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Transport Economics Working Papers WP-TR-16 Heavily Regulated, but Promising Prospects: Entry in the German Express Coach Market Matthias Walter, Fabian Haunerland and Robert Moll April 2009 Submission to: Transport Policy Dresden University of Technology Chair of Energy Economics and Public Sector Management Manuscript Click here to view linked References Heavily Regulated, but Promising Prospects: Entry in the German Express Coach Market Matthias Walter,∗ Fabian Haunerland† and Robert Moll‡ April 7, 2009 Submission to Transport Policy Abstract Express coach services in Germany have long been heavily restricted by regulation, although offerings comparable to countries like, for example, Great Britain or Sweden bear substantial opportunities for competition, the environment, and mobility. In this paper, we motivate market entry in the German express coach market for local public and integrated transport companies by high profitability rates in other countries and the availability of bus facilities and skills. This is followed by the evaluation of supply and demand. Supply is represented by an analysis of external and internal costs showing that express coaches have significant cost advantages that are intensified by the possible internalization of external costs. Demand is represented by a survey of customers that is evaluated with a conjoint analysis. Our results suggest a market share for express coach services in Germany of at least 5.3%. Keywords: Express Coach, Market Entry, Demand, Public Transport, Regulation, Conjoint Analysis ∗Corresponding author. Address: Dresden University of Technology, Faculty of Business and Economics, Chair of Energy Economics and Public Sector Management, 01062 Dresden, Germany. Phone: +49-(0)351-463-39762, fax: +49-(0)351-463-39763, email: [email protected] †Dresden University of Technology, Germany. Email: [email protected] ‡Dresden University of Technology, Germany. Email: [email protected] 1 1 Introduction Express coach services in Germany historically have been heavily restricted by regulation to protect the national railway from competition. According to the passenger transportation law (Personenbef¨orderungsgesetz (PBefG), § 13) which applies to all public road transport, new services are only allowed if they can demonstrate significant improvements in travel, and the existing local or long-distance railway operator must first be asked if it can operate the new service suggested or improve its service. Hence, the possibilities for market entry have been negligible. Recently, the framework for transport provision has changed due to the liberalization of transport markets in general, increased horizontal integration of international transport companies, more environmental awareness, and demographics. These and other changes pose the question: From the viewpoint of economics, is it worthwhile to supply extensive express coach services in Europe’s largest economy and transport market? To relate the question to the challenges faced by Germany’s public transport companies, we review their incentives for entrance to the market. We focus on the diversification of existing transport operators and their corporate strategies, and because of the scope of this paper, omit looking at specialized entrepreneurs. By providing the first comprehensive economic analysis of the express coach market considering supply and demand, we contribute to the ongoing policy discussion. The results can be highly relevant for the business community, policymakers and researchers. The remainder of this paper is structured as follows. Section 2 describes selected international express coach operations. We review the existing literature about express coach services and conduct a player analysis of the major firms operating express coach services with respect to business segments and their turnover figures. A profitability analysis shows the attractiveness of market entry. Section 3 looks at the regulatory practice in Germany as well as the major German public transport players that potentially could be interested in providing express services. Section 4 looks at the supply side by comparing external and internal costs of different modes of transport. Section 5 studies the demand side with a market share estimation derived from a conjoint analysis based on an extensive survey. Section 6 concludes. 2 2 Selected international experience 2.1 Literature review The deregulation of express coach services in Britain in 1980 has been intensively analyzed in the international literature (e.g. Cross and Kilvington, 1985, and Robbins and White, 1986). More recent papers focus on efficiency analysis of coach (and bus) transportation (Yu and Fan, 2008, for Taiwan, Dalen and Gomez-Lobo, 2003, for Norway) and on scheduling express coach services (Yan and Tang, 2008, and Yan et al., 2007). However, recent literature on the regulation of express coach markets and on the overall perspectives of express coach services is rare. There are some governmental reports and domestic articles on the development of services, e.g. Maertens (2006) for Germany, Statens Institut f¨orKommunikationsanalys (2005, 2007) and Banverket (2006) for Sweden, and Schwieterman et al. (2007) and Transit Cooperative Research Program (1999, 2002) for the US. 2.2 Market shares, turnover figures and profitability To study Germany, we first look at domestic express coach activities in the United Kingdom, the United States and Sweden,1 because they have already experienced liberalization (UK 1980, Sweden 1998, US 1982). Their express coach markets are dominated by integrated transport companies offering mainly train, express coach and local bus services (UK and Sweden), and to a lesser extent in the US, where the market is more diversified.2 Understanding the domestic express coach activities in these countries is relevant for Section 3 of this paper which focuses specifically on the market opportunities for local public transport companies in Germany. 2.2.1 Player analysis for Great Britain National Express is the market leader in Great Britain with a market share of 83% in British express coach services in 2007 (National Express Group, 2008). In that year National Express generated total revenues of over 3 bn EUR. Its largest branch is represented by the UK train business with 1 An additional consideration of international express coach connections, apart from purely domestic services, is beyond the scope of this paper. However, to provide some background, there is a dense network of international express coach lines connecting Germany with many destinations throughout Europe. 2 This explains why we omit express coach services in Finland, South America, etc. 3 56% turnover share. Local buses in Great Britain and the North American student transport division generate 12% each of total turnover. Urban and commuter as well as long distance services in Spain contribute 11% of total turnover, followed by the British express coach division with a 9% turnover share. Figure 1 shows the normalized operating profit margin3 of National Express’ different business units from 2003 through 2007. Additionally the operating profit margin of the company as a whole is given. National Express shows an express coach profitability continuously above company average. Profitability of express coach services is only topped by the profitability of local bus services: 14.2% in comparison to 10.0% for 2007. The ”biggest” rival of National Express’ coach services is Stagecoach with the coach brands Oxford Tube, megabus.com and Citylink. Stagecoach is another integrated transport company active in the rail, coach and bus sectors. While National Express acts as a franchisor and contracts with local bus companies in order to keep its express coach business running, Stagecoach manages its own bus operations. These operations are, as White (2008) points out, mainly based on pre-booking relying on a yield management system. 2.2.2 Player analysis for the US Stagecoach is also active in the US. This market has 3,500 providers (Nathan Associates Inc., 2006), making it far more diversified than any European market. The market leader, Greyhound, is a subsidiary of another integrated British transport company, FirstGroup. Greyhound has a share of 37% in the total US market for express coach services of around 0.95 bn EUR in 2007 (FirstGroup, 2007 and BEA, 2008). For First Group, the adjusted operating profit margin4 of express coach operations is 3.1% in 2007. This relatively low number in comparison to Great Britain can be explained by the restructuring undertaken after the company’s acquisition, by various competing offerings in the market in general and by the price wars among competitors particularly on the East Coast.5 3 Profit before tax, goodwill impairment, intangible amortization and exceptional items divided by revenue. 4 Profit before amortisation charges, non-recurring bid costs, other non-recurring items and profit/loss on disposal of properties divided by revenue. 5 The operating profit margins for FirstGroup are only available for 2007, because FirstGroup acquired Greyhound in early 2007. 4 2.2.3 Player analysis for Sweden The express coach market in Sweden is dominated by Swebus Express, a subsidiary of Concordia Bus. Concordia Bus is one of Scandinavia’s largest transportation companies with at turnover of more than 0.5 bn EUR in 2007/2008.6 Horizontally integrated as well, Concordia Bus operates only with buses. Revenues from contractual bus services in Sweden amounted