Academic journal article The McKinsey Quarterly

Deregulation on Track? the Transformation of European Rail

Academic journal article The McKinsey Quarterly

Deregulation on Track? the Transformation of European Rail

Article excerpt

The deregulation of Europe's rail freight business is gaining momentum. In January 1998, the European Union plans to introduce trans-European rail freight freeways, a move that could be a turning point in introducing competition to railroads and winning back market share from road transport. The freeways may open the door to an entirely new rail business in which long-distance pan-European rail carriers run high-speed freight shuttles between major hubs while low-cost local railroads cover the regions.

Forming through-paths between international rail hubs, these freeways will be accessible to both existing railway enterprises and new licensed operators. Use of the freeways will be facilitated by "one-stop shop" infrastructure agencies that will allocate and charge for paths transparently and efficiently. Border delays will be minimized or eliminated.

For rail customers long dissatisfied with cross-border services, freeways offer the prospect of better service at lower prices. For railroads, they promise - or more likely threaten - sweeping change. State-owned, highly integrated railroads operating exclusively on national territory have held a monopoly on rail freight for many years. But the way they operate is iii suited to the international demands of today's customers. Locomotive and crew changes at border crossings and misalignment of schedules mean that the average speed of cross-border transport is only 16 kilometers an hour, a third to a quarter of the speed of road transport. Delivery targets are often missed, and there is no integrated European system for quoting prices, invoicing, or tracking goods.

As a result, rail does not get its fair share of international freight flows, even for distances of more than 300-400 kilometers, where it ought to have a competitive advantage over road. Only 6 percent of the chemical industry's international traffic uses rail, for example, compared with 25 percent of its domestic traffic even though the average distance an international cargo has to travel is 520 kilometers, compared with 370 kilometers for a domestic consignment. Yet international traffic is now the most important part of most European railroads' freight business. On the Italian, Swiss, Dutch, and Austrian railroads, 60 to 75 percent of the freight volume transported consists of import/export goods or goods in transit [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. For these railroads in particular, being able to offer a competitive international rail product is vital.

The absence of competition in the rail industry has further eroded what should be rail's natural advantage over longer distances and for heavier goods by leading to low productivity. European railroads' annual productivity improvements have generally lagged behind those of their road transport competitors. They also trail those achieved in the US, where rail freight was deregulated in the early 1980s (see text panel, "US railroads' experience of deregulation"). As a result, rail's market share fell from almost 30 percent of all tonne-kilometers of freight in Europe in the early 1980s to 16 percent in the mid-1990s.

Forces at work

The European Commission has responded to changes affecting transport in Europe by drawing up proposals to make railroads more competitive. These proposals' main thrust has been to separate the management of operations and infrastructure from the provision of transport services, and to push for competition between railroads by opening up access to the infrastructure. The first concrete move in this direction will come in January 1998 when the freeways start to function (see text panel, "European Commission proposals").

Deregulation is only one reason for European railroads to rethink the way they compete. Shifts in customer demand and supplier structure, the deregulation of road transport (with its immediate impact on prices), and the growing reluctance of national governments to maintain subsidies all argue the need for change. …

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