Regulatory approaches to rail competitive entries

Abstract

This paper reviews the regulatory approaches to open access passenger rail competition. This kind of competition has developed substantially in the EU during the past decade. There have been major entries into the national main lines in Italy, Austria, the Czech Republic, and Sweden. These entries have been very popular with passengers and rail ridership has gone up substantially. However, there have also been costs to these entries. The operations of the new entrants are diminishing economies of density, leading to higher unit costs. Further challenges include cherry-picking behaviour, scarce infrastructure capacity, tariff disintegration, and long-term sustainability. The major question is whether the social benefits outweigh the costs. This paper aims to review emerging evidence in the field of open access entries and approaches to their regulation. The scope of this paper is open access passenger rail entries in Europe after 2000 with a particular emphasis on the major entries that took place in Italy, Austria, the Czech Republic, and Sweden after 2011. The contribution of this article to the existing literature is threefold. Firstly, it provides an up-to-date review of open access entries in Europe. Secondly, it combines the results of simulation studies with empirical evidence to provide an overview of market impacts. Lastly, it reviews the spectrum of regulatory approaches.

Keywords

competition incumbents railway regulation policy

Introduction

Open access entries have developed in the EU over the past decade. Major entries of new operators on main European lines has occurred on Milan–Rome (from 2012), Vienna–Salzburg (from 2011), Prague–Ostrava (from 2011), and Stockholm–Gothenburg (from 2015). Unlike previous niche market entries in Germany and the UK, these entries were major attempts to challenge the incumbent on the main passenger line in the country. These attempts were dedicated entries, and they have brought significant benefits to customers in the form of reduced fares, increased frequencies, and product innovations. These market impacts made them popular with the public and with some authorities. Some of these authorities (EC 2011; Competition and Markets Authority [CMA] 2016) have even advocated for a higher role for open access in revitalising national rail markets. However, there are also costs to open access entries. The operations of new operators may diminish economies of density, leading to higher unit costs. Further challenges include cherry-picking behaviour, scarce infrastructure capacity, tariff disintegration, and long-term sustainability of operations. Therefore, it is not entirely clear whether the benefits of open access entries outweigh their costs.

This paper aims to review emerging evidence in the field of open access entries and approaches to their regulation. The scope of this paper is open access passenger rail entries in Europe after 2000 with a particular emphasis on the major entries that took place in Italy, Austria, the Czech Republic, and Sweden after 2011. The contribution of this article to the existing literature is threefold. Firstly, it provides an up-to-date review of open access entries in Europe. Secondly, it combines the results of simulation studies with empirical evidence to provide an overview of market impacts. Lastly, it reviews the spectrum of regulatory approaches. The structure of this paper is as follows. It starts with a review of relevant theoretical concepts and simulation studies that reveal how fixed costs and economies of densities are essential for assessing open access competition. It follows with a review of emerging evidence on the major open access entries in Europe over the past 20 years. After that, a more detailed discussion of regulatory approaches is presented. Finally, it emphasises the crucial role of regulation to guarantee that the benefits of open access competition outweigh their costs.

Theory and simulation studies

The impact of open access competition on the development of railway markets had been analyzed even before it emerged in real markets. After the development of open access competition in real markets, there was a second wave of interest in theoretical and simulation studies. They tended to cover aspects that were hard to analyse on real data due to commercial sensitivity. This chapter reviews firstly theoretical investigations and then simulation studies.

Theoretical investigation

Competition is expected to have beneficial impacts on the efficiency of markets, and open access competition is a direct attempt to bring competition into the provision of passenger rail services. We could expect lower fares and better services when competition enters formerly monopolistic markets. So what could potentially be wrong with the impact of competition on the efficiency of rail markets? There are at least three reservations that may significantly complicate the beneficial effects of competition on railway markets. These are (Preston, 2012): barriers to entry and exit (due to sunk costs), economies of density (splitting loads leads unit costs to rise), and the multi-product nature of the industry (leading to various network economies).

The importance of these factors for railway markets has been investigated in several theoretical studies. Ivaldi (2005) analysed the model of open access competition. From his investigation, the following conclusions were derived: 1) because of economies of density, price competition that significantly increases traffic may be an extremely profitable strategy; 2) stable on-track competition may often not be viable (one of the operators has to withdraw); 3) operators seek ways to soften competition by differentiating their product; 4) the lower the costs of the entrant, the more intensive the price competition is; 5) where there is strong connecting traffic, there are fewer cherries to pick; and 6) non-transferability of tickets can be an attractive strategy due to the Mohring effect.

Ivaldi and Seabright (2003) developed a model where price competition in the rail industry with homogenous services triggers a price war and erodes profits. Depending on the efficiency gap, different entry scenarios are possible. If entry costs are non-negligible, then social welfare may not always be improved with entry. As for entries, Mankiw and Whinston (1986) suggested that in markets with a homogenous product, imperfect competition, and business-stealing behaviour, there may be a tendency for excessive entries that are not socially desirable. Therefore, in homogenous markets, entry restrictions may be socially desirable. However, the introduction of product diversity can reverse the bias towards excessive entry. Button (2003) investigated the possibility of the existence of an empty core in scheduled transport markets. He argued that the need to offer a scheduled departure imposes a fixed cost that cannot be fully recovered in competitive and possibly contestable conditions. Specifically, in the presence of a minimum efficient scale and free entry, no equilibrium will exist. As long as the new entrant can attract sufficient business by cutting its price, the market price cannot be sustained above the minimum average costs (Button, 2005).

Railways are typified by a high amount of sunk costs. These investments have few alternative uses and therefore railway firms can be captured in intensive price wars because firms may have significant difficulties in exiting the market. Further costs to open access operations include the loss of economies of density and network economies. The principal question is whether these costs to competition entry are higher or lower than their benefits. This question has been investigated in several simulation studies, which are reviewed in the next section.

Simulation studies

The first study within open access modelling was Preston et al. (1999), which developed a simulation model and tested it on a British inter-city route. The results of this modelling exercise suggest that the emergence of some competition is likely, but it is unlikely to promote economic efficiency unless it leads to costs reductions and/or product differentiation. In the detailed investigation, it turned out that entry based on cream-skimming and fare reduction was profitable but did not increase social welfare. Head-on competition was feasible when the entrant was charged only marginal costs for infrastructure provision. In total, open access competition increased benefits to users but usually reduced welfare because of a greater reduction in producer surpluses. This analysis was further developed in two subsequent papers. Preston (2009) applied this simulation model to lines in the UK and Sweden. The results suggest that in the UK, with high infrastructure charges, head-on competition is not commercially feasible; however, cream-skimming with a concentration on peak times and directions and/or niche market entry with product differentiation could be commercially feasible. In contrast, in Sweden, with a lower level of infrastructure charges, head-on competition may be commercially feasible on the busiest lines, if there is capacity. Johnson and Nash (2012) investigated the implications of open access for an international route with a strong domestic market. The results suggest that open access has benefits to customers, but it would be hard for the newcomer to achieve profitability. One way to do so would be to decrease infrastructure charges; however, this would required increased subsidies for the infrastructure manager, and it is not clear whether competitive tendering would not be more effective in delivering competition. From these British studies, three broad conclusions emerge: (1) cream-skimming entry is the most likely scenario, with head on entry expected only on the busiest routes; (2) major entries usually lead to an excessive level of services and costs that more than offset benefits to customers; and (3) the results are heavily dependent on the level of infrastructure charges.

In contrast to these three studies, a study by Broman and Eliasson (2019) used a stylised simulation model to study how open access affects market conditions. They concluded that aggregate social welfare increases when going from a profit-maximising monopoly to duopoly competition. In their simulation, consumers’ gains were higher than the falls in operators’ profits. At equilibrium, one operator had a higher frequency and higher fares than the other. The authors claimed that the model parameters were calibrated to resemble the Stockholm–Gothenburg rail line. However, their specification of demand and cost functions implies huge monopoly profits prior to the entry of new operators.

These reviewed studies simulated open access competition in the context of intramodal competition. There is another group of simulation studies that has analysed it in the context of intermodal competition. These studies came to the following conclusions. Ivaldi and Vibes (2008) developed a simulation model to analyse inter- and intra-modal competition based on game theory. In this model, consumers choose a mode and operators strategically decided on prices. The results indicated that prices went down in all alternatives, particularly for the rail incumbent. All incumbents lost traffic, and consumer surplus rose by a considerable amount. Cherbonnier et al. (2017) built upon this model and analysed net gains and trade-offs in implementing rail competition for the market and in the market. They concluded that the effects of opening up competition for the market are relatively predictable and potentially positive; however, those of opening up to competition in the market remain very uncertain. Alvarez-SanJaime et al. (2015) introduced a simulation model with the presence of a private and public operator that was calibrated by Spanish high-speed rail. The results indicated that entry was found to be welfare improving only when it generated significant increases in traffic. Otherwise, losses would materialise even though the entry led to some efficiency gains. Alvarez-SanJaime et al. (2016) confirmed this basic result and emphasised the importance of infrastructure charges in determining the results.

To summarise the simulation results, the common conclusion of these modelling exercises is that head-on entries are often unprofitable. Sometimes they are profitable, their profitability depending on the level of access charges and traffic generation. However, even in situations where the head-on entries are profitable, they are usually not welfare improving. The losses on producers’ surplus are greater than consumers’ benefits, and only an extremely high increase in ridership can guarantee socially beneficial results. However, there are three limitations concerning these studies (Preston, 2012): 1) it is assumed that firms already cost-efficient; 2) dynamic efficiency is ignored; and 3) uniform pricing is assumed. However, it must be acknowledged, that the recent modeling studies are more optimistic about the benefits of open access competition. It may reflect the fact that, based on the experience of actual entries, the potential for high increases in ridership was realized and built into modeling assumptions.

Empirical evidence

For a long time, the analysis of the impact of significant open access entries on the development of railway markets was confined to theoretical and simulation studies, because real-world examples were limited to niche market entries. However, after 2011 significant open access entries happened on main railway lines in several European countries.

Italy

The most visible example of open access competition is Italy. It is the most intensive case and, at the same time, the only case where the entry occurred on a high-speed rail network. The history of entry began in 2012 when the privately owned NTV entered the Italian rail market on the Milan–Rome main line against the vertically integrated and state-owned incumbent Trenitalia. The market impacts of this entry were summarised by Bergantino (2016). She noted that the growth in ridership on the line between 2011 and 2016 was 40%. The sources of this higher patronage were partly induced demand and partly passengers from airlines. The market share of NTV was 26% in 2016. As for price development, Bergantino argued that Trenitalia employed a strategy of pre-entry deterrence and decreased prices prior to the entry of NTV by 31%; however, there was no further price war after the entry. There has been an increase in the supply of high-speed services, but also a substantial decline in conventional services. The visible result of competition has been significant improvements in service quality, and quality competition is a notable feature of the situation on this line (Bergantino, 2016).

More recent research has concentrated on price developments. Beria and Bertolin (2019) argued that, quite surprisingly, rail lines with competition in Italy have higher fares than lines without competition. They explained that lines under competition are usually the top lines, and the operators can extract rents from these top services. The fares on the route are therefore determined not only by the intensity of competition but also by passenger volumes, load factors, fidelity programs, and yield management. It was also observed that the incumbent had higher prices than NTV did (Beria and Bertolin, 2019; Bergantino, 2016). The question of who is the price leader and who is the follower has been investigated by Bergantino et al. (2018). They concluded that Trenitalia was the leader and NTV the follower.

The complex Italian case creates significant challenges to the quality and intensity of regulation. Bergantino (2016) documentes that a new regulator was established in 2014 and that it was a real change in regulatory practice in Italy. The new regulator decreased infrastructure charges by 30% and dealt with many disputes between NTV and Trenitalia. The regulatory design and practices were also analysed by Desmaris and Croccolo (2018). They concluded that regulator behaviour was motivated very much by pragmatism and not by sophisticated economic theory. They also questioned the financial sustainability of the NTV business model. The other crucial regulatory challenge is the coordination of public and commercial services inside one rail network (Beria and Bertolin, 2019).

Austria

Another intensive open access entry took part in Austria when in 2011 the privately owned WESTbahn entered the Vienna–Salzburg main line. WESTbahn approached the market with fares that were 50% of the incumbent’s fares. This step provoked a response from the incumbent ÖBB, who started to offer heavily discounted tickets on the line. The start of operations was not very successful from the newcomer’s point of view, and it reported significant losses. A substantial change in the development of the Austrian open access case was the decision of WESTbahn to significantly increase frequencies in 2018. WESTbahn started with 29 services per day in 2011, and this rate was stable over the period of 2011–2017. In 2018, WESTbahn increased its frequencies to 58 per day, doubling its services. As soon as 2019, WESTbahn announced that in 2020 the frequency would be cut in half again.

Czech Republic

The Czech case has been interesting due to the fact that there has been not only one newcomer, but two of them. The competitive history began in 2011 when the main line between Prague and Ostrava was entered by the newcomer RegioJet. It challenged the incumbent České dráhy with improved quality of rolling stock and significantly lower fares. The incumbent retaliated, and the result was a short but intensive price war (Tomes et al. 2014). The intensity of the competitive struggle intensified in 2013 when the second private operator Leo Express entered the same line. Its entrance has led to a further decline in fares. The total fall in fares between 2011 and 2014 was 44%, and the combined market share of the two private operators reached 59% in 2014 (Tomes et al., 2016). The second phase was an overflow of competitive struggles into neighbouring countries. In particular, RegioJet was active in prolonging its open access lines from the Czech Republic into Austria and Slovakia (Tomes and Jandova, 2018).

Sweden

The competitive situation in Sweden had long been characterised by small-scale niche market entries (Froidh and Nelldal, 2015). However, the situation changed significantly in March 2015 when the Hong Kong-based private entity MTR entered the Stockholm–Gothenburg main line with seven services per day against the state-owned incumbent SJ. It was a significant increase in supply because SJ had run 18 services a day on this line. Vigren (2016) documented that MTR prices were 25% lower than those of SJ. As a result of the competition, prices on the line went down in the period of 02/2015–06/2016 by 13% (Vigren, 2017). The entry occurred on the Swedish main line, connecting two major agglomerations. Vigren (2017) stated that this line used to be the most profitable line for the incumbent. After the entry, MTR complained of discriminatory practices by SJ. One very significant effect came from a unique selling platform owned by SJ, which had not enabled access to MTR, which was perceived as a substantial barrier to entry (Vigren, 2016).

UK

The open access entries in the UK are strongly regulated, and to be approved they must fulfil two conditions (Nash, 2016): 1) they must be not primarily abstractive, and 2) capacity must exist. Due to this strong regulation, out of 19 applications, only four have been approved (CMA, 2016). Currently, only two are running – Hull Trains and Grand Central – and their share of total passenger-kilometres used to be less than 1% (CMA, 2016). Where allowed, however, open access competition can have a significant impact on the market. Griffiths (2009) reported that for open access lines, frequency increased by 9–100%, prices went down by 11–32%, and ridership went up by 10–100%. Temple (2015) compared stations with and without rail competition and reported that stations with competition saw faster growth in ridership (42%–27%) and revenue (57%–47%) but slower increases in yield (11% compared to 17%) relative to those where there was no competition. The passenger benefits of open access competition have stimulated a discussion in Britain, and the CMA report (2016) advocated for an increased role for open access in the British system, although some reservations remain (Nash, 2016).

Other countries

Germany liberalised its railway market very early, and since 1994 both passenger and freight operators can freely enter the rail market (Link, 2012). Despite this, the actual competition in the passenger market is very limited, with only a few niche market entries. The failure of open access operators to enter the German market was analysed by Seguret (2009). The rail market in France has been closed to open access competition due to formal restrictions. These will soon be lifted, although further barriers include high access charges and the lack of available capacity on the best routes (Nash et al., 2019). Because of this, the only case of competition in France can be found on the international Marseille–Milan line, which is operated by Thello and on the French side is competing with the services of SNCF.

Open access entry in Poland has been analysed in Krol et al. (2018). The authors investigated on-track competition involving two publicly owned operators on many intercity routes in Poland. The competitors were the incumbent PKP and the regionally owned PR. Underfinanced and neglected, PR made a curious attempt to win the market and revenues on the long-distance market by offering low cost, low quality services appealing to price-sensitive customers. The attempt was running between 2009 and 2015, and it subsequently collapsed under the pressure of commercial mistakes and political pressure (Krol et al. 2018). Krol et al. (2019) analysed minor cases of open access competition in Poland, which have tended to concentrate on small-scale niche market entries. They are usually tolerated by the incumbent and regulatory authorities. An interesting development is offered by the experience with open access entries in Slovakia. It started in 2014 when the intensive competition in the Czech Republic overflowed into the country and intensive competition began on the Bratislava–Žilina–Košice main line (see Masek et al., 2016, Tomes and Jandova 2018, Kvizda and Solnička 2019, and Desmaris & Croccolo, 2018). The intensive entry of (foreign) rail operators provoked a strong reaction from the national authorities, which introduced free tickets for pensioners, children, and students on the incumbents’ public-service obligation trains in an attempt to help the incumbent to repulse the competitive attack. This strategy partly succeeded when RegioJet left part of the market, but it still remains present on the part of the main line. Some entry happened also in Romania, where on the Bukurest–Brasov main line the incumbent CFR was challenged by the newcomers Astra and Softrans. An important international operator started to be Flixtrain with operated lines in Germany and Sweden. In Spain, there has been an interesting combination of open access limited to duopoly by directed competition as described by Montero and Ramos Melero (2020)

Synthesis

Based on the empirical overview, it can be inferred that there exist two different types of open access entries in contemporary Europe. These are intensive and niche market entries. The intensive entries are typified by dedicated entry on the market with the explicit aim to gain substantial market share. These entries are typified by high frequencies, comparable quality, and an aggressive price strategy. These kinds of entries have been possible to observe in Italy, Austria, the Czech Republic, and Sweden. Their impacts on rail markets have been significant, and they usually provoke a strong response from the incumbent (see Table 1).

Table 1.

Types of open access entries.

Country	Route	Competitors	Market share – new operators (2018)	T, %ype of entry
IT	Milan–	Trenitalia	31	INTENSIVE
IT	Rome	NTV	31	INTENSIVE
AT	Vienna–	OBB	49	INTENSIVE
AT	Salzburg	Westbahn	49	INTENSIVE
CZ	Prague–	ČD	42	INTENSIVE
CZ	Ostrava	RegioJet, Leo Express	42	INTENSIVE
SE	Stockholm–	SJ	26	INTENSIVE
SE	Gothenburg	MTR	26	INTENSIVE
UK	East Coast main line	LNER	12	NICHE
UK	East Coast main line	Hull, grand central	12	NICHE
DE	Hamburg–	DB	9	NICHE
DE	Cologne	Flixtrain	9	NICHE
FR	Marseille–	SNCF	6	NICHE
FR	Nice	Thello	6	NICHE
PL	Katowice–	PR	14	NICHE
PL	Krakow	PKP, LE	14	NICHE
SK	Žilina–	ZSSK	21	NICHE
SK	Košice	RJ, LE	21	NICHE
Ro	Bucharest–	CFR	20	NICHE
Ro	Brasov	Astra, Softtrans	20	NICHE

Sources: IRG (2020), Tomes and Jandova 2018 – Slovakia.

The second type is niche market entries, which are generally typified by low-frequency and low-cost entries. They occur on the market margins, and they can sometimes be viewed as a complement to existing incumbent services. Due to their limited scope, they are not considered a significant threat to the incumbent, and they have usually been met with mild or even no reaction from the incumbents. Due to their limited nature, they have limited impacts on the rail market. They typically improve the current state of the market; due to their limited scope, however, they constitute little opportunity or threat to the market.

Economics of intensive open access entries

The empirical analysis revealed that there are two types of entries: intensive and niche. Only the former has significant impacts on the rail market, and these entries have developed mainly in Italy, Austria, the Czech Republic, and Sweden. In this chapter, the economics of the intensive entries is investigated.

Frequencies

The new entrants typically offered a significant number of departures and the incumbents usually did not reduce their frequencies. As a result, the total number of departures on the line went up sharply. This means that for the average traveller there are more choices in departure times and lower effective waiting times for the nearest departure (see Table 2).

Table 2.

Weekly train frequencies of operators in 2018.

Milan–Rome	Vienna–Salzburg	Prague–Ostrava	Stockholm–Gothenburg
Trenitalia: 840	OBB: 420	České dráhy: 370	SJ: 310
NTV: 540	Westbahn: 406	RegioJet: 152	MTR: 108
NTV: 540	Westbahn: 406	Leo Express: 112	MTR: 108

Source: IRG Report 2020.

Fares

Higher frequencies have increased seat capacity and intensified the competition struggle. The new operators needed to fill their capacity and win sufficient market share. Therefore, especially in the first part of the competition struggle, sharp price competition was the usual scenario. All newcomers entered the market with lower prices than the incumbent. This aggressive pricing policy usually provoked the incumbents into retaliation with some preferential price offers, and so the average fare level on the lines under competition usually went down significantly (see Table 3).

Table 3.

Average change in fares and ridership between 2011 and 2016.

	Milan–Turin	Vienna–Salzburg	Prague–Ostrava	Stockholm–Gothenburg
Fares	−31%	−25%	−44%	−13%
Ridership	+74%	+25%	+92%	n.a

Sources: Milan–Turin: Bergantino (2016); Vienna–Salzburg: Pfeiler (2016) and Tomeš – Jandová (2018); Prague–Ostrava: own elaboration; Stockholm–Gothenburg: Vigren (2016, 2017)

The higher frequencies and lower fares attracted ridership. The ridership on the attacked lines went up substantially. In quantifying these impacts, however, it is necessary to be cautious. It is not clear how much of these changes were actually caused by the effects of open access competition and how much these ridership changes were caused by the other factors. In addition, it is not clear how much of this increase has been attracted from other modes of transport and how much is completely new. These topics are potentially fruitful for further research.

Quality and innovations

Despite the impressive impacts from intensive entries on capacity, fares, and ridership, arguably the most dramatic impact of these entries has been on innovations on the line. The entry of newcomers brought about completely new models of operations. They introduced dynamic pricing, new services, discounts, further connections, and many connecting and upgrade services. Moreover, their impact on the behaviour of the incumbents was also very important. The incumbents, which in all four cases were state-owned incumbents, were forced quite forcefully to improve their services and to react quite swiftly and with determination to repel these vigorous attacks. They also had to significantly improve the quality of their services and started to be much more reactive to the demands of customers. In a larger sense, it can be argued that the entry of newcomers disciplined the behaviour of the incumbents and forced all players to unveil the hidden potential of the lines. This effect can be arguably viewed as the biggest benefit of open access competition on the main lines.

Profitability

The open access main lines saw substantial growth in ridership. At the same time, however, fares went down and so revenues increased only mildly or even stagnated. Together with high costs of entry, this led to the situation that in the first years of entry almost all new operators were struggling with negative profitability. After a few years, the situation has improved, with especially NTV and RegioJet able to break into positive numbers, but the financial conditions of Westbahn and Leo Express are still not good. The financial results for MTR from open access operations in Sweden are not known. An even bigger unknown is the impact of open access operations on the profitability of the incumbents. All state-owned incumbents are fiercely refusing to publish separate data about their open access operation revenues and costs, making it hard to assess them. More research is needed to clarify the actual impacts of open access competition on the efficiency of these markets.

Regulatory challenges

There were differences in the development of regulatory capacity among the forerunner countries. Sweden chose a gradual approach to market liberalization and the development of competition was slow. The regulatory body therefore had time to prepare for the new situation. On the other hand, the swift development of on-rail competition in Austria and the Czech Republic caught the regulatory authorities in these countries unprepared (Tomes and Jandova, 2018). For a long time, the markets in these countries were dominated by the incumbent and strong external regulation was not necessary because many regulatory tasks were done internally, inside the incumbent’s structure. The dedicated entries of private operators changed this situation almost overnight and the regulatory capacities were not prepared to be responsible for dealing with complex competitive issues (Tomes et al., 2020).

An important factor is the structure of the industry. Sweden, the UK, and the Czech Republic have a completely vertically separated structure and Italy, Austria, and Germany have retained vertical integration. Although, the empirical evidence that a vertically separated structure promotes competition, efficiency, or ridership is not particularly strong, operators in countries with a vertically integrated structure have voiced a great deal of concern about potentially discriminatory behaviour from the incumbents. However, it is not easy to disentangle what is a legitimate complaint and when the new operators are complaining about intensive but principally fair competition. The usual quarrels have been about accessing platforms, stations, and, in the Swedish case, ticket platforms. Rolling stock can be an obstacle for some entries because for most of the market the incumbent is the owner of all existing rolling stock and the new operators must bring their own.

Liberalized countries differ strongly in their approach to the set-up of access charges for the use of rail infrastructure. Some of them have low infrastructure charges, which is beneficial for the development of open access competition. For the strongly liberalized countries, low charges are typical for Sweden and the Czech Republic. Sweden has very low charges due to policies that promote rail over road. The Czech Republic has low charges on passenger trains, but significantly higher charges for freight trains. These low charges were undoubtedly a factor in promoting rail competition, as was also the case in Italy when, in 2014, the charges were strongly decreased to stimulate rail competition. On the other hand, high charges are typical for Germany, the UK, and France, which is a very strong competitive barrier. Clearly there is a dilemma (Crozet & Chassagne, 2013) between the goal of competition promotion (low charges) and the requirements for the financing of expensive rail infrastructure (high charges).

A connected issue is the system for allocating infrastructure slots to competing operators. Capacity is mainly allocated on priority rules that aim to reach consensus. The priority rules are defined differently in different countries and are operated by different authorities. Ait and Eliasson (2021) claimed that it is strange that auctions are not used more in allocating available paths because they could strongly enhance the efficiency of the process.

A further challenge for the open access entries is the infrastructure capacity on the main lines. The attacked lines are usually the main railway lines in the country with a dense mix of long-distance, commuter, and freight traffic. However, the open access entries are increasing strains on scarce infrastructure capacity. The capacity is limited especially around big agglomerations, where significant bottlenecks have emerged. Problems have been reported for commuting and freight trains in obtaining good infrastructure slots as a result of the growth in open access services (Tomes et al., 2016). A system of infrastructure access charges could be designed to allocate the capacity efficiently. However, this is very seldom the situation. Moreover, the access charges in Sweden and the Czech Republic were low even prior to the start of open access operations. The regulatory authorities in Italy and Austria decreased access charges recently to stimulate competition.

An important factor in determining the room for competitive entries is the scale of commercial services on the market. The scale is quite limited in small countries such as the Czech Republic and Austria, where only one line is commercial (Prague–Ostrava; Vienna–Salzburg) and the rest of the network is organized under a PSO system, usually with direct awards to the incumbent. In this system, a commercial entry to the PSO can occur, but it either has not (Austria) or did so only in one isolated case (Prague–Brno). There is a similar situation in Sweden where there can be commercial entries alongside PSO routes, but they tend to be rare. A greater scope for commercial entries seems to be present in bigger countries such as Italy, where HS network services are commercial, and Germany, where all long-distance services are operated as commercial. However, the level of entry is very different, which is probably determined by the different level of access charges. The countries also differ in their requirements to apply an equilibrium test when commercial services enter alongside a PSO. Austria and the Czech Republic have not required such tests, while Italy and the UK have.

A typical feature of intensive entries on the main lines has been that they concentrated on the most lucrative part of the network. The newcomers had no interest in entering the less attractive parts of the networks. This can create two kinds of problems. First, even in the world of purely commercial services, if there are network economies, this cherry-picking behaviour can complicate their realization. The second problem arises when many of the services in the network are operated as PSOs. The entry of newcomers reduces potential profits on the main lines, which have arguably been used to cross-subsidise loss-making services in the rest of the network, and the net result is a rise in the subsidies to be paid by taxpayers.

In opposition to the purely commercial view of railway services as single-line business cases is the more integrated view of network services that stress the need for and utility of unified tariffs, timetables, and public services. The entry of open access operations put these systems under pressure. Some countries (e.g. Austria, the Czech Republic, Switzerland) have organized their timetables in long-distance transport according to the principles of periodic timetabling. The introduction of open access services disrupts the logic of these principles (Smoliner, 2019). Balancing these conflicting demands is not straightforward and crucially depends on the slot allocation system in the country.

The entry of new operators has brought about dynamic pricing and more diverse business models. This development puts pressure on the incumbents, who are forced to react and improve their behaviour, which had often been far from effective. The combined efforts of newcomers and incumbents can lead to the true revitalisation of rail transport. The new image of rail competition and improved services has been covered mainly in national media. This development may be especially important in post-communist countries where the services of the incumbents used to be weak and the new entries brought completely new quality into the provision of rail services (Tomes and Fitzova, 2019). Another effect is the pressure on the government to improve infrastructure, decrease access charges, and pay for its public service obligations. In this way, new public money can be channelled into the rail markets. It is also essential to utilise new market opportunities and seek innovative solutions (e.g. a rail–bus network). These opportunities may be seized by both newcomers and incumbents and can help to revitalise rail markets. In addition, it may be essential to overcome the rigid national structure of rail markets (present at least in Central Europe), where due to the effort of some new operators (in particular RegioJet), new international connections were created. Through these efforts, not only public but also private capital is attracted to the business of providing rail services.

Furthermore, if open access competition is allowed, it usually pays off to have some entry checks to block opportunistic cherry-picking behaviour and ensure that the entry does not have only an abstractive (business -stealing) nature. In addition, the issue of infrastructure capacity should be monitored closely. Intensive open access entry on main lines has the potential to fill capacity. An effective and incentivised regime of infrastructure charges and balanced priority rules are very necessary when the open access entries arrive on the market.

The COVID-19 crisis has brought about dramatic changes to the rail industry. During the crisis, ridership in trains has dropped to extremely low levels. In reaction to this development, many incumbents and newcomers have reduced the number of departures per day. The drastic fall in demand has caused significant financial troubles for all operators. Small private operators are particularly vulnerable in that they may have much lower reserves than state-owned incumbents. The majority of private operators have reported problems. The COVID-19 crisis may be the most severe test for the endurance of private operators, given their shaky economic results even before the crisis. An innovative solution during the crisis was adopted in Austria when the commercial Vienna–Salzburg line was transferred for 3 months into emergency public-service obligation services with both OBB and Westbahn participating in the scheme. There are also calls for a decrease in access charges and an increase in subsidies, but it is not clear how these will be financed.

Conclusions

Open access passenger rail competition used to be confined to niche market entries, especially in the UK and Germany. Over the past decade, however, intensive entries took place on the main rail lines in Italy, Austria, the Czech Republic, and Sweden. Unlike niche market entries, these intensive entries have had significant impacts on the development of rail passenger markets. They have brought both substantial benefits and costs. The major benefits have included increases in supply and capacity, declines in fares, and many service innovations. This development was very popular with passengers, and ridership went up significantly. The improved services and higher ridership stimulated hopes that open access entries may be the way to revitalise the passenger rail industry. An additional attraction was that these entries were financed by private capital and did not seem to require any additional public money.

However, there have also been significant costs to open access entries. The higher frequencies have often led to the replacement of longer trains by shorter trains causing a loss of economies of density. Low fare prices and high entry costs have caused problems with profitability for open access operations, raising questions about long-term sustainability. These entries have also created strains on infrastructure capacity, especially around big cities. The operators concentrated on the best routes and best times, which makes the issue of cherry-picking very acute. The final problem is the disruptive impact of open access operations on the integration of tariffs and services in networks where public-service obligation services dominate.

The principal question is whether the benefits are higher than the costs. The answer based on static evaluations in simulation studies is that the costs usually outweigh the benefits. In real markets, however, the dynamic nature of competition can reverse this conclusion. Open access rail entries have proven to be powerful in introducing new services and many innovations in the organisation, differentiation, and pricing of existing services. This has also forced the incumbents to improve not only their services but also their general approach to these markets and customers. This may unlock the potential of these rail markets and help to win customers against the other transport modes. To achieve this positive state of affairs, however, effective regulation is needed to promote benefits and block costs. The most pressing issues are regulating entry, optimising the use of infrastructure, trying to maintain integrated tariffs and timetables, and moderating and resolving emerging competitive disputes.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the project New Mobility – High-Speed Transport Systems and Transport-Related Human Behaviour, Reg. No. CCZ.02.1.01/0.0/0.0/16_026/0008430, co-financed by the Operational Programme Research, Development and Education.

ORCID iD

Zdenek Tomes

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