Aiming for a ‘no spoilage-no spill’ balance
With the recent introduction of ‘surge’ pricing on the Rajdhani, Shatabdi andDuronto, Indian Railways hopes to increase its revenues. Influencing consumer behaviour through variable pricing is a strategy used by railways around the world. Lorenzo Casullo, an economist at the International Transport Forum, writes about how railway operators in Europe and North America have approached ticket pricing.
Rail ticket prices in North America and Europe have traditionally been set based on kilometric fares depending on total distance travelled. This relatively simple system is still in place in some regulated rail markets, such as regional concession for passenger services. However, more recently, a number of operators have introduced yield-management of rail fares, following the trend set by the aviation and coach industries and taking advantage of new technologies such as online ticket sales and real-time pricing tools.
Yield management techniques consist of setting differentiated fares for rail services, with prices set at levels all the way down to the marginal costs of providing that service. The opportunity to differentiate fares arises due to the diversity of preferences of rail travellers, both in relation to how much they travel and how uncertain their travel dates are. For instance, flexible travellers able to book their tickets in advance may seek low prices, while business travellers may need to buy a specific ticket at short notice.
Two main approaches are commonly adopted by rail operators: either they define different ticket categories and restrict the number of tickets in each category (for instance based on travel class, or discount cards), or; they increase prices over time in response to emerging bookings.
Despite a common trend towards greater price differentiation in rail fares, the rationale for the introduction of yield management techniques varies depending on the market structure and regulation in place in each country. Three examples follow.
French approach
In France, the historical operator SNCF is a regulated monopolist in the market for rail passenger services. Price differentiation first appeared in 1981, with the opening of a new High-Speed Rail (HSR) line linking Paris to the South-East of France, when different prices were offered for peak and off-peak travel.
A much more sophisticated yield management system was introduced from 1987 onwards, benefiting from the insights of airline industry specialists.
SNCF’s main objective is to maximise revenue and extract a greater share of consumer surplus, given the heterogeneity of passengers’ valuations described above. The system benefits from real-time adjustments based on demand fluctuations. In the absence of competition, rail fares are regulated in France.
North-East corridor
In the North-East corridor of the U.S., Amtrak is the federal rail operator offering intercity passenger services in a largely deregulated pricing environment. The government’s aim is to provide Amtrak the lowest subsidy possible. Amtrak’s parallel goal is therefore to generate the most revenue per seat-mile possible. This requires minimising spoilage – when pricing is set too high and seats remain unsold – and spill – when the train sells out while demand remains.
Advance purchase is available 335 days before departure. With dynamic pricing, the fares go up as more tickets are purchased closer to departure. There are five “buckets” on coaches for long distance travel. For example, Amtrak might decide the best way to sell tickets is to put an equal number of seats in each, with the first 20 per cent selling at the lowest price, then the price increasing to the next lowest price. Demand is projected for each train, and an inventory is allocated to that train. If sales do not materialising as forecast on a particular train, then tickets will stay at the lowest price.
Italian experience
The High-Speed Rail network in Italy links major cities along a north-south axis. Two operators run parallel services:Trinitarian, the national incumbent operator, and NTV, a privately-owned new entrant. Both operators are separated from the infrastructure manager RFI (although Trinitarian belongs to the same holding group) and offer passenger services exclusively. Fares are not regulated given that the providers compete on price and service quality.
As a result of competition on the network, operators differentiate their prices not just to maximise revenue, but also as a way to attract passengers from competitors. For instance, five categories of travel have been introduced by new entrant NTV. In addition to these five price buckets, fares also vary depending on time of the day, day of travel, time of purchase, presence of special offers, and prices offered by the competitor.
Increasingly, airlines and rail operators react to each other’s prices, too, when they operate on the same market segment. International experience points to different reasons as to why rail operators may introduce differentiated fares. Just as the rationale varies depending on specific market structures, so do the effects of price differentiation.
Business indicators
In France, yield-management techniques have contributed to improving business indicators such as revenue per train (+150 per cent between 2003 and 2012). In the U.S., Amtrak has been improving its financial position and there is evidence that revenue in the North-East Corridor has nearly doubled between 2003 and 2013. In a competitive market such as the Italian HSR network, price differentiation has resulted in “real-time price wars” between operators. Average fares have decreased, while total passengers have increased and the modal share of rail in the Milan-Rome corridor has grown from 37 per cent to 55 per cent.
Price differentiation can be effective depending on the policy goal and the situation of the rail market. If demand is low, yield management techniques can attract more passengers to rail services while the operators maximise their revenues. If peak demand is high, differentiated fares can incentivise passengers to use off-peak services and operators can better plan ahead their train utilisation strategies. However, high prices run the risk of pricing out some passengers with a shift towards road and air modes, where these offer a viable alternative.
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