Which regulation for which rail freight market structure in Europe? The Belgium

case study

Florent Laroche, Christa Sys, Frank Troch, Thierry Vanelslander

Transportnet seminar – Karlsruhe – 11/03/2016

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Question: How to ensure a good level of competition on the Belgian rail freight market?

Introduction – Research goal

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S-1 Worst case S-2 Medium case S-3 Best case

2 operators 4 operators 10 operators

Risk of concentration and low competition on the Belgian market?

Which levers for Belgian authorities to keep a high level of competition?

8M tons-km (+10%) 12M tons-km (+64%) 17M tons-km (+133%)

BrainTrains project: How to increase the share of the rail freight mode in theintermodal chain by 2030 in Belgium?

Define the market

Data collectionRanking

Static measuresDynamic measures

Level of regulationLevers for regulation

Part 4 – Regulation paths for Belgian market

Part 3 – Concentration market

Part 2 – Operators overview

Part 1 – Market scope

Regulatory analysis

Introduction – Framework

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Market analysis

Only 3 operators have their head office in Belgium

100% of operators are international (> one country)

B logistics keeps 80% of market share (2013)

2 regional operators: Crossrail, Railtraxx

6 major operators: DB Schenker, Europorte, B logistics, SNCF Geodis, PKP Cargo, CFL Cargo

4 subsidiaries: Euro Cargo Rail, Captrain, Rotterdam Rail Feeding, Trainsport

12 active operators

Market scope – The Belgian market (2014)

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Connected to 3 major European corridors

> 70% of the traffic is international

7 billion Tons-km

Main figures for the Belgian market

Market scope – The Belgian market

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Link between the number of active operators and the market size (in tons-Km) by European country in 2014

Source: Own calculation

Germany115 companies

112 Mds tons-Km

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Strongly linked to the European market (international operators)

Strategic place for international operators (port of Antwerp)

Market scope – Western-European market

NO

SEDK

DENL

BELU

CHFR

UK

ESPT IT

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Analyze of active operators in the Western-European market (homogeneity)

(PL)

Independent/SubsidiariesInternational/national/localDate of creationType of service (diverse/specialized)Nationality (place of head office)

Qualitative data

Operators overview – Data collection

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Sources

Quantitative data (Time series 2007-2014 when

possible)

Limits

Amadeus databaseAnnual reports & websites of operatorsSurvey (by email)

Turnover (€)Freight tons-KmFreight tonsNumber of employees

Lot of gaps among quantitative dataVery few time series

Data collection for each active operator per selected country

Operators overview – Results

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49% are Germans (location of head office)

46% started to operate after 2000

26% operate at an international level (> one country)

≈ 169 independent operators

70% are not specialized (> one market segment)

Estimated aggregated turnover ≈ 15€ billion (2014)

Operators overview – Results – Top 20

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Rank Company Turnover Nationality Date1 DB Schenker Rail 4.517.000.000 DE 19942 Rail Cargo 2.073.100.000 AU 19233 SNCF Geodis 1.107.000.000 FR 19374 PKP cargo 999.767.000 PL 19185 SBB Cargo 821.240.009 CH 19026 Geneese&Wyoming 635.928.658 USA 19957 Trenitalia cargo 623.000.000 IT 19058 B logistics 451.860.473 BE 19269 Green cargo 444.266.000 SE 1856

10 Hupac 392.400.000 CH 196711 Europorte 267.000.000 FR 200512 RENFE mercancias 259.800.000 ES 194113 CTL Logistics GmbH 177.634.046 PL 200314 CFL Cargo 153.793.792 LU 194615 Cargo Net 147.255.689 NO 188316 Lotos Kolej 141.359.734 PL 200217 BLS Cargo 138.978.758 CH 194118 Verkehrsbetriebe Peine - Salzgitter 115.651.000 DE 197119 LKAB Malmtrafik 112.571.000 SE 1903

20 Holding Exploris 94.000.000 LU 2014

Considered as class I in USA (> 400M€)

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Mainly incumbents among the biggest companies (80%)

100% operate on an international level (> one country)

One alliance represented (Holding Exploris)

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First step: Which level of concentration?

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Concentration market – Static measures

Herfindahl-Hirschman Index (HHI)

Concentration Ratio (CR4)

Number equivalent (NE)

Indicators

Data

000,101

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HHINE /1

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Panel 31 operators

Limits No time series

Tons-Km by operators (2014)

Represents 82% of the market

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Concentration market – Static measuresPa

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CR 4Tight Oligopoly > 60%Loose oligopoly 25 – 60%No oligopoly < 25%

HHI

Low concentration < 1000Moderate concentration 1000 – 1800 High concentration > 1800Monopoly 10 000

56%

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NE 8“A number to indicate how many "effective" competitors exist in a sector” (Lipczynski, 2005 in Sys, 2010, p131)

Results

High ratio: high market concentration

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Second step: Which tendency of market concentration?

Ratio Capital/Labor cost(Meersman et al., 2011)

Persistence of profit (POP) (Lipczynski, 2005)

Existence of economies of scale?Existence of abnormal profit on short-run (SR) and long-run (LR)?

Low ratio: low market concentration

Persistence on LR: low competition & high barriers

No Persistence on LR: high competition & low barriers

Market concentration Competition & barriers

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Concentration market – Dynamic measures – Ratio C/L

Data

Panel

To compare

34 operators12 incumbents

22 new operators

2007-2014Labor cost

Depreciation cost

Source Amadeus database

5 firms

Panel from meersman et al, 2011

LuminusBASF

Arcelor mittalCoca-Cola Belgium

Cordeel temse

Ratio Capital/ Labor cost per operator

Liberalization and structure re-organization

No reasons to have a monopoly or duopoly

Source: Amadeus

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Concentration market – Dynamic measures – Ratio C/L

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2007 2008 2009 2010 2011 2012 2013 2014

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Moderate economies of scale

High

Low

Incumbents

New operators

Moderate

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4Concentration market – Dynamic measures –persistence of profit (POP)

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Persistence of a firm’s standardized profit rate= firm’s actual profit rate – average profit rate across all firms per year

Panel 24 operators10 incumbents

14 new operators

Data 2006-2014Turnover (€)EBIDTA (€)

Source Amadeus database

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4Concentration market – Dynamic measures– persistence of profit (POP) – Results

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On short-run

On long-run

Average short-run profit persistence (0,177) lower than in other industries (0,4-0,5)

High competition

Quick erosion of the short-run persistenceDynamic competition (entry

on the market)

Standardised profit rates of all firms ≠ 0 (-0,011)

Remain barriers to entry (no convergence between firms)

54% of firms have a negative long-run persistence of profit

Risk of concentration (exit, mergers, alliances)

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Concentration market – To resumePa

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On the Western-European rail freight market

Moderate concentration (DB Schenker power market)

Existence of loose oligopoly

Remains barriers to market entry (cost of rolling stock)

No reasons to have a monopoly or duopoly

Sign of increased competition since 2006

Ratio C/L = moderate economies of scale

POP = Low persistance of profit on short-run and convergence on long-run

Tendency to mergers/ acquisitions/ alliances

Static measures = moderate concentration

Average HHI per country

4794 Concentrated

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Regulatory analysis – European competition in trompe l’oeil

Market share of new operators in 2013 (Eurostat, 2015)

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Strong national base for main incumbents

High concentration on national market

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Regulatory analysis – Belgian casePa

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Two cases

Goal

Action level

Authority

Levers

Tools

Concentration on EU marketConcentration only on Belgian

market

Reduce barriers to entry (contestability)

European problem (industryattractiveness)

Belgian problem (market attractiveness)

European CommissionEuropean Railway Agency

Federal StateRegulatory agency

Competition policyHarmonisation/standardisation

Corridor policy

Competition policyInfrastruture quality/pricing

Investments (corridors)

Market monitoring (operator level)Indicators of concentration (European/national)

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Conclusion

Key element to manage freight operators: Before liberalization: measure of efficiency by benchmark

After liberalization: measure of competition by market analysis

Assumption of a good level of competition is enough to control market efficiency

Two conditions for market analysis: Define a relevant market scope to assess the market power

Monitoring of operators to reduce asymmetric information

Two levels of market analysis: European level: moderate concentration and increasing competition

Belgian level: high number of major operators but remains market power from incumbent (highlycontestable)

Two levels of regulation: European level: single market and control mergers and acquisitions

Belgian level: control performance of network manager and national connections to European corridors

To go further: Improving quality of time series to assess evolution of market

Improving the regulation analysis (type of incentives, etc.)

Thank you for your attention.

BRAIN-TRAINS

BELSPO project

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Annex 1 – European opening rate

An analysis in trompe l’oeil: strong national base for main incumbents

CompanyVolume operator (Vo in Md T-km)

Volume market (Vm in Md T-

km)

National market share (Ms in %)

Opening rate (Or in %)

UE-28 market share

Rail Cargo 25,9 19,2 82% 38,6% 2,9%

SNCF Fret 28,5 32 64% 28,1% 2,3%

DB Schenker 104,2 112,6 67% 27,2% 8,2%

Green cargo 11,1 20,9 44% 16,8% 0,54%

Trenitalia cargo

14,9 19 76% 3,4% 0,15%

PKP Cargo 30 50,8 59% 0,5% 0,04%

Opening rate (Or): percentage of traffic from the international market

Limits:- Problem of data quality and reliability- No historical overview

Source: own calculation

Vo

MsVmVoOri

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Annex 2 – POP analysis – Results

The strategy of acquisition seem to have a negative impact on the profit

ABOVE -> BELOW ABOVE (upper the normal profit)

Name Country Date Activity Acquisition Date Market share Name Country Date Activity Acquisition Date Market share

Green Cargo SE 1856 Diverse Logistic group (PostNord) 2012 3% LKAB Malmtrafik SE 1903 Specialized - - -

DB Schenker DE 1994 Diverse Multiple - 26% BLS CH 1941 Diverse - - >1%

Floyd HU 2004 Diverse - - - Hupac CH 1967 Specialized - - -

Direct rail Service UK 1995 Specialized - - >1%

Freightliner UK 1995 Diverse ERS Railway 2013 3%

Magyar HU 2003 Diverse - - >1%

Hector Rail SE 2004 Diverse - - >1%

Continental ES 2007 Diverse - - -

BELOW (under the normal profit) BELOW -> ABOVE

Name Country Date Activity Acquisition Date Market share Name Country Date Activity Acquisition Date Market share

RDT 13 FR 1920 Diverse - - - SBB Cargo CH 1902 Diverse - - 3%

Rail Cargo AU 1923 Diverse Multiple - 7% PKP Cargo PL 1918 Diverse - - 7%

Mendip Rail UK 1993 Specialized - - - VPS DE 1971 Diverse - - >1%

Crossrail BE 2000 Specialized DLC 2007 - Comsa ES 2007 Diverse - - >1%

Lokomotion DE 2000 Diverse - - -

Rail Traction IT 2001 Specialized - - -

Europorte FR 2005 Diverse GB Railfreight 2010 1%

Acciona Rail ES 2007 Specialized - - -

Inrail IT 2009 Diverse - - -

General data: 2 536 billion Tons-Km (Eurostat, 2015) Coal and chemical products: 50% of tons originated in 2012 (AAR, 2014) vs 16% in UE in 2012 (Eurostat, 2015) Modal splite for railway: 30,7% in 2012 (Eurostat, 2015) Most of the competition between networks 560 operators (AAR, 2014)

Ranking (AAR, 2014): Class I: turnover > $453 million Short line and regional railroads

Class I: 69% of traffics (Tons-Km), 90% of employees & 94% of revenues 7 operators : BNSF Railway Company, Canadian Pacific Railway, CN, CSX Transportation, Kansas City Southern

Railway Company, Norfolk Southern Railway Company, and Union Pacific Railroad

Short line and regional railroads: 31% of traffics, 10% of employees

Annex 3 – Comparison USA/West UE

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EuroporteDB Schenker

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Incumbent: negative short-run since 2007 as sign of dominant position (Sys, 2010)

New operator (2005): negative short-run & acquisition strategy (GB Railfreight, 2010)

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Concentration market – Dynamic measures– persistence of profit (POP) – Results

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BelowBelow

AboveAbove the norm

Below

Below

Below

2010

Below2009