Revolution on the rails: how low-cost trains are challenging traditional TGVs
2013 saw the launch of Ouigo, the low-cost alternative to the classic TGV. Intended to revive interest in rail travel, it also created new competition for the TGV, now known as inOui. What impact will this new competitor have on the rail market?
Florent Laroche, Université Lumière Lyon 2 Patrice Bougette, Université Côte d'Azur and Thierry Blayac, University of Montpellier
Until recently, high-speedrail services in France were totally unified. Whether dressed in orange or Atlantic blue, the TGVs offered an identical range of services, managed by a single operator: SNCF. The big change came on April 2, 2013, when the blue and pink "Ouigo" trains were launched on the rails at 300 km/h, offering low-cost tickets in exchange for the obligation to arrive at the station in advance and travel with limited baggage. This launch came at a time when TGV ridership was falling, under the effect of growing intermodal competition from car-sharing (creation of Blablacar in 2006) and low-cost air travel (EasyJet on national routes from 2007). The 2015 Macron law subsequently opened up a new low-cost modal alternative to competition: long-distance buses.
According to Dominique Memmi, director of research in social sciences at the CNRS, is this the return of the third class? Be that as it may, Ouigo is a real success story, which Alain Krakovitch, head of TGV-Intercités at SNCF Voyageurs, welcomed in June 2024, calling it "a real turning point in French high-speed rail travel".
By 2027, the fleet will have grown from 38 to 50 trains, he announced during the same press conference, and all the carriages will be renovated, with the installation of individual sockets and the development of a new design.
In 2017, the inOui label and carmillon livery began to be applied to all classic TGVs. And this with the promise of "more comfort, services and connectivity": wifi, access to the press and films via a platform accessible on board, catering at the seat...
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. Segmented enough to appeal to different customer groups? 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 assess the 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, thus isolating our case study from elements that could have disrupted the analysis. Nice and Toulouse are only partially connected to Paris by high-speed rail: some 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 half and half. Data were collected over 13 Tuesdays, for bookings made to D-7.
Competition in the transport sector is assessed in two areas in particular: ticket prices and train frequency. As far as prices are concerned, SNCF has been practicing yield management since the 1990s, i.e. it tries to maximize its revenues by varying fares for the same journey according to different criteria, such as the reason for the journey (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 applied, as in the rail industry.
Several variables were taken into account and compared with the price per kilometer in first and second class of inOui TGVs, as well as their frequency. We considered technical variables relating to journey characteristics, such as distance, journey time or frequency of service by mode of transport; variables capturing the degree of competition (calculated, for those in the know, using theHerfindahl-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 (15-29) and older (60-74) passengers, the size and employment rates of destination towns.
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Competition weighing on prices, especially in first class?
Our analyses reveal a number of salient points. In first class, distance has a negative effect on price per kilometer: all other things being equal, the greater the distance, the lower the price per kilometer, as expected. The presence of low-cost trains also has a significant negative effect, particularly at off-peak times, which may seem more surprising for first class. However, these are times when first class is already cheaper, due to yield management and SNCF's desire to fill as many seats as possible. In fact, it's more in the company's interest to fill a seat at a lower cost than to leave it empty.
The higher the quality of service, the higher the price: in other words, the fewer intermediate stops, 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 city size, but decreases with a relatively young population in both origin and destination cities.
In second class, we find the same effects of distance and the presence of low-cost trains. On the other hand, competition from other modes of transport has no significant effect, as this effect is transferred to the least crowded class in off-peak periods, i.e. first class. The unemployment rate is also significant: the higher the unemployment rate on an origin-destination, the lower the price per kilometer. This would mean that, in setting its second-class fares, SNCF takes into account the socio-economic characteristics of the populations of the towns it serves. Price drivers are thus partly common and partly specific between first and second class.
Frequency: substitution or compensation?
As far as the frequency of inYes TGVs is concerned, this is logically lower on long distances and when journey 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 increases when that of bus, car-sharing or Ouigo also increases in the most dynamic markets. Only low-cost air travel has a significant negative effect on supply. In the former cases, the effect is one of complementarity between modes, notably when the dominant inOui offer is insufficient to meet all transport demand; with air travel, on the other hand, we observe a substitution mechanism.
In terms of socio-demographic variables, the frequency of TGV inYes decreases with city size and the proportion of young people, who are more inclined to turn to alternatives. On the other hand, it increases with the proportion of senior citizens, reflecting their attachment to traditional TGVs.
In conclusion, there is limited competition between Ouigo and inOui services, largely due to the strategic distribution of trains throughout the day. inOui trains are preferably scheduled during peak periods, which are the most profitable for SNCF thanks to less price-sensitive business travel, while Ouigo trains are positioned during off-peak periods, when leisure travelers are more attentive to fares. This system has the virtue of limiting substitution between the two offers. While it enables as many people as possible to travel at a price that suits them, they sometimes have to agree to leave at a less convenient time, which spreads demand more evenly over the day and fills all the trains more fully, to the benefit of the carrier.
Florent Laroche, Senior lecturer in economics, Université Lumière Lyon 2 Patrice Bougette, Professor of Economics, CNRS, GREDEG, Université Côte d'Azur and Thierry Blayac, Professor of Economics, Centre d'Economie de l'Environnement de Montpellier (CEE-M), University of Montpellier
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