Planes, Trains, and Automobiles Crossing Paths in European Travel

The Boston Consulting Group has conducted the first pan-European study of the travel market, surveying 13,000 consumers from 13 countries on the means of

transportation they use, why and how they use them, their pref-erences for one mode of travel over another, and their percep-tions of the brands of 43 passenger-transportation operators, including long-distance rail carriers, traditional airlines, and low-cost airlines. The results of this survey provide further ev-idence that there is considerable opportunity in the European travel industry.

Europe’s travel sector has been evolving for some time, but the pace has accelerated as competition has intensified among modes of travel and across national borders. Rail- ways and airlines are coming face-to-face with new chal- lenges as deregulation and consolidation, combined with high-speed technologies and new business models, enable both rail and air travel to be fast and low-cost. By 2020, pas-sengers will be able to travel faster from point to point by high-speed rail than by plane on nearly half of Europe’s dens- est air routes. Eurostar’s continued dominance of the London-to-Brussels route demonstrates how effectively rail can cap-ture share: Eurostar’s market share on the route has climbed from 44 percent in 2002 to 75 percent in 2008. Airlines are rising to the challenge: leading companies, such as Lufthansa and Air France-KLM, have established rail partnerships and codeshares to broaden their reach and provide better con-nections into their hubs. As a result, travelers will enjoy an unprecedented range of options among operators and modes of travel. In addition to these changes on the supply side, powerful consumer trends are also driving competition across national borders and competitive barriers. Our study, which is the first to explore these trends, found, for example, that the travel preferences of European consumers—especially in the lucra-tive segment of business travel—no longer differ significantly from one country to another. This has created opportunities for travel operators to become pan-European. So far, howev-er, only easyJet, Ryanair, and, to some extent, Eurostar have footprints outside their home markets, making them truly cross-border brands.

OppOrtunitiesfor ActiOn

CONSUMER

By 2020, passengers will be able ■to arrive at their destinations faster by high-speed rail than by plane on nearly half of the densest European air routes

One-third to one-half of European ■travelers would like to switch to an-other means of transportation

Both airlines and railways could ■win far more passengers by focusing on automobile travelers—30 percent of whom would prefer to travel by air or rail—than by trying to steal market share from each other

There is room for only a few cross- ■border operators—success requires a differentiated offering for new con-sumer segments along with smooth implementation

Planes, Trains, and Automobiles 2

As changes on both the supply side and the demand side take hold, railways and airlines will no longer be able to claim the captive customer base they once counted on. One of our study’s major findings is that more than 30 percent of consumers would like to switch travel modes, and in some countries the number is as high as 65 per-cent. Considering the size of the travel market, this pre- sents a huge opportunity for the provider of the alter-nate mode of travel and an enormous threat to the incumbent. Furthermore, both rail and air providers have neglected the largest portion of the market: the au-tomobile sector. In Germany and the United Kingdom, for example, more than twice as many long-distance trips are taken by car as by air and rail combined. More than 30 percent of the drivers we surveyed said they would prefer to travel by air or rail.

The potential for rail operators to attract airline pas-sengers and vice versa pales when compared with the opportunity for both rail and air providers to lure pas-sengers currently traveling by automobile. If only a small fraction of automobile travelers who would like to switch to either train or plane could find the right of-fering, airlines and railways could expand their markets considerably. Our study suggests that both airlines and railways could win far more passengers by focusing on that untapped opportunity than by trying to steal mar-ket share from each other.

What Do Travelers Want and Who Does It Best?Today all passengers expect travel to be safe, clean, con-venient, punctual, fast, and good value for the money. Those are the table stakes—the required elements of the value proposition that travel operators must provide in order to retain their existing customers and attract new ones. According to our survey, airline operators in all but three countries can claim the pole position in traveler satisfaction with regard to most of those crite-ria—even safety. However, consumers’ high satisfaction with top-league railways suggests that rail operators could equally meet travelers’ expectations by following the leaders’ best practices.

Beyond the basic criteria for transportation, consum-ers continue to see travel as an “experience,” and they have formed firm opinions about the different kinds of experiences that each mode of travel provides. When consumers seek a pleasurable emotional experience, in which travel becomes a journey with elements of excite-ment and sophistication, airlines win out decisively. In our survey, home-country railways averaged a 62 per-

cent recommendation rating among travelers, whereas home-country airlines averaged 76 percent.

As common as air travel has become, flying is still viewed as classier than taking a train. Despite the hassles and delays of security checks and long queues at the airport, consumers—perhaps irrationally—still see flying as an upscale experience. This is especially surprising because services such as expedited check-in, baggage handling, seat reservations, and free meals can no longer be taken for granted. Participants in our study rated airlines as being more innovative, dynamic, and elegant than railways, even when in some markets there were only a few apparent differences in service offerings to explain those perceptions. Consumers also perceive booking air travel to be straightforward, easy to navigate, and almost entirely standardized. In fact, fliers believe that it is easier to plan an international trip by air than by rail. This suggests that ease of book-ing can be an effective differentiator for railroads, too.

Yet travelers consider railways to offer some emotional benefits as well. They believe that trains are the most environmentally friendly way to travel, although that criterion is surprisingly low on consumers’ lists (except for Scandinavians), despite persistent efforts by rail-ways to position themselves as the “green” alternative. Travelers also continue to associate trains with a more leisurely, comfortable, and sociable experience than ei-ther planes or automobiles.

We believe that the relative dissatisfaction with rail travel, when compared with flying, stems from the lack of significant competition among rail providers, which has resulted in little customer segmentation or service differentiation. Interestingly, this was the state of the airline industry before deregulation and the entry of no-frills carriers. Consumers’ relative disappointment with railways thus also reflects the improved performance of top-tier European airlines; however, further indus-try consolidation is likely to decrease the difference in performance among airlines. Therefore, passenger rail companies could improve their competitive position by learning from the leading airlines’ and rail providers’ best practices.

Retaining Your Customers and Attracting New OnesBecause having their travel needs met is ultimately more important to consumers than which mode of transpor-tation they use, competition for future European trav-elers is a wide-open arena. Such an environment calls

Planes, Trains, and Automobiles 3

for a greater focus on traveler satisfaction, the ability to compete across transportation modes, and the ability to brand across borders.

Focusing on Traveler Satisfaction. Historically, rail-ways and airlines have concentrated on production; op-timizing processes, fine-tuning networks, and increas-ing connectivity have been the backbone of competitive advantage. When it came to customers’ needs, rail and air operators focused primarily on improving punctual-ity. Yet consumers have increasingly come to take reli-able operations for granted—a minimum standard for all companies to meet. Now, differentiating advantage must shift to satisfying travelers in ways that go beyond smooth operations.

A more customer-focused strategy begins with a clear understanding of passengers’ conscious and uncon-scious needs in each of the market’s critical segments. This makes it possible to standardize some travel fea-tures across all segments, thereby reducing the cost per traveler and freeing up resources to create more individ-ualized offerings for consumers willing to pay a premi-um. Deep insight into a company’s customers also helps identify where further investment in improvements will command a price premium. For example, how much more will passengers pay to enjoy some extra comfort, quality work time, or better meals and beverages?

Understanding customers’ price sensitivities will be just as important as understanding their needs. Railways and airlines must know the value of specific market segments to their businesses and how those segments will respond to innovative pricing options. Group dis-counts could be particularly attractive to budget-con-scious travelers who previously had no other option but to share a car. Pricing and revenue tools that go beyond optimizing prices for individual “seats” to finding the sweet spot in pricing for groups, such as families or stu-dents, become important competitive advantages.

Although rail operators must continue to serve a broad-er demographic than airlines, achieving the maximum return from all their segments will become easier as pricing structures continue to be deconstructed. Air-lines have already begun charging for such “extras” as additional baggage, food, and lounge access. Railways could do the same.

Competing Across Transportation Modes. For rea-sons of cost and speed, most door-to-door trips will continue to involve multiple modes of transportation,

because travelers need to connect between an airport or a train station and their homes or offices, as well as points in between. Transportation operators that can provide the most seamless door-to-door experience across multiple travel modes, often by working with other companies, will have an obvious advantage and a winning formula.

Railways are particularly well positioned to combine train travel with other means of transportation because they are less encumbered by the security considerations that make airline connections more complex. Further-more, they enjoy the structural advantage of stations located in city centers.

Branding Across Borders. Branding involves trans-forming moderately content customers into fans and “addicts.” It must be more than a series of marketing activities. It consists of orchestrating entire business systems to serve a consistent brand experience. Brand-ing guides product development, motivates employees, and shapes the company. And it continuously integrates consumer feedback into the offering and its delivery. Top hotels have embraced Web sites such as TripAdvi-sor, which relies on customer reviews, as a tool to track performance and generate ideas. The site helps hotels see their business more clearly through the eyes of con-sumers.

Branding matters, particularly when a company com-petes across borders. Our study indicates that as inter-nationalization becomes a reality, only a few railways are favorably positioned to extend their brands out-side their home market. Although consumers tend to prefer their own country’s providers, a small number of rail operators are perceived even more favorably by travelers from abroad. But when contemplating an in-ternational move, rail operators should note that the only two companies to have successfully positioned themselves outside their home markets—easyJet and Ryanair—have built strong brands rather than adopt a national identity. If the top railways can position their brands internationally, as many companies have done in other industries, they will have a head start in real-izing a cross-border strategy.

Rail companies face unprecedented opportunity in Europe’s future, but they must develop their strate-

gies carefully. Any game plan should include the follow-ing elements:

Planes, Trains, and Automobiles 4

◊ Grow by differentiation. Identify customer groups that are likely to switch from car or air travel and offer them the product and service features they are miss-ing today.

◊ Upgrade offerings to capture loyalty. Selectively enhance the passenger experience along those dimensions that will create the highest loyalty.

◊ Enhance branding to capture loyalty. Define a unique brand identity that goes beyond a purely national identity. Ensure consistent delivery by creating a cus-tomer-focused organization.

◊ Compete across borders. Carefully evaluate internation-al opportunities and weigh them against the potential “tit-for-tat” moves of other rail companies entering the market. Partnerships might be an appropriate re-sponse.

◊ Compete across modes of travel. Expand your reach by forging links with airlines and with other rail compa-nies. Beware of asymmetric benefits, at home and abroad.

As attractive as the new opportunities in the European travel arena are, it is important to realize that they will put all competitors in the travel sector on a high-speed track. Hence, a cautionary lesson from the deregulated

airline sector: There is room for only a few large cross-border operators. Too many airlines pursued interna-tionalization and grew beyond their “natural” home markets without a clear logic founded on economics. Now the industry is undergoing a painful wave of con-solidation, which will result in the downsizing of many carriers—in some cases, by half.

Peter UlrichSylvain Duranton

Martin Koehler

Peter Ulrich is a partner and managing director in the Munich office of The Boston Consulting Group. Sylvain Duranton is a partner and managing director in the firm’s Paris office. Martin Koehler is a senior partner and managing director in BCG’s Mu-nich office and leads the firm’s Travel and Tourism sector.

You may contact the authors by e-mail at:ulrich.peter@bcg.comduranton.sylvain@bcg.comkoehler.martin@bcg.com

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© The Boston Consulting Group, Inc. 2009. All rights reserved.

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