Organization & Performance
Cost-Cutting Strategies To Mitigate the Impact of Inflation
With rail passenger numbers plummeting across Europe, John Goddard looks at the challenge of right-sizing and how rail providers can evaluate the true costs of the pandemic.
My name's John Goddard. I've been a partner at LEK for over 20 years. I work across a broad set of sectors and I have industrial clients, clients in the transportation sector. The passenger rail industry is another sector that's been very hard hit by the impacts of the pandemic. If you take late 2021, in the UK for example, the rail industry is probably running about 65 to 70% of pre-pandemic demand, with commuting considerably lower. For all the reasons we know around flexible and hybrid working models, perhaps commuting is at 55% of what it was.
We're seeing similar levels of demand across Europe and those markets which passenger rail has historically been an important mode of travel to business, to commute and so forth. We're unlikely to see level of rail demand come back to levels of pre-pandemic for some time, and it may not recover until we see fundamental underlying growth coming through. That really means that these real networks are not right sized for the demand and they're not right sized for the demand that is likely to develop over the next few years.
That poses governments and rail infrastructure providers big questions, about how to manage that cost base and to prevent excessive cash hemorrhaging out of these businesses, at a time when many of these countries cannot afford that, given what they've had to put in to the economy as a result of the pandemic.
The migration to electrification in transportation is accelerating. We see that in terms of the increased demand for electrical personal vehicles, but we also see this with increasingly deployment of electric buses and alternative forms of propulsion for coaches in long distance travel. China has been leading the way in electric buses and we're seeing increased moves in Europe to pick up the pace, but infrastructure's really important. You've got to have the infrastructure, the electrical infrastructure, the connections to the grid to allow that to happen. We're already seeing debate about that in Western Europe, and North America, around infrastructure for personal vehicles, but also there'll be a requirement for infrastructure, be it in depots and locations where buses and coaches can charge.
We're helping our clients evaluate the trade offs between the costs and the benefits of moving to new forms of propulsion for their transport fleets. You take a diverse transport operator, that might have long distance coaches in Western Europe. It might have buses in Singapore, or it might have school buses in North America. There is not one solution there to move to a net zero position and to reduce your emissions. You've got to understand where the technology is, both from a capital cost standpoint, but then also the expectations around operational costs. Making those trade offs, and helping our clients choose when to invest, how to invest and over what period to consider the benefits from a strategy, is really where we come in.
When technology is changing, there's always uncertainty. One of the things that we do in transportation, be that yellow school buses in North America, be it red buses in London is help our clients trade off and understand how each of those markets are likely to develop with a reasonable set of assumptions. That then allows them to have more confidence in decisions that they make around capital expenditure, around operating expender and the pace at which they deploy those strategies.