High-Speed Passenger Railways

The development over the last decades of high-speed railway networks in places such as Western Europe and Japan has provided passengers with a fast, efficient and comfortable means of transportation. Today, railway operators in countries like France, Germany and Spain compete directly with airlines (traditional and low-cost) on certain short and medium-haul markets. Although the maximum speed of the fastest trains is still about a third of that of a modern airliner, factors such as the central location of stations, less stringent security controls and boarding procedures, and an overall more comfortable journey make rail travel an attractive alternative to flying on distances less than a thousand kilometers.

In order to profitably maneuver in this new, highly-competitive environment, railway operators, many of them former or partially-privatized state monopolies with legacy structures, have had to review some of their practices. In the European Union, the progressive deregulation of rail transport, scheduled to take place between 2006 and 2011, will accelerate the drive towards the adoption of new business processes in this domain. Yet most operators also have a social mission that has no equivalent in the airline industry. For instance, several citizen categories (youth, elderly, military and veterans, civil servants, government officials, etc.) have a de facto right to significant reductions. Many operators, in order to encourage public transportation, also sell special cards which, in exchange for a sunken yearly fee, offer further rebates on the price of a ticket. Several railway operators must constantly juggle between their social commitments and the need to ensure long-term profitability in a rapidly changing commercial environment. Some revenue optimization methods initially developed in the airline industry have already made their way into railway operations, but so far no consensual solution has been widely adopted.

The Joint Revenue Optimization (JRO) tools developed by ExPretio allow railway operators to optimally set prices and determine seat availabilities in a competitive environment, be it intra- or extramodal. The underlying mathematical models, based on the theory of bilevel optimization, take directly into account the purchase behavior of passengers having to choose among a global transportation offer, which includes train, airplane and automobile. The behavior of the customers is quantified by mining historical sales records with sophisticated statistical and econometric procedures. This information is then fed to a bilevel pricing and capacity management model which optimizes revenue, given current market conditions.

The resulting computerized tool can be used in two different contexts:

1. In a strategic context, as a planning tool helping marketers to validate new pricing policies, design new products and marketing strategies, or to evaluate the revenue impact generated by the opening of new routes. Such a tool offers functionalities such as what-if pricing and scenario analysis, cross-market comparisons, competitive fare structure evaluation, and demand characteristics estimation.
   
2. In a tactical context, as an operational tool allowing pricers and seat inventory controllers to optimally determine prices and capacity allocations in real-time, given current market conditions, the products offered by competitors, and the nature of demand. In this context, solutions have a short lifespan and frequent on-line reoptimizations must be performed. Short-term what-if elements can also be integrated into a reoptimization scenario and analyzed in real-time. A tool such as this one will become indispensable in a deregulated environment, whereby railway operators progressively move from static pricing practices, with few products and stable prices, to a more dynamic and volatile sale process, similar to the one currently applied in the airline industry.

ExPretio's railway solutions have been validated in partnership with a major European railway operator exploiting several competitive high-speed lines. The results obtained from scenario analyses and what-if simulations provided extremely valuable insight into the current pricing strategies of the firm and the characteristics of the markets in which it operates

For further information on ExPretio's Revenue Optimization solutions for railway operators, please contact an ExPretio representative, or see our technical white paper Choice-Based Revenue Optimization Applied to the Railway Industry.