new private operators
were optimistic about their chances of success against the
incumbent.
It is important to properly clarify the role of the state and the
state-owned incumbent in a newly liberalised environment. The
state is forced to perform many conflicting roles. As the owner of
the incumbent, it has an interest in the best economic results;
however, by liberalising the sector and enabling open access on
the most profitable line, the state is harming the economic prospects
of the incumbent. The coexistence of commercial open access
and subsidised PSO services in the rest of the network is
uneasy.
The situation in the industry is complicated by non-existence of
a dedicated industry regulator that could effectively resolve frequent
disputes among open access competitors. This regulator
should be not only independent but also capable of resolving these
thorny issues with sufficient speed. The competition authority,
which is empowered to resolve these issues in the Czech Republic,
is not ready to resolve such specific cases, and its many years
contemplating the verdict increases the anxiety of operators on
the Prague–Ostrava line. The inactivity or inability to resolve these
cases is imposing costs on all parties, and private competitors are
threatening to sue the incumbent for anticompetitive behaviour
and the state authorities for inactivity. Due to incomplete vertical
separation in the Czech Republic (Tomeš et al., 2014), control of
railway stations, depots and washing facilities stayed with the
incumbent who makes it hard for the newcomers to use them.
This is a fact that does not make the situation of open access operators
any easier. A partial solution to this situation lies in
transferring ownership of railway stations from the incumbent to
the infrastructure manager that should happen in 2016. In spite of
that, however, it is still hard for newcomers to access other facilities
under incumbent's control (depots, washing facilities) and
they are forced to costly build up their own facilities. The solution
could be as follows: some of these facilities would be under control
of the infrastructure manager, with access rights for all operators
or stronger role of the independent regulator who could
force the incumbent to allow access for other operators under fair
conditions.
6. Conclusion
The Prague–Ostrava route is a major railway connection in the
Czech Republic with high passenger demand due to low intermodal
competition. Until September 2011, service on this route
was operated solely by the incumbent. However, in September
2011 and January 2013, two private entrepreneurs began their
operations, which resulted in the unique competition of three
operators on the same route. Simulation and theoretical studies
predict that such competition will lead to an intensive price war,
market dynamics and product differentiation. The development of
the Prague–Ostrava route is broadly consistent with the predictions
of these studies. The prices of the most common tickets fell
by 46%, and the fall was most intensive immediately after the first
private operator had entered the route. The fall of prices was less
significant in 1st class; however, price competition increased the
spread of prices in both classes substantially. All three operators
are currently unprofitable on the line; nevertheless, none shows
any intention of leaving the market. This may change in the future
when financial pressures on LEO Express or pressure from the
competition authority on ČD may influence the competitive situation
on the route. In addition to the decrease in prices, service
quality has improved substantially. Strong development in innovative
selling and pricing strategies has been recorded. The
number of direct connections during rush hours has doubled;
however, the number of evening and night connections has declined.
The average number of seats per train has declined significantly
at all times. After the emergence of open access competition,
a strong trend of price differentiation between peak and
off-peak fares appeared. The average occupancy rate is high but
with high fluctuations among departure times and operators.
However, cream skimming in the form of concentration on only
rush hour departure times has not been reported, probably due to
short travel times and the operational necessity of utilising rolling
stock. The entry of private operators brought about a massive increase
in quality, standardisation and innovation in services. The
intensive price competition is forcing all three operators to seek
continuous innovation in their services. The development of open
access passenger rail competition is complicated by the non-existence
of dedicated regulator. Sharp competition of operators
leads to many disputes regarding access rights, anticompetitive
behaviour and predatory pricing. The competition authority seems
unable or unwilling to deal with such specialized case; therefore,
there is a need for a dedicated industry regulator that would be
capable of resolving many emerging competition issues.
Acknowledgements
This research has been supported by the Technological Agency
of the Czech Republic grant TD0-10063 and by internal grants of
Masaryk University, 1148/2014 and MUNI/A/0997/2015.
Fig. 4. Number of Passenger Trains Departing from Ostrava to Prague on Weekdays (number of trains per hour).
Source: own elaboration based on timetables.
Z. Tomeš et al. / Transport Policy 47 (2016) 203–211210
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