Revolution on the rails: how low-cost travel is challenging the traditional high-speed train
In 2013, Ouigo, the low-cost version of the classic TGV, appeared on the rails. Intended to revive interest in trains, it also created new competition for the TGV, which became inOui. What impact has this new competitor had on the rail market?
Florent Laroche, Lumière Lyon 2 University ; Patrice Bougette, Côte d’Azur University and Thierry Blayac, University of Montpellier
Until recently, high-speedrail services in France were completely unified. Whether orange or Atlantic blue, TGV trains offered identical services, managed by a single operator: SNCF. A major change took place on April 2, 2013, when blue and pink trains bearing the "Ouigo" logo were launched, traveling at 300 km/h and offering low-cost tickets in exchange for passengers arriving at the station in advance and traveling with limited luggage. This launch came at a time when TGV ridership was declining due to growing intermodal competition from carpooling (creation of Blablacar in 2006) and low-cost airlines (EasyJet on domestic routes since 2007). The Macron law of 2015 subsequently opened up a new low-cost modal alternative to competition: long-distance buses.
Is this a return to third class without saying so, according to Dominique Memmi, director of social science research at the CNRS? Whatever the case, Ouigo has been a real success, with Alain Krakovitch, head of TGV-Intercités at SNCF Voyageurs, praising it in June 2024 as a "real turning point in French high-speed rail."
By 2027, the fleet will expand from 38 to 50 trains, he announced during the same press conference, and all carriages will be renovated, with the installation of individual power outlets and the development of a new design.
In 2017, the inOui label and the Carmillon livery began to be applied to all conventional TGV trains. This came with the promise of "greater comfort, services, and connectivity": Wi-Fi, access to newspapers and films via an onboard platform, in-seat dining, and more.
The market is now segmented, not to mention the more recent arrival of Trenitalia high-speed trains between Paris, Lyon, and Italy, and Renfe between Lyon, Marseille, and Spain. Is it segmented enough to cater to different customer bases? How does inOui compete with Ouigo and other modes of transport? This was the question at the heart of our recently published research.
How can we appreciate this phenomenon?
We studied five routes to and from Paris: Lyon, Bordeaux, Toulouse, Nice, and Brussels. The data covers the period from September 2019 to March 2020, before the Covid pandemic and the arrival of foreign high-speed trains on the network, which allows us to isolate our case study from factors that could have disrupted the analysis. Nice and Toulouse are only partially connected to Paris by high-speed rail: some of the journeys are made on the conventional network, and it is to these destinations that competition from air travel is most keenly felt. The train/plane split is roughly 50/50. The data was collected over 13 Tuesdays for bookings made seven days in advance.
Competition in the transport sector is assessed on two points in particular: ticket prices and train frequency. In terms of prices, since the 1990s, SNCF has been practicing yield management, which means it tries to maximize its revenue by varying the fares for the same route according to different criteria, such as the reason for travel (business/leisure) or the date of booking, for example. The literature shows that this method is particularly effective in sectors involving high fixed costs and where some form of regulation is in place, such as the rail sector.
Several variables were taken into account and compared with the price per kilometer in first and second class on TGV inOui trains, as well as their frequency. We considered technical variables relating to journey characteristics such as distance, journey time, and frequency of service by mode of transport; variables capturing the degree of competition (calculated, for those in the know, usingthe Herfindahl-Hirschman index) from Ouigo or other modes of transport, as well as service quality (distance/time ratio); and finally variables relating to the socio-economic environment: the proportion of younger travelers (aged 15-29) or older travelers (aged 60-74), and the size and employment rates of destination cities.
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Competition that puts pressure on prices, especially in first class?
The analyses conducted reveal a few salient points. In first class, distance has a negative effect on the price per kilometer: all other things being equal, the greater the distance, the lower the price per kilometer, which was to be expected. The presence of low-cost trains also has a significant negative effect, particularly during off-peak hours, which may seem more surprising for first class. However, these are periods when first class is already cheaper due to yield management practices and the SNCF's desire to fill as many seats as possible. The company therefore has a vested interest in filling a seat at a lower cost rather than leaving it empty.
The higher the quality of service, the higher the price: in other words, the fewer stops there are, the higher the price per kilometer. Similarly, the less competition there is from other modes of transport, the higher the price. All other things being equal, the price also increases with the size of the cities, but decreases when the population of the cities of origin and destination is relatively young.
In second class, we see the same effects of distance and the availability of low-cost trains. However, competition from other modes of transport has no significant effect, as this effect is transferred to the least occupied class during off-peak periods, namely first class. The unemployment rate is also significant: the higher it is on a given origin-destination route, the lower the price per kilometer. This would suggest that when setting its second-class fares, SNCF takes into account the socio-economic characteristics of the populations of the cities it serves. The determinants of price are thus partly common and partly specific to first and second class.
On frequency: substitution or compensation?
As for the frequency of inOui high-speed trains, it is logically lower on long distances and when travel times are long. Beyond three hours, fewer trains are offered, which may leave room for other modes of transport. Nevertheless, we observe that the frequency of inOui trains increases when the frequency of buses, carpooling, or Ouigo trains also increases in the most dynamic markets. Only low-cost airlines have a significant negative effect on supply. In the former cases, there would be complementarity between modes, particularly when the dominant inOui supply is insufficient to meet the total demand for transport; with air travel, on the other hand, we see a substitution mechanism.
In terms of sociodemographic variables, the frequency of inOui high-speed trains decreases with the size of cities and the proportion of young people, who are more inclined to turn to alternatives. However, it increases with the proportion of seniors, reflecting this demographic's attachment to traditional high-speed trains.
In conclusion, there is limited competition between Ouigo and inOui services, which can largely be explained by the strategic distribution of trains throughout the day. InOui trains are scheduled primarily during peak periods, which are the most profitable for SNCF thanks to business travelers who are less price-sensitive, while Ouigo trains are scheduled during off-peak periods, when leisure travelers are more price-conscious. This system has the advantage of limiting substitution between the two offerings. While it allows the greatest number of people to travel at a price that suits them, it sometimes means accepting a less convenient departure time, which spreads demand more evenly throughout the day and fills more trains, to the greater benefit of the carrier.
Florent Laroche, Senior Lecturer in Economics, Lumière Lyon 2 University ; Patrice Bougette, Professor of Economics, CNRS, GREDEG, Côte d’Azur University and Thierry Blayac, Professor of Economics, Montpellier Center for Environmental Economics (CEE-M), University of Montpellier
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