Passengers are willing to pay for comfort

11 december 2017 | Kommersant

Analytical Center expert Aleksey Safronov told the Kommersant about some of the simple and complex ways to make suburban trains more profitable.

Aleksey Safronov
Aleksey Safronov
Department for State-Run Programs and Budgeting

In 2016, 21 suburban passenger companies out of 25 broke even or turned a profit. The remaining four suburban passenger companies netted a loss of RUB 632.8 million. However, suburban passenger companies generally manage to turn a profit by getting compensations from the federal budget for the 99% of the fee for the use of the available rail infrastructure as well as by getting subsidies from the regional budgets that cover the difference between the economically feasible and actual transport fares. The financial performance of these companies in 2016 also was affected by the introduction in 2015 of the 0% VAT rate for the services of suburban trains. Suburban passenger companies could, however, boost their own revenue either by drawing more passenger traffic or by raising the fares. Studies that have been conducted and some of the developments seen in this market in recent years suggest several ways to achieve both goals. Special mention should be made of the fact that significant effect can be achieved early on through organizational measures that don't require any major investments.

The studies that were conducted demonstrated that as household income rises, passengers also tend to spend more on suburban trains. The correlation holds until monthly pay reaches RUB 50-60 thousand per month.

Significant regional variations mean that suburban passenger companies face very different business conditions. And yet, the Ministry of Transport of the Russian Federation still has a policy that offers one-size-fits-all recipes for suburban trains across the country. Customizing the way each specific suburban passenger company is regulated can significantly improve the efficiency of state regulation. With the above taken into account the proposals made below should not be regarded as universal recipes equally applicable to any and all suburban passenger companies.

The standard response of many suburban passenger companies to falling revenue is to increase fares, which reduces the passenger traffic even more and drives revenue down further. Suburban passenger companies are not paying enough attention to market research or studying the elasticity of the demand for their services relative to the price and to other factors, preferring instead to simply pass the buck of their financial problems to budgets of the subjects.

One example of such policy is the situation with the Baikal suburban passenger company where, in 2015, the fares went through the roof reaching RUB 108 for the first 10 km of travel and RUB 1,043 for 200 km. In 2016-2017, the fares were reduced in several stages with prices overall eventually falling by a factor of three, the result being that the passenger traffic on suburban trains went up from 170,000 in 2015 to 269,000 in 2016. As a result, reducing the fares by a factor of three on average, the company's profit between 2015 and 2016 fell just 1.5 times (from RUB 46.3 million to RUB 29.4 million). This was achieved even as the subsidies actually received from the local government fell from RUB 645.9 million in 2015 to RUB 625.2 million in 2016.

This means that if the subsidies remained at the same level in 2016 as they had been in 2015, the company's profit would have gone up despite the lowering of the fares. Several new routes were added in 2017, and the number of trains was increased, renovation work also began on the train station in Ulan-Ude, a measure which was expected to further increase the amount of passengers and eventually allow the company to return to its original level of profit. Thus, an adjustment to the pricing policy and the introduction of new routes based on market research can increase the total passenger traffic and the amount of revenue of a suburban passenger company, thereby reducing the need for subsidies.

Surveys of passengers suggest that for many the price is not the main limiting factor when it comes to suburban trains. The categories of passengers that can afford to pay the most (adults that live outside major cities but work in the cities and that use suburban trains or personal vehicles to commute to work) cite lack of comfort and the presence of anti-social elements on the trains as the main problems. The Moscow region has seen notable success with express trains that are essentially identical to ordinary suburban trains.

Even though there is no real technical difference, express trains are popular with passengers as the higher fare guarantees there are always seats available in the cars while driving away marginalized types, vendors and beggars. Designating some trains as express trains and charging a higher fare coupled with measures to improve safety and passenger security en route is one way to boost revenue without making any extra investments in the rolling stock. In addition, the fares could be differentiated depending on destinations and the wealth of the passengers living in different areas.

When Lastochka trains were launched on the Moscow-Tver route in 2015, it was possible to assess the return on investments in new rolling stock in real time. After the Lastochka had been in operation for one year, they had transported 10.4 million people with 2.2 million (20%) having switched from other modes of transport (they were mostly switching from cars and buses). Despite the fact that the average ticket for Lastochka is 1.5 times more expensive than the ticket for a standard suburban train on the same route, 55-60% of the passengers departing from the same stations where Lastochka makes a stop prefer the new option. This has to do primarily with a whole new level of comfort that the new rolling stock offers the passengers. In 2016, Moscow-Tver Suburban Passenger Company, which operates trains on this route, became the third most profitable company among all the suburban passenger companies. As demand skyrocketed, a decision was made to extend some of the routes that run between Moscow and Krukovo to Klin from September 2017.

Suburban train passes are one way to increase passenger loyalty to suburban trains. In addition, modern digital passes can significantly improve the quality of transport statistics, allowing companies to better estimate losses from passengers that manage to travel further on cheaper fares and to better plan their operations. However, in a number of cases offering discounts on passes and allocating them to different fare zones prove to be insufficiently attractive for passengers. Better market research should help develop more attractive passes and improve passenger loyalty to suburban trains.

People that live in towns where express trains make no stops could also make use of them by taking the express to the big station closer to their destination if the pass also allowed them to travel to all the small stations between the big station they travel to and the next big station the express train makes a stop at. This would allow people to cover the bulk of the distance they need to travel in the shortest time possible, without having to spend money on buying another ticket from the nearest big station to their final destination. A similar system has been used quite successfully in the Netherlands.

Significant savings could be achieved by varying the number of cars to a train and optimizing their routes by adding more routes where people need to transfer from train to train. With this approach, high capacity express trains could be traveling between major stations while shorter trains could take passengers from smaller stations to the nearest bigger station where an express makes a stop. These kinds of innovations can only be implemented in cooperation with Russian Railways, because the organization of suburban train traffic depends not only on passenger demands but on the schedules allocated to suburban passenger companies by Russian Railways.

One way to reduce the costs of suburban passenger companies is by replacing booking offices with ticket vending machines. It has to be said, though, that people still generally prefer to buy tickets from human clerks, which partially stems from people not willing to learn how to use ticket vending machines and partially from the poor reliability of the vending machines (which sometimes fail to print a ticket or refuse to give change). The current efforts aimed at deploying ticket vending machines in greater numbers should be supplemented by efforts to improve their reliability and explain to more passengers how to use them.

At stations that don't have turnstiles, some passengers end up traveling without a ticket against their will as they often simply don't have time to buy a ticket. Placing ticket vending machines directly on the platform would allow these passengers to buy tickets at the last moment.

Source: The Kommersant

Photo: from open sources