Finance France High-Speed Rail

For French High-Speed Rail, a Lower-Cost Future Pondered

» National operator SNCF is considering expanding low-cost options for country’s fast trains in response to increased competition. Increasing premium services also proposed.

Faced with the prospect of direct competition for the first time and settling into a difficult fiscal environment, French national rail operator SNCF is strategizing for a more nimble, efficient future that will include cheaper tickets on some of its most frequented routes. In five years, passengers traveling between big cities like Paris, Lyon, and Marseille can expect to see a variety of companies offering similar services at reduced prices.

SNCF is expected to begin offering an increasing number of low-cost services beginning in 2012.

For train riders on the low end, this could mean a sharp turn towards TGV high-speed rail operations based on those promoted by low-cost airlines — at least for routes that have the demand to handle the crowds that these services require. Business people may be asked to pay more for the products they’re used to receiving for free. On minor routes, customers may see fewer trains — and they may have to be subsidized by the government.

It’s a mixed bag, but one that results from a system that disincentivizes solidarity in provision for transport across the entire nation even as it increases offerings for well-used routes.

SNCF’s future is one that will be marked both by international expansion and domestic competition. The company’s majority-owned offshoot Keolis already operates transit systems in a number of cities worldwide and is now pushing to do the same in high-speed rail, starting with the €10 billion Medina-Mecca link planned for Saudi Arabia. At the same time, foreign competitors are entering the French market — by 2012, Deutsche Bahn will link Paris with Brussels and London and Trenitalia will run trains from Milan and Genova to Paris. This competition will reduce the ability of SNCF to use the TGV as a cash-cow whose profitable operations cross-subsidize its other intercity routes, which explains the company’s new effort to adapt itself to a changing market.

Moreover, the company, faced with extremely high track use fees, is desperate to increase its revenue stream. Despite the fact that both SNCF and the national track owner, Réseau Ferré de France (RFF), are entirely government owned, they have been at odds with each other because of their diverging interests since the latter entity was created in the late 1990s (previously the tracks were owned by SNCF). European Union rules have allowed government monopoly ownership of rights-of-way even as they have promoted competition in operations.

RFF has been increasing its track use fees significantly over the past decade, and plans to continue to do so in order to contribute to the funding of new high-speed lines in France and to pay off the enormous €28 billion debt it has inherited. This situation, however, has put SNCF in a bind; its TGVs aren’t bringing in enough money to pay for the their operations, track maintenance, and the construction of new lines. For now at least, the company’s long-term model isn’t sustainable.

The odd result is that last year, RFF made its first profit since its creation even as SNCF lost €500 million (after a one billion Euro profit the year before). The situation is becoming so bad that almost a third of TGV services, once all operationally profitable, will require subsidies from the government beginning next year, irritating other potential operators. SNCF has a major high-speed train fleet replacement program planned, but that can only be possible if the company finds more funds.

It’s a bizarre state of affairs in which one government entity must hand over its profits to another, with an end result that threatens the integrity of national rail service in France.

Thus the new effort by SNCF to both increase ridership on trains through lower prices and more (packed) seats, along with a parallel effort to introduce business service offerings. Whether this will increase revenues by 28% by 2015 has yet to be demonstrated.

SNCF already arguably has the cheapest high-speed services in Europe, with average trips costing only €42. But the new plan will introduce more low-cost trains similar to the company’s already existing iDTGV fleet, which offers trains with fewer personnel on board, more for-purchase services, off-train ticket-checking, and at-home ticket printing. An example of a particularly cheap iDTGV ticket: €19 between Lille and Marseille, a 1000-kilometer trip. That’s an amazing deal.

Similar offers will be expanded over the coming years to fight off other companies. France, probably the most lucrative rail market in Europe because of its large tourist base and high train-using public, will be the beachhead for the future of high-speed rail in which multiple operators serve the same routes. The German, Spanish, and Italian networks are likely to see similar situations over the next decade. As I’ve discussed before, this situation is likely to result in cheaper tickets and more offerings between the biggest cities but fewer travel opportunities elsewhere unless the government steps in.

The French government’s choice to subsidize TGV routes to less popular destinations rather than having SNCF cancel them because they’re no longer profitable is a political response to a management problem, since SNCF no longer is making enough money on its most-used lines to cross-subsidize within the company. Yet there is no way to assume that this is a permanent solution, since competitors will begin pushing for their own subsidies soon enough. The prioritized association between the goals of the French state and SNCF will slowly dissolve.

Yet that relationship, which ensured good rail service throughout the country, has had its major benefits. While it may theoretically be possible to have cheaper service along major corridors, their profits has meant excellent access by train to just about anywhere. It also also allowed the implementation of major social benefits programs that provide large discounts to the young, seniors, people with large families, and the unemployed. Can a system in which there is competition allow that to happen? Does it make sense to transfer the obligation to fulfill those programs, enshrined in goals of solidarity, from the rail operator to the government?

American planners considering how to implement high-speed rail services have an obligation to look across the Atlantic to judge how they ought to approach similar situations in the future. There are a variety of questions that must be pondered based on the relationships our governments establish between high-speed rail track owners and operators.

Assuming that tracks are publicly owned, should train service providers be required to pay high track use fees, in order to maximize the use of operational profits for the creation of new lines? Or should profits from high-speed lines be redirected towards the operation of less productive corridors in order to encourage geographical equity, with the government stepping in to fully cover the construction costs of new tracks? Should we expect to see a direct fiscal payback for initial capital expenditures, or is it reasonable to simply ask that high-speed rail services cover their operations and maintenance regimes?

For services that are not profitable, should the government use separate funds to ensure their continued running? Wouldn’t that simply result in the all-too-familiar privatization of profits and socialization of losses?

It troubles me that states now funding new intercity corridor development, including California, Florida, Illinois, and Wisconsin, have failed to address these questions straight-on, as complicated as they might be. Considering international experience, the projects in each of these states are likely to produce operational profits, but state governments haven’t established where that additional money would be directed. If we’re serious about improving the U.S. rail system, we have an obligation to do so in a way that establishes our response to these problems before we run full-on into them.

Image above: A TGV in southeastern France, from Flickr user Jean-Louis Zimmermann (cc)

29 replies on “For French High-Speed Rail, a Lower-Cost Future Pondered”

Great article, but can I take issue with the slogan of “geographic equity” that you mention as a reason for government subsidy?

Shouldn’t there be a distinction between routes that have low patronage because of low population, and routes that have market potential but may need to be run at a loss for a while?

And if you’re getting low patronage because of low population, well, doesn’t low population warrant a lower level of service? Isn’t there a level of population below which no TGV service is warranted, and another below which no rail service is warranted at all?

The problem with the slogan “geographic equity” is that it conjures an image of service evenly distributed across a map. That, of course, wouldn’t be equitable at all, becuase the population isn’t distributed that way.

Do you have a more nuanced definition of what you mean by “geographic equity”?

This is a great question — another that needs to be considered by U.S. rail planners, and one that Amtrak already is discussing in relation to its long-distance routes.

I’m not sure I have any kind of definition for geographic equity, but I think it is important to balance the needs of a population both in terms of spreading transportation resources to areas around the country and in terms of providing the best services to the most populated areas.

A couple of thoughts on Geographic Equity.

One way to look at it would be using operating profits to cross subsidize money losing routes. The money losing routes are one of two types: low traffic unlikely to ever make an operating profit or new routes that need subsidy to grow to enough to generate operating profits. That begs the question as to why should rail users in one area subsidize another. Perhaps fares should be adjusted to target break even on routes that generate operating profits while subsidizing those that don’t.

Another concern is the network effect. A complete network is more useful and will generate more revenues than a network limited to the profitable lines. Obviously cost becomes an issue here as those less profitable lines require subsidy but do make the network as a whole more useful.

In the end, Geographic Equity is about providing useful service to all areas. That’s not to say it shouldn’t come as a combination of TGV, Regional Rail and/or Bus. The key question really is the funding aspect.

“Another concern is the network effect. A complete network is more useful and will generate more revenues than a network limited to the profitable lines.”

As far as I’m concerned, this is the *only* argument for “geographic equity” between low-population and high-population areas.

The branch lines bring passengers to the mainline, and carry passengers away from the mainline. Without the branch lines, people start taking their cars instead.

The problem with the network effect argument is that it’s sometimes used for lines for which network effects are tiny. Sometimes, the argument is serious, for example a branch line feeding a profitable main line. But sometimes, it’s spurious: for example, the Empire Builder does not feed the Northeast Corridor, contrary to what NARP and the URPA say.

Cullen, the problem with arguing network effects in France’s case is that SNCF doesn’t exploit the possible connections to maximize TER and TGV ridership. For example, at Nice-Ville, the TER connection to Monaco and Menton and the TGV connection to Paris are timed to just miss each other.

If instead the transfer were timed well, and the trains ran on time, then there would be more riders using both train types. It would also be possible to be more aggressive with TER transfers. Thus, selling the combined tickets at a premium over the commuter tickets, as SNCF does today, would allow collecting TGV fares for a TER spending level.

Frankly, this tells me that you really should not normally seperate operations and infrastructure in the railroad field. I know, there are a lot of examples of trains running on trackage rights, but overall, at least in America, such operations are relatively limited (although some are quite significant, and have been around a long time). The more recent experience in Fance and England suggests this may not be the best way to go.

Is idTGV as cheap as you say it is in more normal cases? I’m asking because when I booked my Nice-Paris trip, about a week in advance, the idTGV leg was cheaper than the regular TGV alternatives but not by a lot. It was something like 72 Euros versus 90.

No, definitely not always — prices are much lower the earlier you book, and a week ahead is not considered early. But, if you book early, you can certainly get prices like the ones I mentioned.

What is the purpose of this advanced purchase requirement? It was fine when airlines ran one or two flights a day to destinations and it filled those seats that would not be taken at higher fares, but railways run high capacity trains at high frequencies. Advance Purchase tickets immediately negate the rail advantage of frequency and flexibility.

Tell that those “mänätschers”…

It is essentially using yield management concepts for airlines which poison the frequency and flexibility concept of rail travel. On the other hand, SNCF (for longer distance) still has to learn about regular interval scheduling. Ah, yeah, and Trenitalia is not much better…

On the other hand, the Deutsche Bahn does have early booking tickets, but you still can just hop on the next train available.

Given SNCF’s funny ideas about schedule adherence, one could say it still has to learn about regular interval scheduling, period. Yes, it’s nice that the TER runs on a takt when it’s on time, but the TER isn’t always on time.

I think it is important to note that by separating the track and the operations, it makes it incredibly easy to transfer wealth from the government to private operators. With RFF posting losses and SNCF posting profits, it would be really easy to see how a private operator could get away with the same thing.

It would be a good thing for HSR triumphalists in the US to see SNCF barely breaking even for a change. I get so sick of hearing about how profitable HSR is when all of the profitable examples rely on subsidized infrastructure.

JR East, Central, and West are profitable after depreciation and interest. In Central and West’s case, the Shinkansen lines they operate had their construction money fully paid for by operating profits before privatization. This is not true for the Tohoku and Joetsu Shinkansen, but nowadays they get so much traffic that they probably would’ve paid their bonds anyway.

The LGV Sud-Est paid its construction money, too. However, the profits were reinvested in lower-performing lines.

But no infrastructure in the US ever gets its financial performance imputed this stringently. The strictest standard, for both roads and transit, is farebox recovery, including depreciation but not interest. By that standard, even Taiwan HSR is profitable.

While what you say about Japanese lines may be true, American HSR proponents rarely reference the Japanese system when they talk profitability. The reason? The US is a lot more like Europe than it is like Japan. We don’t have very many megacities, we don’t have insane population densities in those cities, and everybody hates the idea of sardine packaged 3+2 seating configurations.

It would be nice if we could claim profitability with a more European style system, but European success is much more varied. The vast majority of high speed lines are money-losers. Sud-Est may be profitable now, but they have a 30 year history of ridership growth. Do you know how long they had to wait before they were profitable?

The Sud-Est was operationally profitable almost from the start, I’m pretty sure. I forget when it paid off the construction bonds – I think it was the early 1990s, but don’t quote me on that. The figure should be in Anthony Perl’s New Departures.

Some potentials US HSR corridors are actually more Japanese than European. They concentrate instead of dissipate frequency, connect larger cities than in Europe, and make intermediate stops in downtown areas instead of on the outskirts.

Shinkansen seats are only slightly narrower than TGV seats, on account of the wider loading gauge, and have a much higher seat pitch, leading to higher available floor area per seat. I find it telling that multiple American blog commenters complain about 3+2 seating in Japan but say nothing about it in Sweden or about the 900 mm pitch on the TGV.

It’s completely untrue that “the vast majority of high-speed lines are money losers.” DB’s long-distance division makes money. RFF plus SNCF is profitable as well; the recent change in how the money is split is one of several decisions the French government is taking to protect SNCF from foreign competition.

It’s also untrue that Japan’s inner cities are densely packed. Tokyo is about as dense as New York, and Osaka and Nagoya are dense as well, but the other cities are not very dense by US standards. Fukuoka is less dense than Philadelphia and Boston, and Hiroshima, Sendai, and Sapporo all have Sunbelt density levels.

“Some potentials US HSR corridors are actually more Japanese than European. They concentrate instead of dissipate frequency, connect larger cities than in Europe, and make intermediate stops in downtown areas instead of on the outskirts.”

HSR projects which come to mind in this regard: California, the “Southeast” (basically North Carolina and Virginia), the NY Empire Corridor, the Cascades in the NW. Also several of the proposed “midwest” corridors (notably the Chicago-Milwaukee and the proposed Chicago-St. Louis *via* Champaign routes). Except for the insuperable station location problems, the 3C line would qualify.

It seems that RFF is playing a dangerous game here, which may be induced by flawed implementation.

It is a good idea to keep the infrastructure (which is built for a long time being, and financed with very long term means) in the public hands (operators change, but the tracks are there…).

However, the problem starts if the infrastructure body is operated like a private company, as this puts way more emphasis on short term profits than keeping the “big picture”.

It seems that RFF is faling into that trap. The evidence for this is that they continuously increase the access fees. And if the profit is not sufficient, they raise the fees again, risking that the operator(s) reduce the number of slots used, which reduces the profit again, and they raise the fees again…

Such a game is possible on places where demand is higher than supply… and if that is the case, I have some serious doubts.

SNCF appears to be more aware of this vicious circle, and tries to get more people on the trains.

In the UK, Network Rail (main national infrastaucture owner) and HS1 Ltd (owner of the high-speed line from eth Channel Tunnel to London) both charge fees on a per-train basis, presumably because they feel this reflects how their costs accumulate. On the other hand, Eurotunnel (who own the Channel Tunnel) charge a per-passenger fee for passenger trains, because they feel this reduces risk for operators, and ultimately will lead to more trains. Maybe RFF should switch to a per passenger charge?

Also, does anyone know how RFF if charge non-SNCF trainsi in the same way as as SNCF trains? I ask because (domestic) open access operators in the UK pay only marginal costs, whereas the franchised operators pay proportional costs, which always work out higher.

The SNCF does not only run bi-levels, but also single-level trains. And then, as the carbodies are shorter in the TGV than in the ICE, which gets the ICE between a bi-level and a single-level TGV, if you calculate the cost per seat (wich essentially affects the ticket prices).

According to the EU Open Access regulations, the access must be non-discriminatory, meaning that it can not prefer a single operator, just because it is that particular operator (although volume or regularity discounts are allowed, meaning that if you buy a slot to be used every day, you get a better price than if you buy a slot for one-time use).

I’ve read through several of Yonah’s excellent posts on HSR over the past few weeks along with the comments, and only one person (Ocean Railroader) mentions the overall impact on transport of oil depletion and the resulting far higher fossil fuel prices in the next few years.

European HSR competes with short-haul flights which is bound to be affected profoundly by significant increases in fuel surcharges. Though many drivers and flyers may chose not to travel much at all when this happens, perhaps half or two thirds will shift to already-available HSR rail, therein providing a real boost to revenues there.

In North America decision makers of all stripes seem to not have enough incentive to at least study the issue of creating a continental HSR system greater depth. Perhaps another couple of radical spike in fuel prices will do the trick.

Well, it is logical to replace the short haul routes first — and to replace the busiest routes first.

The various existing HSR schemes in the US are mostly pretty good about doing that. They just need funding….

The problem is that the profit redistribution wasn’t transferred from old system to the new one. Obviously, in competition-based system, it can’t be done by operators. The other places could be RFF (by diferentiation of track fees for various lines) or French department of transport (by collecting license fees on profitable lines and subsidizing the lossy ones).

So RFF is charging the SNCF, which gets subsidized by the French government, which then gets those subsidies back by the RFF. So in fact nobody is loosing anything here, except non-SNCF tain operators trying to get into the French HSR market. Additionally, it appears some of the trackage owned by RFF is managed by the SNCF — which the RFF pays for. This whole system smells like a protectionist scheme to keep Die Bahn out of France.
Because the strike ridden SNCF couldn’t really compete against more market oriented train operators, it has opted to undermine the whole open access agenda.

Sweden and Germany have both made clear distinctions between long-distance trains and local/regional service. In Sweden, local services are subsidized by the lan (counties), or by a group of lan. The cross-subsidy that Thatcher used to carp about with British Rail doesn’t exist in Swedish operations. In Germany, states typically contract with Deutsche Bahn or with private operators. In some states, it’s become a political issue (some opposed to private operators, some all but opposed to DB), but there’s still a clear national network of services. Not only is the network structure apparent, but the whole issue of competition on intercity routes is still restricted by the number of available timeslots. In Sweden’s case, this is even more relevant, because the entire intercity system is constrained by track limitations in Stockholm. No matter what, there are only so many trains that can be run. Compare this to low-cost airlines, which have made an art of taking direct and indirect subsidies (I don’t see Ryanair or Southwest paying the full cost of operating even one airport), and which generally create a mess by doing what works for them, and damn the most effective use of infrastructure. But then, I guess I’m arguing for something that isn’t a priority in the debate right now.

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