Competition and the advantages of Russian Railways

Competition in the freight transport market

Russian Railways has approximately 43.2% of the total freight turnover (including pipelines) in the Russian market for freight transport and logistics services (excluding GEFCO).

Pipeline development has led to a reduction in crude oil transportation by rail.

Motor transport also has significant competitive advantages compared to rail transport, and its share in the total freight turnover of the country has increased in recent years. The stated advantages are associated with the following:

• Smaller financial burden on motor transport. Russian Railways maintains and develops public railway infrastructure at its own expense, while major costs relating to road maintenance are borne by the Federal Bugdet;
• Lack of governmental regulation of motor transport tariffs. This allows the motor transport industry to respond quickly to economic environment fluctuations by changing its pricing policy;
• High availability and ease of obtaining transportation services from motor carriers.

The share of motor transport is also growing because it can ensure cargo delivery on a door-to-door basis, which is the most convenient for consumers.

There has been growing competition in freight rolling stock operations owing to the implementation of the Programme of Structural Reform of Railway Transport. As a result, Russian Railways share of  traffic volumes in Russian freight car operations (excluding subsidiaries and affiliates) decreased from 71.3% in 2003 to 10.2% in 2011. At the end of 2011, the Company sold shares in OJSC PGK and CJSC Rusagrotrans. Consequently, the proportion held by Russian Railways decreased first to 5.4% in 2012 and then to 4.6% in 2013. Finally, Russian Railways’ share in the freight car market during this period decreased more significantly – specifically from 78.2% in 2003 to 1.4% in 2013 .

In accordance with the Federal Law No147-NL on natural monopolies dated August 17, 1995, rail transportation is defined as a natural monopoly. State authorities are working on demonopolisation of this segment, but no decision has yet been made with regards to the timing, manner and form of competition development in the field of freight railway transportation.

In order to strengthen its position, Russian Railways plans to enhance its offering from pure stand-alone transportation service to an integrated transportation and logistics service. Additional services include transshipment, sea freight, scheduled transportation, and arranging transportation across foreign railway administrations, as well as switching to electronic document flow. On particular routes the Company will also offer customers a single rate for the entire cargo journey.

The Russian Railways goal of providing integrated transport services in the market will allow the Company to improve its commercial results and strengthen customer loyalty by satisfying demand for comprehensive services via the “one window” principle, whereby all the necessary freight delivery services are provided to a client by the same company.

Competition in the passenger transport market

Currently, profitability of the unit is marginal. This is mainly due to the lack of long-term state resolutions on operational subsidies in both suburban and regulated long-distance transport, as well as a lack of competitive proposals in high-margin sectors compared with air and motor transport. As a result, there is a gradual shrinking of railway transport’s share of the overall transport mobility market.

The strongest competitive threat to railway transport in Russia and throughout the world is air transport. The main competitive advantages of air travel are speed, the absence of price regulation, and the commercial and marketing flexibility of airlines . From 2007-2013, air passenger traffic doubled and the airline industry’s share of the overall transport market increased by 21.2 percent. This level of expansion is due to the ability of airlines to pursue a flexible tariff policy, an overall increase in business travel leading to higher income generation, and the Russian government’s policy of ensuring the affordability of air transport.

Competition from long-distance bus transportation is less significant, but no less important for railway passenger transport. Bus carriers provide a comparable or even higher level of comfort at lower prices than for second-class sleeping transportations with a similar trip duration.

However, the potential for growth in both volume and profitability of the passenger unit is quite significant. The Group is the largest passenger carrier in the country (10% mobility) with available railway infrastructure. It is possible to consolidate the position of railway transport in the passenger traffic market by enhancing the quality of rendered services, and by developing intermodal passenger traffic and the international passenger transport segment.

Passengers’ preferred mode of transport (share of competing modes of transport), %