High-speed rail will impact airliner markets in India

IN DECEMBER 2011 INDIA'S RAILWAY Ministry selected a Japanese-led consortium to conduct a feasibility study on establishing a high-speed rail (HSR) link across the south of the country. It is one of six new HSR lines being planned, and the Indian government is setting up a National High-Speed Rail Authority to manage the nationwide program. Systra, a French company, has already completed a feasibility study of the 650-km Pune-Mumbai-Ahmedabad line, and other consultants have been chosen for the 991-km Delhi-Patna line and the 135-km Kolkata-Howrah-Haldia lines.

HSR networks are being developed rapidly across Asia. China plans to lay down 10,000 mi. of high-speed track by 2020. "Taiwan is extending its network, there's talk in Thailand of developing a national system, and South Korea's KTX is successful and being extended," according to Ken Harris, editor of Jane's World Railways. "Despite the current difficulties, China will forge ahead with its program, because the demand and the money are there."

Other industry experts are equally bullish about the Asian HSR market. Of the 17,000 mi. of planned HSR track implementations worldwide, nearly 10,000 are allocated for Asia, according to New York-based industry forecaster SBI.

In the Middle East, new HSR programs are also being developed. Planing is under way for an HSR to link the states of the United Arab Emirates in a 1,200-km network as early as 2018, and a wider network to link all six Gulf Cooperation Council member states is under consideration as well. Saudi Arabia is planning a line to carry 200-mph trains between the holy cities of Mecca and Medina.

Asian countries are likely to spend around $172 billion between 2010 and 2020 on high-speed rail projects, according to a recent survey by Frost & Sullivan. This is a long way behind the $338 billion earmarked for HSR developments in Europe, according to the company. In North and South America the investment figure is likely to be $137 billion.

Global, growing market

Globally, HSR is a huge, growing market that is likely to develop further with new competitors, from China for example, and new faster trains. Last December, Spain's CAF began the first trials of its 220-mph Odaris high-speed train on the Madrid-Seville track.

The distance between Madrid (with a population of 5.7 million people) and Seville (population 750,000) is 335 mi. Before the HSR link was established between the two cities at the start of the 1990s, the mix of air/rail passengers was 67%/33% air to rail. After the HSR link, that changed to 16%/84% in favor of rail and will rise to 13%/87% in favor of rail by 2020, according to Frost & Sullivan forecasts.

The story is the same throughout Europe: HSR links are being developed or expanded between key trading centers at the expense of airline travel. As HSR services are established on key routes--London-Paris, London-Brussels, Barcelona-Madrid, Paris-Lyons--airlines have either pulled frequencies, reduced aircraft sizes, or departed from the routes altogether. By 2020 a new high-speed line will be built between Paris and Barcelona, cutting journey times on the 514-mi. route from 8 hr to 4.5 hr. This will be just the start of a new interconnected France-Spain HSR jointly operated network, managed along the same lines as the U.K.-France Eurostar HSR system. By 2020 most of Europe's major trading centers will be interconnected via an HSR network.

It is not just in Europe that aviation is losing out to rail. At the end of March 2011 all airline services between Nanjing and Wuhan in China were canceled following the establishment of an HSR link between the two cities, offering a cheaper and competitively fast link on the 284-mi. journey. The introduction in 2007 of the 209-mi. Taiwan High Speed Rail link between Taipei and Kaohsiung has reportedly cut domestic airline services by 50% in the past three years.

Some believe that competition between rail and air has only just begun.

"The impact of the HSR industry and rail in general on air networks has not been as great as it could have been because of the commercial management of the rail system, which is still broadly government controlled," says Ian Lowden, principal with the U.K. aviation consultants LowdexxAviation Consulting. "Airlines, in general, have developed far more flexible and advanced management systems. The rail industry lacks a global distribution system as effective as the airlines' Amadeus system--but that could come. As air travel's competitive advantages have been eroded through fuel price increases and taxes, the airline industry needs to up its game to face a potentially more aggressive and competitive rail system."

So what impact will these developments have on the market for civil aircraft worldwide, especially as HSR links become available in the dynamic air traffic growth regions of China, India, and the Middle East?

Complex calculations

The underlying mathematics to the supply and demand of aircraft on high-density routes where air passenger numbers become eroded by the advent of new fast train services is highly complex. This is especially true when factors such as subsidies, road alternatives, size of linked conurbations, business/leisure traffic mix, airport capacity, and ease of access to an airport from the downtown are factored in.

For example, two-thirds of Japan's population, or almost 100 million people, live in a narrow, densely populated corridor along the south shore of Honshu Island between Tokyo and Fukuoka--an ideal demographic for proponents of HSR services. According to a recent paper from the Transportation Research Board of the National Academies in Washington, D.C., airlines and train companies fight a fierce, competitive, but mutually profitable battle for business along this narrow corridor, which for some sectors sees airlines gain the upper hand (Tokyo-Fukuoka), while in others (Tokyo-Osaka), rail is the clear winner. Distance is a factor, but other competitive issues, such as the frequencies offered, are also important.

But Japan is unique. The demographics favor HSR, and the solution provided by airlines in the form of high-density Boeing 747s for short-haul operations are found nowhere else in the world.

Fear of subsidies

HSR can clearly offer cheaper, more frequent, and more comfortable alternatives to air services in certain markets--HSR has 86% of the Osaka-Tokyo travel market; the cities are 325 mi. apart--on a relatively 'level' competitive playing field such as Japan's. But aircraft manufacturers and operators are worried that if governments appear to be heavily subsidizing HSR systems for environmental or other reasons, air will start to lose out to rail, and fewer aircraft will be needed.

Mike Ambrose, director general of the European Regional Airlines Association, said in September 2011 at the association's annual general meeting, "For too long, politicians have favored rail over air as a solution to many of the problems facing intra-European transport, including congestion, environmental impact, and investment programs. That high-speed rail is seen by key European decision-makers as a preferred alternative to air transport is more a result of doctrine than rational and transparent analyses."

In 2011 the association produced a study that showed annual government subsidies for rail in the 27 countries of the EU are 125 times higher than state aid granted to air transport.

This factor, coupled with the growth in megacities in Asia and the movement of populations from the less densely populated regions (where airlines are often the only practical form of fast transport links), may put pressure on the long-term market drivers for single-aisle aircraft.

Countervailing factors

Some estimates are suggesting the impact could be more short term. According to a study by the Centre for Asia Pacific Aviation on the implications of HSR growth in aviation in China: "Some estimates put the loss in revenue for China's aviation industry from reduced traffic and price pressure at up to CNY10 billion ($1.5 billion) in 2012, or 3-4% of the total. Li Jiaxiang, director of the Civil Aviation Administration of China, stated some 50% of flights less than 500 km in length could become unprofitable as a result of competition from high-speed trains, and around 20% of flights of between 800 and 1,000 km could also run at a loss for the same reason. But sectors above 1,500 km are not likely to be threatened, he added....Guotai Junan Securities recently predicted that high-speed rail could capture between 1.3% and 5.3% of domestic airline passengers [per annum] by 2014.

"First Capital separately forecast that airline revenues would decline by between 3% and 7.9% due to shrinking demand," the study continues. "China Minzu Securities, while downplaying the impact of high-speed railways on airlines, stated up to 9% of passengers could shift from air to rail transport by 2016."

However, the impact of new HSR services on the demand for single-aisle aircraft may be less than many in the aviation industry fear.

The plans are ambitious, but economic and other issues have slowed down HSR plans in many countries. The recent European economic issues have delayed HSR plans in Poland by up to 20 years, according to recent reports. The crash in July 2011 of two high-speed trains in Wenzhou, Zhejiang Province, China, with the loss of 40 lives, prompted the government to postpone many of the major HSR developments it had planned. China's railway has also been under increasing financial pressure. At the same time, the country plans to build 70 airports between now and 2020, suggesting that it is building its aviation services in parallel with, rather than instead of, its fast train system.

Second, airlines have successfully reacted to HSR competition by increasing frequencies and introducing new regional services where HSR rail simply cannot compete.

"Low cost carriers might respond to the emergence of a high speed rail alternative by increasing the frequency of service," according to a 2009 study, Competitive Interaction between Airports, Airlines and High-Speed Rail, by the Organisation for Economic Cooperation and Development and the International Transport Forum. "A similar improvement on the rail side would be very expensive given the cost of trains, and this would reduce rail's market share and profitability.

"In addition, low cost carriers can provide services between regions instead of cities (so avoiding the need to acquire expensive slots at centrally located airports). This is effectively what happened after the high speed rail service between Paris and London opened. The potential strategic responses from low-cost carriers reinforce the view that high speed rail may be justified where densely populated origin destination pairs exist, but is not a general model for interurban and interregional transport."

The effect of HSR competition on northern European routes between London, Paris, Amsterdam, Brussels, and Frankfurt has been to open up slots at heavily congested airports, a phenomenon most airlines have welcomed as they have been able to replace short-haul services with more profitable long-haul routes. In this scenario, integrated air-rail HSR networks allow fast trains to become 'feeder services' to an airport hub, encouraging network carriers to develop their global services using larger aircraft.

But there is a downside to this. Some European politicians now see HSR as an alternative to airline services, rather than a parallel, if connected, transport system. In the U.K., for example, the government has declared it will not build any more runways in the southeast but will promote new HSR lines, potentially depressing the number of aircraft required by U.K. airlines.

Although the potential for HSR developments to eat into the market for single-aisle aircraft is real, the evidence so far is that its impact will probably be less than originally estimated. The demand for new aircraft for domestic routes in South Korea, Taiwan, and France has already been depressed, and further reductions as a result of new fast rail competition should be expected from the cities of the Pearl River Delta in China and from reduced demand on routes between France and Spain.

HSR SERVICES IN EUROPE Population, High-speed lines Rail passenger use, 2010 Area in operation, 2011 2009 Country (millions) (km2) (miles) (million passenger km) France 64.7 547,660 1,185 88,610 Germany 81.8 348,630 803 81,206 Italy 60.3 294,140 577 49,524 (2008) Spain 46.0 499,110 1,285 23,056 U.K. 62.0 241,930 71 52,765

Sources: Eurostat; World Bank; Union Internationale des Chemins de fer; U.K. House of Commons Library.

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