The price war goes into high gear

It was the month of May 2021. The French company Ouigo, owned by the public SNCF, burst into the Spanish railway sector, until then the private preserve of Renfe. In three years, the stations have welcomed many more high-speed trains, they have experienced a real explosion in demand and prices have plummeted where the AVE is measured against the French and Iryo, the operator with Italian capital. Of course, the number of passengers has skyrocketed: the three companies added a total of 31.8 million travelers in 2023, 35% more than in 2022 and another 42% compared to the 22.4 million that rose to the highest Renfe speed in 2019, when it was the only option. These are the effects that, at first glance, are occurring in the Madrid-Barcelona, ​​Madrid-Levante and Madrid-Sur corridors, where the battle is concentrated, which has now led to a notorious clash between the Ministry of Transport, on which they depend the infrastructure manager (Adif) and the dominant operator (Renfe), and the French low-cost firm.

Minister Óscar Puente accuses Ouigo, more aggressive in its price offer, but with less presence on the network, of carrying out

dumping

practices (working at a loss to gain share). If someone is willing to take red numbers like that, the goal of opening up a competition between equals could be undermined.

“We understand that they are carrying out deeply unfair practices,” said the minister. “My duty is to protect Renfe, because by protecting Renfe I am protecting rail transport in our country. That is the reason why a public transportation company is necessary,” he concluded. “This is the first time we have been criticized for having low prices,” the company responded. “The model works with occupancy factors of 90% or more, and that has been achieved,” said its general director, Helene Valenzuela, while promising that “the low price policy will not change.”

Whether or not there is a basis for the accusations, the truth is that the French brand has incurred 31 million losses in 2021 and 36 million in 2022. In that period, it maintained its rates starting at 9 euros for those over 14 years of age and a single price 7 euros for minors. Is that legal? Legal sources warn that the illicit assumption of market abuse would only be attributable to a dominant operator (which Ouigo is not), while that of predatory pricing (bearing losses with the aim of expelling a competitor) “is very difficult to prove, especially in the launching phase of a new player.”

Regarding the shadow of doubt about Ouigo's support via French subsidies thanks to the State's participation in it, the company defended itself days ago by denying any type of public aid. Be that as it may, the Ministry of Bridge Transport is now waiting for the 2023 accounts to decide whether it is possible to file a complaint for anti-competitive practices in case the losses become large again.

The conflict between the ministry and the company brings into debate the real effects of liberalization on prices. In the world, it is stated that “the best kept secret by operators is their average rates,” in the words of the head of one of these companies. Everyone boasts of incredibly low prices, but these rise as capacity runs out and the train's departure date approaches. This is what commercial strategy specialists call revenue

management

, common in the airline or hotel sector.

Among the experts, there are those who trust that the Italian case will be replicated in Spain, where the entry of Italo against Trenitalia meant a jump in demand and discounts that have removed thousands of cars from corridors such as the Rome-Milan. There are also those who fear that a long rate war will end up bursting operating margins, threaten the survival of companies, limit the interest of new competitors and hamper the quality of services.

“Before, they used to market a first and a second class,” recalls Deusto Business School Economics professor Massimo Cermelli, “now technology allows us to know the consumer's way of acting and anticipate pricing policy.” With the lowest prices offered long before the trip, a high occupancy factor is guaranteed in the first phases of marketing. “The company ensures market share with competitive rates, and relies on attracting greater returns to purchases made by the many travelers who are less opportunistic, who tend to move out of necessity or for business,” adds Cermelli.

What is clear is that the first Ouigo double-decker train that ran on the Madrid-Barcelona corridor, together with the subsequent entry of Iryo, generated a commercial tension that did not exist until 2021, but it also rose to high speed to millions of people. The latest CNMC report on the effects of competition, dated March 21, confirms that high-speed passenger traffic rose by 28.8% in the fourth quarter of 2023 compared to the same period in 2022, up to 8.8%. 48 million. The number of places offered, for its part, increased by 34.2%, with 10.35 million. The derivative is the collapse of average prices, according to the regulator: they fell 20.8% year-on-year in Madrid-Barcelona services; almost 22% in Madrid-Seville and almost 24% in trips between the capital and Valencia.

For its part, the independent ticket sales platform Trainline maintains that they now cost 65% less than in 2019, before liberalization, on the Madrid-Barcelona axis. In that same study it is noted that 54% of Spaniards demand competition on new routes.

Trainline has been asking for years to go even further for the benefit of the consumer. It has been one of the platforms favored in January by the decision of the European Commission to promote equal access for independent distributors to the commercial offer of operators (schedules, rates, benefits, etc.). This creates a business niche for intermediaries and favors the traveler's ability to choose, which should further heat up the fight on the roads. But from their trenches, the technology companies also claim to be able to sell tickets with “fair” remuneration from the railway companies, a point in which they have had a good part of the operators against them.

The director of Government Relations of Trainline in Spain, Guillermo Serrano, sees in the processing of the Sustainable Mobility Law an opportunity to end the regulatory vacuum. And, as a mediator in the marketing of tickets, he believes that "the normal thing is that prices stabilize on the most mature Spanish routes and there is an important adjustment in the routes that receive new companies."

Fight for market share

The president of Renfe, Raül Blanco, has come to publicly acknowledge his concern about operating margins. At the end of last year, Renfe retained a market share of 50.6% on the Madrid-Valencia axis, 55.5% on the Madrid-Barcelona route and exceeds 70% on the rest of the lines in which it fights with one or two rivals. And this is just the beginning: Ouigo plans to connect Madrid with Valladolid, Segovia, Cuenca, Elche and Murcia this first semester, and will reach Seville and Málaga and Córdoba in the second semester.

Its president for Spain, Alain Krakovitch, explained at a press conference on March 21 that low prices are possible thanks to a business model based on cost efficiency and high occupancy. What is foreseeable is that in 2023 the red numbers will be repeated, and it is in 2024 when balance is expected.

That is yet to be seen. The National Markets and Competition Commission (CNMC) reveals a 40% worsening in the average income per passenger and kilometer operated on the Madrid-Barcelona and Madrid-Valencia axes, down to 7.63 and 7.1 cents of euros per traveler and kilometers, respectively, compared to those that occurred when the AVE was alone.

Cermelli, from Deusto, speaks of a virtuous circle that will be achieved when the competition framework is perfect: “Supply stimulates demand and prices and services become competitive, which is good for the consumer. The State also wins due to the higher income from fees and the amortization of the investment in the network is speeded up.” The professor concludes with the environmental advantage: “With the network already built, the high-speed train is much more sustainable than the road.”

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