Generic railway strategies TOCs
train operator strategies
a research-oriented knowledge base for train operating companies (TOCs)
a research-oriented knowledge base for train operating companies (TOCs)
4.3 Strategy III: Low-price connector
The economic logic of low-price focused operators requires cost efficiency. It is majorly achieved by the companies’ lean value chain. Numerous tasks are outsourced (e.g. maintenance, administrative functions), train utilization is maximized (quick turnarounds, double-deck trains), distribution channels are selected by cost efficiency, standardization is applied wherever possible and also serving secondary stations in huge cities seems possible to reduce costs (Seabright et al., 2003, p. 61). Regarding revenue generation efficient yield management is applied by low-price connectors in a closed system (tickets connected to available seats). Load factors of trains will be potentially above 80 percent. To achieve this, aggressive pricing strategies in direct competition to other operators on certain routes are necessary.
Initially low-price connectors enter markets on selected routes between capitals that offer the demand to utilize high capacity trains. The usage of high speed trains seems beneficial where leveraging intermodal switching potentials is possible. Core focus of low-price connectors is the quick point-to-point transfer. With continuous existence in a market the establishment of small networks, potentially arranged around a centralized maintenance hub, can be possible. Expansion is mainly pursued on selected routes within a country between cities with travel times below three and a half hours because those offer a high degree of modal share for railways (Seabright et al., 2003, p. 61, Esplugas et al., 2003, p. 6).
To get access to know-how, strategic partnerships with incumbents from other countries as well as close ties with rail manufacturers to understand trends seem possible. Growth of low price connectors will to large extends be organic. Because of high customer demand for low price rail, low-price connectors’ expansion will potentially take place with accelerated speed. Additional motivators for quick expansion are potential early mover advantages to launch services as the first low priced operator on a route. The existence of one low-priced connector on a certain route does often exclude the presence of a second low-price player as proven by the limited competition degrees of low cost airlines on similar routes.
Low-price connectors focus on the core value delivery of transportation: Affordable transport from location A to location B. In all European countries except Austria (WESTbahn) this segment offers uncontested market space to be exploited. Thereby, low-prices do not completely exclude a certain degree of quality. An optimum strategic setup for players in this group is presented in the following section.
To differentiate in competitive markets, price-oriented operators mainly focus on price sensitive leisure travelers and specifically exclude premium customers. Their value proposition aims at safe, affordable and reliable transportation without frills and only one service level. Additional benefit creation on-board for extra charges is possible.
The economic logic of low-price focused operators requires cost efficiency. It is majorly achieved by the companies’ lean value chain. Numerous tasks are outsourced (e.g. maintenance, administrative functions), train utilization is maximized (quick turnarounds, double-deck trains), distribution channels are selected by cost efficiency, standardization is applied wherever possible and also serving secondary stations in huge cities seems possible to reduce costs (Seabright et al., 2003, p. 61). Regarding revenue generation efficient yield management is applied by low-price connectors in a closed system (tickets connected to available seats). Load factors of trains will be potentially above 80 percent. To achieve this, aggressive pricing strategies in direct competition to other operators on certain routes are necessary.
Initially low-price connectors enter markets on selected routes between capitals that offer the demand to utilize high capacity trains. The usage of high speed trains seems beneficial where leveraging intermodal switching potentials is possible. Core focus of low-price connectors is the quick point-to-point transfer. With continuous existence in a market the establishment of small networks, potentially arranged around a centralized maintenance hub, can be possible. Expansion is mainly pursued on selected routes within a country between cities with travel times below three and a half hours because those offer a high degree of modal share for railways (Seabright et al., 2003, p. 61, Esplugas et al., 2003, p. 6).
To get access to know-how, strategic partnerships with incumbents from other countries as well as close ties with rail manufacturers to understand trends seem possible. Growth of low price connectors will to large extends be organic. Because of high customer demand for low price rail, low-price connectors’ expansion will potentially take place with accelerated speed. Additional motivators for quick expansion are potential early mover advantages to launch services as the first low priced operator on a route. The existence of one low-priced connector on a certain route does often exclude the presence of a second low-price player as proven by the limited competition degrees of low cost airlines on similar routes.
Before market entry low-price connectors should focus on creating a cost competitive organizational structure. To avoid discrimination by competitors, partnering as well as the selected choice of sales facilities (e.g. replacement of sales facilities in stations by pure purchasing of tickets on-board without additional fees) are necessary. To generate a smooth launch, top routes should be picked initially to assure demand, to generate high revenues as well as to create a positive image and good word of mouth.
