CVP Analysis in action – the TGV
A few weeks ago I posted a piece on costs and profits when there is too much volume in the market. This post takes a look at the TGV (high-speed) service of SNCF. It’s in a spot of bother in terms of profit and management are considering various options.
I have been on the TGV several times. It is a fabulous service, but in today’s low-cost flight era it’s a bit expensive. And that’s exactly what a recent post from the Economist noted. According to the post, many TGV routes are no profitable. The reason for non- or low profitability is two-fold 1) increased competition from low-cost airlines who entice passengers with lower fares and 2) increasing costs paid to the rail track operator. SNCF management have apparently suggested three possible solutions, as follows:
1) decrease volume – i.e. reduce routes to those which are more profitable and attract adequate passenger numbers
2) increase volume, by lowering price. This could attract passengers back from low-cost airlines. It is a risky option though, as failure to attract enough passengers could worsen things
3) overhaul operations to be more like a low-cost airline i.e. become more cost conscious and efficient.
Which ever of the above three options are chosen, it is a classic case of the application of Cost-Volume-Profit (CVP) analysis. The costs and revenues will determine how profitable the TGV routes are, but so will the volume available. For example, using option 1 may improve profitability, but may not address costs or revenues. It may also be a bad option politically. Option 3 might keep service volume, but increase profitability and maintain pricing. And, as mentioned, option 2 might increase profitability if passenger volumes increased. It is not to hard to imagine a management accountant at SNCF using CVP techniques to show managers possible outcomes of each option.
Hi all, just passed 20,000 hits on my blog! Not much in the grand scheme of the internet, but it’s not a bad start.