Will privatisation of passenger trains work in India?
The Indian Railways has kick-started the process of inviting bids to allow private companies to operate passenger trains on selected routes in India to address the excess demand in the railways. This process is expected to attract an investment of `30,000 crore. While this seems like a large and exciting opportunity, there are nuances that must be considered.
Before I begin, as a Cofounder of Railofy, India’s first ‘Waitlist and RAC Protection’ service, aimed towards tackling the problems faced by the passengers travelling by trains after being put on the waiting list, I wish to state that why we have an opinion in this area? Let me explain! Railofy connects excess demand from the railways at affordable prices to other modes of transport like flights and buses through our WL & RAC protection products. Hence, we sit at the intersection of all the intercity transportation modes in India (trains, flights and buses) and have a birds-eye view of passenger behaviour across these transportation modes. So let’s begin.
Domestic Passenger Traffic
Despite the growth in passenger air traffic of 18 per cent CAGR (14-19) over the last 5 years, which is primarily driven by new to air customers migrating from long-distance trains, the traffic in railways has remained flat over the same period. This is not surprising given that over 300M+ Indians get waitlisted each year on the Indian railways where demand far exceeds supply. What is surprising is that we are nowhere close to the “peak” of the problem. Take this for an example; in the USA an average person takes 3.1 trips per year via flights (ignoring other forms of long-distance travel). If we compare the same number in India, an average person takes 1.6 trips per year via trains (reserved class) + flights put together. As you can see that as India becomes more aspirational, domestic travel is likely to explode manifolds in the next few decades leading to further constraints on the Rail capacity.
The problems faced by Indian Railways
Despite so much demand, the Railways in India has a peculiar problem. Approximately, 10M passengers travel by long-distance (non-suburban) trains daily. Given its impact on the masses, governments over the decades have been reluctant to increase passenger ticket rates. This has resulted in the Railways having to run these trains at losses. So every time you hear a rail minister announcing a new train in the annual budget, the Railways is only increasing its losses that have to be funded by the government. On the other hand, the freight operations of the railways are both profitable and also have a strong potential to compete with other modal solutions especially transport by Road. The Railways would love to have increased the number of freight trains to enhance profitability but there is massive congestion on tracks on account of passenger trains also using the same tracks.
The proposed solution
Welcome Dedicated Freight Corridor (DFC) and Privatisation of trains! The DFC is a project by the Railways that is currently under construction (expected official completion date - 2022) that seeks to, in simple terms; add new track capacity specifically for freight trains. This will enable the railways to not only introduce more freight trains but also freezes up existing track capacity for more passenger trains. Now, here is the interesting part. Instead of just introducing more passenger trains on its own (which would only further increase Railway losses), the Railway is experimenting with an interesting idea of privatisation of trains where they are hoping that better amenities and services by private players will lead to better fare realisation leading to profitability.
So will private passenger trains work in a country like India?
As per media reports, there is significant interest by private players. To better understand the impact of these trains one must divide the entire market into short routes (Mumbai-Pune, Chennai-Bengaluru, etc, that buses generally ply on) and long routes (Mumbai-Delhi, Chennai-Kolkata, etc that buses generally don’t ply on)
Short Routes
The cost of the traffic on these routes travel via trains or buses as flights are generally not operational. For most
passengers, the Railway is generally the preferred choice not just because of the pricing but also the comfort of travel. Hence a lot of demand for buses on this route can be assumed to be spillover demand – there is either no train available in that time period or no seats available on the trains. Welcome Private trains! Private trains on these routes will essentially compete with buses as they will provide superior comfort and services at a similar price point of AC buses. We have already seen a lot of success (as per Railways) of the trial of Tejas Express (a proxy for a private train) on the Delhi-Lucknow route.
Long Routes
However, the picture is not so clear on the longer routes. Welcome airlines! In India, significant capacity (by some estimates 40-60 per cent) of the airlines is filled at 10-20 per cent premium to AC train (Rajdhani) prices. Airlines also provide the superiority of travel time making them a preferred choice – For example, a Mumbai- Delhi flight will take you approximately 2 hours while at the same time trains will take close to 18 hours. The vast majority of Indians only travel on trains on these routes for price benefit. Now, given the extremely competitive pricing of airlines in India, there is very little headroom for private trains between the price of a flight and the price of a train run by Indian Railways. There is of course ample pricing headroom available for private trains between 14 to 0 days to departure when airlines jack up their prices. Whether this window of opportunity is good enough to create a large enough market remains to be seen. Also, there will always be a significant looming threat for private trains on these longer routes if any airline decides to disrupt pricing in order to compete for market share. In India, this a real threat especially has given that Indian airlines have an order book of 1000+ planes as per media reports.
Stating Anand Srinivasan, an industry expert and ex-Head of Revenue Management at GoAir, “Privatised trains present a very exciting prospect for shorthaul connectivity in the country. Rail connectivity between metros on the shorthaul provides the perfect balance of speed and convenience. Flights on short hauls are not attractive to passengers since the overhead on air travel far outweighs the speed and comfort provided by flights. On the other hand, buses, while frequent, usually involve longer travel time and lower levels of comfort. Fast, comfortable travel between metros on short routes is a market that shows huge potential. This is especially attractive to business travellers who can be productive the entire duration of the travel with easy availability of Wifi and connectivity. This will serve a niche market that is willing to pay a premium for the right blend of comfort and convenience, which none of the existing modes (air and road) can meet.”
In conclusion, in our view, the private train opportunity is extremely attractive on short routes where buses operate. In fact, the total size of the bus market in India is pegged at $15B annually which is larger than the entire passenger revenue of the railways ($8-9B). However, the case for the private train is not clear on longdistance routes in India. Even if there was a case to be made, there is no doubt that trains on these routes will always carry a potent threat from airlines trying to increase the market share aggressively.