CRPY F &) N CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU Canadi

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.„_ CRPY F &) n CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU CANADi

21st ANNUAL MEETINL

PROCEEDINGS

VANCOUVER, B.C. MAY 1986

A 149

THE IMPACT ON THE INTERCITY BUS INDUSTRY OF POLICY CHANGES IN AIR AND RAIL PASSENGER TRANSPORTATION

D. M. Cape

1.0 Introduction

Passenger modal substitution capability is becoming an increasingly important issue as deregulation continues, the initial impact analyses of which concentrated on intramodal carrier substitution. This paper addresses the intermodal substitution and modal reaction issues with particular reference to the intercity bus industry.

2.0 Canadian Policy Background

At time of writing, March 1986, the Government of Canada is in the throes of implementing their "FREEDOM TO MOVE" document, which has had wide circulation since the summer of 1985. The sub-title "a framework for transportation reform" connotes the contents which are proposals for economic regulatory reform in the transportation sector. The proposals in "FREEDOM TO MOVE" will likely have been embodied in a new National Transportation Act by the time of presentation of this paper. On surface passenger transportation issues, "Freedom" is deafeningly silent. The concept of deregulation discussed precludes any weakening of safety constraints, but concentrates instead on entry, exit, and pricing. One other piece of legislation is in the mill, Bill C-97 The National Rail Passenger Transportation Act.

As the major thrust of current policy in all modes is ward market reliance to determine the industry direction, it seems useful to assess how regulatory easing in other modes might be expected to reflect on the intercity bus industry. Unfortunately, hard data is sparse.

One may presume that passenger rail travel is preferable to intercity bus travel where both are equally available. This presumption is re-inforced by the fact that the bus industry typically undercuts rail prices, and by the ability of passengers to readily stretch their legs and Perhaps obtain refreshments at their convenience en route. Quality differentials in intercity surface passenger trans-

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port were discussed in Cape, 1984 [11. On the same basis, on aggregate, air travel is presumed to be preferable also to intercity bus.

3.0 Canadian Modal Perspective

3.1 Railway Policy Changes-Canada

Perhaps the first major competitive jolt inflicted by the railways on the intercity bus industry in Canada was the introduction of demand based pricing by Canadian National Railways in the late 1960's when they introduced their Red, White and Blue fare plans as a form of price discrimination/differentiation and market segmentation.

Such pricing strategy was designed to flatten peaks and troughs in rail passenger demand. In off-peak periods the new low rail fares would generate additional demand, persons who would not otherwise travel would now do so. Additionally this action would divert some traffic from the competing modes as the price differentials among rail, air, automobile and bus would have moved in favour of rail in the off-peak period. It is significant that the peak periods for all intercity modes are contemporaneous. This action leads to a deepening of the off-peak trough in the non-rail modes. Similarly in the high peak period, the swing in traffic would be away from rail and toward intercity buses and the other modes, again aggravating the peaking problem in the intercity bus industry. At this time, the bus industry was in a developmental, even if not growth, phase. The construction phase of major inter-city highways was almost complete, and the technological change within the bus industry in the form of air suspension, more efficient air conditioning, reclining seats and on board toilets was continuing to make the bus a more appealing alternative than previously. These concurrent changes would tend to mask the impact on the bus industry of changes in the other modes.

Reschenthaler, in 1981 [21 estimated the overcapacity supplied by the intercity bus industry to satisfy peaking and to ward off potential entrants to be of the order of 25% of total equipment. No doubt the rail pricing policy changes have been responsible for some of that additional capital investment in rolling stock by the bus industry.

A second incursion into the revenue base of the intercity bus industry was taken on a much smaller scale by VIA Rail Canada in 1981 in Southwestern Ontario when, for a few weeks, VIA [31 offered its "Way-to-Go" fare structure with 40% reductions in off peak periods, ostensibly to combat the severity of unemployment and decline in travel in that region. The intercity bus industry, determined not to lose market share, reduced its fares on competitive services to

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return to a point one dollar under those offered by VIA Rail, a fare structure that has "stood the test of time". Mathematically, this change has to be a fare reduction i n excess of 40% given the smaller base price. The bus industry voiced its protest against predatory pricing by a crown corporation, certainly informally if not formally. "Way-to-Go" fares went away.

A third incursion arose in the early 1980's with the increasing reliability of VIA's modern LRC rolling stock, providing what some would assess as improved travel quality. That the intercity bus industry did not completely disregard this development is reflected in the adoption by Voyageur Colonial Coach Lines of a demonstration project involving articulated intercity equipment. As will be discussed later in the paper, the adoption of higher quality equipment by the intercity bus industry in the United Kingdom in 1980 was an effort to match quality improvements being offered there by British Rail in the form of widespread introduction of High Speed trains.

With close substitutability between the bus and rail mode, and in Canada basically one intercity bus carrier competes head-to-head with the one rail carrier, VIA, the economic description of the intercity surface public passenger industry has to be that of an oligopoly - small number of suppliers, each heavily interdependent. The standard economic outcomes in such an environment are either that of sticky prices upward or of the presence of a price leader. The examples above suggest that, in Canada, ;rail has been the price leader, at least up to now.

There are, however, other opinions of the substitutability between bus and rail. Gormick [4] notes that "buses and passenger trains serve different markets. 'The competing bus line even admits it had no success in attracting local passengers left without service when the [Toronto-Havelock] train was chopped in 1982". Notably Trentway-Wagar Bus Lines offered to provide the same service as VIA on this route for the same amount as the VIA subsidy $5.8 million and charge no rider fees, or alter- nately charge rider fees and return part of the subsidy. As an operating carrier on this line, this action alone would seem to suggest that Gormick's claim is only partly correct. Voyageur's testimony [5] eives a very real threat to the survival of the bus industry if the rail is to continue and step up its penetration of the intercity market, leaving the local collector services to the bus.

The new National Rail Passenger Transportation Act does have implications for increased cost recovery by VIA Rail Canada Inc. At this stage 100% of specific costs In [Windsor-Quebec] Corridor service; 60% in Transcontinental service; and 40% in Regional service. The first and third

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3.2 Air Policy Impacts-Canada has To date, Canada's intercity bus industry probably not felt much impact of air policy changes. The development result of third level air services in the early 1970's as a of efforts by the Government of Ontario in the development minimal and extension of its norOntair network probably had low volume effect. This network was designed to serve Timmins, routes, primarily serving communities such as would Earlton, and Sault Ste. Marie. Of itself this network not divert a large volume of the intercity bus industry's bound to ridership, but this short haul air technology was have incursions on the higher volume routes. higher Other demonstration projects followed on such volume routes such as Ottawa - Montreal. Now "City Express" is providing a well-regarded Short Take Off and Landing service among Montreal, Ottawa, Peterborough, and Toronto Aero- and recently upgraded to full Dash-7 service. General down- space currently provide STOL service from Toronto's now has town Island Airport to Buffalo, a link that up to priced been the preserve of Gray Coach. Such efforts being the between air and rail are bound to draw, as well, from bus not only for business travel but for the VFR (visiting friends and relatives) category also.

A more significant incursion into the VFR category for the longer hauls has arisen since the acceptance in 1978 by fares Canadian Transport Commission of Charter Class Canada at which allowed air carriers to offer fares within Canada prices comparable with those being offered on "charter" this services to destinations outside Canada. Again, other pricing policy would have attracted ridership from (cheaper) modes as well as having generated new traffic. basis for As little data is available publicly on a link the bus, one can only draw inferences.

4.0 U.K.Perspective

4.1 Rail Policy Impacts-U.K.

In the U.K., it might be said that the intercity motor became coach industry (as the bus industry is known there) frozen in time from, essentially, the mid-1930's to 1980 with perhaps the only improvement being the building of the motorway network (the U.K. equivalent of North American freeways) in the 1950's and 1960's. During this same period the railway passenger industry was modernising slowly, first by dieselisation resulting in faster and cleaner travel, and later by the development and introduction of Main 100 mph electrically hauled services on the West Coast

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Line. This sequence ultimately resulting in widely available 125 mph High Speed Train services. In sum, these developments had one main effect, that being to widen the quality differential with the bus industry.

In the U.K. rail could not be as easily construed as being a price leader. Although nationalised since 1947, British Rail's operating subsidy is considerably less than VIAls, of the order of 3% (12 million pounds on 450 million pounds) [61. VIA is 1984 Financial Report indicates that passengers paid $177m of $596m expenses, or 29.7% implying a subsidy of 70.3% [71. Ostensibly the services covered by VIA in these figures are non-commuter in nature, although many rides are serving remote stations.

British Rail's financial structure segregates commuter, provincial, and freight services from intercity but will require by 1989 that 5% return on assets be obtained, a far cry from a 70% subsidy in Canada. That British Rail (at least in 1980) felt absolutely no threat to it from the intercity bus industry is evidenced by the fact that, on Nov 30, 1980 a scant 55 days after the deregulating of the coach industry, proceeded to raise its ordinary fares by a whopping 19 per cent, and season tickets by 17%. So much for the argument that deregulation would lead to price shaving by the competition. Later, though, the rapid technological progress that the bus industry adopted as a result of its deregulation in 1980 accompanied by innovative pricing and service character- istics resulted in retaliatory, defensive tactics by ,British Rail in the form of market segmentation and SaverCards.

4.2 Air Policy Changes-U.K.

The major intermodal competition for air travel within the U.K. comes from the railway, essentially on services in excess of 200 miles. The acceptance of proposals by more carriers to serve more markets has resulted in an expansion of chiefly business travel over the longer links. possible expansion of short hop services using STOL technology may, in the future, be a force for the intercity coach industry to reckon with. At present it is inconsequential for the coach industry.

5.0 U.S. Perspective

5.1 Rail Policy Impacts-U.S.

Little analysis has been made public on the intermodal responses to deregulation in the U.S. Babcock and German [ft] in a paper presented at the 1984 TRF concludes a sizeable interaction presently and in the future among AMTRAK, low-cost air services, and intercity buses.

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Although AMTRAK'S reputation has improved steadily over its 15 year life, The Reagan administration is still making noises about future full cost recovery. Such efforts would seem to presage increased trade for the bus industry as well as the (deregulated) low cost air carriers. The public interest group, NARP, is quoted by Transport 2000 as estimating that only a cut in excess of 10% in AMTRAK'S budget could result in closure of the entire system.[9]

5.2 Air Policy Impacts-U.S.

The announcement of the U.S. air industry deregulation came initially at the time of the TRF meetings in New York in October 1978. Over the last seven years the shake-outs have resulted in a greater variety of more appropriate services. Many of which will have impacted adversely on the bus industry. A link specific analysis would seem to be needed to assess whether there is a quantifiable relation- ship. It has been said that ...the intercity bus industry in the United States is threatened with near extinction by airline competition due to deregulation. There are now 49 AMTRAK served communities with no bus service (94 have no air service) and a number of other communities have only very poor bus service. Trailways, for example, has cut numerous runs between Los Ang[e]les and San Francisco. Greyhound is responding to the crisis by franchising its weaker routes to other operators. In the latest round of AMTRAK-bashing, bus companies have joined the attack. However market surveys show very litle overlap between rail and bus markets fin the U.S.- ed.].[10)

6.0 Conclusion

There seems to be little doubt that in Canada that the intercity. bus industry is

(a) relatively unsubsidised, and (b) competitive with rail where rail chooses and is able to operate. (c) serving some 3400 communities compared with 900 for rail and 300 for air (obviously bus must be the sole supplier to over 2000 communities -ergo no competition)

What seems to be less well realised is that in the intercity market, new STOL air services can be expected to draw more business from the bus. It is well recognised that for heavy traffic city pair links between 50 and 350 miles, bus and rail do compete and changes in one will affect the other in a predictable way.

The perspective offered by perusal of the U.K. and

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U..S.environments is useful for future policy planning in Canada.

The philosophy of the new Rail Passenger Transport- ation Act says, quite succinctly, that the goal is a safe, modern, efficient, reliable network at the lowest cost to the Government of Canada without unduly affecting the ability of any passenger car-Fre-FTO provide transportation services under normal competitive conditions. Policy makers are going to have to deal with the fact that, in all Probability, the free world's transportation systems are presently in. what the economists call, Pareto optimal conditions in that no player can benefit from change without at least one other player being unable to be compensated for the loss sustained by such change. The choices are difficult, and the social implications pervasive.

ENDNOTES

1. Cape, D.M. 1984, Intermodal Surface Passen ger- Com etition-and Co-ordination in Southern Ontario- 1983,Annual Proceedings of the Canadian Transport- ation Research Forum, pp.302-306.

2. Reschenthaler, G.B. 1981,Performance Under Regulation: The Canadian Intercity Bus Industry,Consumer& Corporate Affairs Canada, Research monograph #10.

3. VIA Rail Canada Inc.advertisement in Globe E. Mail Toronto, Feb.21, 1983. 4. Gormick, G.Transport 2000 Ontario,Winter 1985/6

5. Voyageur Colonial Ltd.,1981,Su. bmission to the House of Commons Standing Committee on Transportation,Montreal. 6. "This Is InterCity",1986,Modern Ra i 1 ways, Vol .4 3 ,- No.448.p.26

7. VIA Rail Canada Inc., Annual Report 1984, p.26 8. M.W. Babcock and H.W. German, 1984, "A Model for the Demand for Intercity Bus Travel", Annual Proceedings- of the Trans ortation Research Forum ,vol. 2 5, no.1.pp.187-193 9. "AMTRAK Wounded But Alive", Transport 2000 Ontario Spring/Summer 1985 Newsletter, p.10 10. "Bus and Truck Industry News", op.cit.,p.3

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BIBLIOGRAPHY

review of Abbott, J. (ed) "InterCity faces the future-a ., British Rail's InterCity business",ModernRailways Vol.43,No.448 January 1986

American Association of State Highway and Transportation Officials,Der e2ulation of the TransEortation Industry:Task Force Report,Denver,1983 the Demand for Babcock, M.W. and German, H.W."A model of of the- Intercity Bus Travel", Annual Proceedings Transportation Research Forum,Vo1.25,no.l.pp.187-193 Transport- "Bus Industry Opposes VIA Restoration Plan", Action, Ottawa, Transport 2000, Mar-Apr 1985 Competition- Cape, D.M. 1984, Intermodal Surface Passenger and Co-ordination in Southern Ontario 1983,19th Annual Proceedings of the Canadian Transportation Research Forum, pp.302-306. Action, "City Express expands STOL Service", Transport Ottawa, Transport 2000, Jan-Feb 1985. Regulation: The- Reschenthaler, G.B. 1981,Performance Under Corporate Canadian Intercity bus Industry,Consumer & Affairs Canada, Research monograph #10. Newsletter, Transport 2000 Ontario Spring/Summer 1985 Transport. 20000ntario,Toronto, 1985 Transport Transport 2000 Ontario-Winter 1985/86 Newsletter, 2000 Ontario, Toronto, 1986 of Inter- Talley, W.K. and R.P. Kilvington, "Deregulation city Bus Service", Annual Proceedings of the Trans- portation Research Forum, Vol.26 No.1 pp.327-332 i t i on Transport Canada, 1981 I nte rc ti Bus ComEet Study:Issues and ConcluiTons, Motor Carrier Branch. and Inter- U.S. Department of Transport, 1981 Deregulation city Bus Operations in Florida since 1980

VIA Rail Canada, Annual Report 1984, Montreal House of Voyageur Enterprises Ltd. 1981 Submission to the Commons Standing Committee on TransportatnT.,Montreal Rail Canada, House of Commons, 1986 Bill C-97 National Transportation Act

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