BUSINESS CONSULTANCY PROJECT

“OPTIMIZATION OF BAKU-SUMQAYIT PASSENGER TRAIN”

VUSAL ASLANOV

ADA INTAKE 5

MBA 52996

Baku, Azerbaijan

September 10, 2019

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Acknowledgment

I want to express my deepest gratitude to my Business Consultancy Project supervisor- Professor Azer

Abizade, for his permanent assistance and precious consulting and advisory activity throughout the research

process. I am grateful for his patience, availability and integral impact to this Paper.

I feel necessary to mention my family, who supported my dedication to study and created a research friendly

environment for me.

I want to thank my colleagues who helped with obtaining necessary information, my group mates for their

support and cheerful atmosphere and my Management for granting me with the opportunity to continue my

education and self-development.

It is not less important to acknowledge the ADA University Management and Teaching Staff for their

invaluable contribution to our education, providing us with efficient and motivating educational environment,

modern approach and positive attitude to even small achievements of the students.

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Abstract

Today urbanization and globalization has become a constant process, which has a huge impact on the

lifestyle of people. According to the modern research, more that 50 % of worlds’ population live in cities and

by 2030, 6 out of 10 people will live in cities. Growth of population, popularity of tourism, globalization trends,

work preferences and many other factors tremendously increase transportation needs. People choose public

transport for long and short distances, and, since modern life style promote “time is money” slogan, people

prefer transport which is fast, comfortable, safe along with the ability to combine travel with work. All these

options are offered by public railway transport.

Railway is one of the most ancient and popular transport system in the world, efficiently used both for cargo

and public transportation, and despite all evident benefits of airplanes for Transocean routes and very long

distances, railway keeps strong positions due to lower price and no need for long registration process and

necessity to loose extra 2 hours in the airport.

In this Research Paper I have chosen the topic of passenger railway transportation efficiency increase due

to several reasons. First, I myself work in ADY- a national freight and passenger transportation services

provider in Azerbaijan, being one of the largest State-owned entities (SOEs) with the sole shareholder – The

Government of Azerbaijan. Second, nowadays Azerbaijan lives the stable population growth, urbanization

and needs the better development of infrastructure, where public transport is an integral part. Finally, I

assume that since Governments become more conscious about environment, there should be projects on

the increase of level of population awareness about ecology, and obviously, electrified railway is more

preferable than diesel and gasoline vehicles, polluting atmosphere, creating traffic jams, and carrying less

amounts of passengers.

In this Paper I have focused on the most popular passenger route- Baku-Sumgayit-Baku, which was

launched in 2015, so I could gather more than 3 years data on its usage.

For the aims of this Research I have used such analytical tools as SWOT analysis, PEST and Porter’s Five

Forces, in order to be able to evaluate internal and external factors of public railway transportation in

Azerbaijan, as well as the potential and weaknesses of ADY itself. Also, I have developed my proposals for

efficiency increase, such as developing new pricing strategy and new transport schedule, which will serve

better for the passengers, based on the analysis of alternative methods of transportation and Survey results.

The results of my analysis have been set up in the form of recommendations to this BCP.

Key Words: ADY, Railway, Transportation, Passengers, Efficiency.

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Acronyms

ADB - Asian Development Bank

ADY – Azerbaijan Railways

AFD – Agence Francaise De Developpement

AR – Azerbaijan Republic

AZN – Azerbaijan manat (national currency of Azerbaijan)

BC – Before Christ

BCP – Business Consultancy Project

BTK – Baku-Tbilisi-Kars

CAREC - Central Asia Regional Economic Cooperation

EBRD – European Bank for Reconstruction and Development

ERA - European Railway Agency

EU – European Union

EUR – Euro, National currency of EU

GDP – Gross Domestic Product

HR – Human Resources

HSBC - Hong Kong and Shanghai Banking Corporation

HSE – Health, Safety & Environment

ID – Identification Card

IFRS – International Finance and Reporting Standards

IT – Informational Technologies

LLC – Limited Liability Company

SOEs – State Owned Enterprise

SOFAZ – State Oil Fund of Azerbaijan

US/USA – United States/United States of America

USD- US Dollar (National currency of USA)

WB – World Bank

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Table of contents

Acknowledgment ....................................................................................................................... 2

Abstract ...................................................................................................................................... 3

Acronyms ................................................................................................................................... 4

Table of contents ....................................................................................................................... 5

Table of Figures ......................................................................................................................... 7

List of Tables .............................................................................................................................. 8

1. Introduction ....................................................................................................................... 10

1.1. Rationale of the Research ............................................................................................. 10

1.2. Problem Statement and Research Objectives ............................................................. 11

1.3. Research Question ........................................................................................................ 13

1.4. Research Approach, Research Design and Research Methods ................................ 14

1.5. Scope and Limitations .................................................................................................. 16

1.6. Feasibility and motivation ............................................................................................. 16

1.7. Outline of the Thesis ..................................................................................................... 17

2. Company Portfolio ............................................................................................................ 17

2.1. History of ADY ............................................................................................................... 17

2.2. Products and services .................................................................................................. 19

2.3. Baku-Sumgayit Stadler ................................................................................................. 20

2.3.1. Baku-Sumgayit direction ........................................................................................... 21

2.3.2. Sumgayit- Baku direction .......................................................................................... 23

2.4. SWOT analysis .............................................................................................................. 25

2.5. Porter’s Five Forces analysis ....................................................................................... 27

3. The role and support of the Government in the development of Railway in Azerbaijan

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3.1. Introduction and industry overview ............................................................................. 28

3.1.1. East-West corridor and Baku-Tbilisi-Kars rail line .................................................. 31

3.1.2. North-South corridor and Astara-Resht-Qazvin railway line .................................. 31

3.1.3. Sumgayit–Yalama rail line ......................................................................................... 32

3.1.4. Baku and suburbs, Baku– Sumgayit rail lines ......................................................... 33

3.1.5. Other projects ............................................................................................................ 33

3.2. PEST analysis ................................................................................................................ 34

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4. Literature review ............................................................................................................... 38

4.1. Introduction ................................................................................................................... 38

4.2. The history and statistics of passenger rail transportation ....................................... 39

4.3. Railway efficiency ......................................................................................................... 41

4.4. Benchmarking railway systems’ efficiency ................................................................. 43

4.5. Constrained development - pricing strategies ............................................................ 46

5. Methodology ..................................................................................................................... 47

5.1. Research Methodology ................................................................................................. 47

5.2. Research Instruments and Tools ................................................................................. 48

5.3. Data Collection and Data Processing .......................................................................... 49

5.4. Validity of the Research ................................................................................................ 53

5.5. Principles of the Research Ethics ................................................................................ 54

6. Findings and Recommendations ..................................................................................... 55

6.1. Data analysis ................................................................................................................. 55

6.1.1. Ideal time of departure............................................................................................... 55

6.1.2. Optimal Schedule ....................................................................................................... 64

6.1.3. Pricing Strategies ...................................................................................................... 67

6.1.3.1. Demand and Price-Elasticity of Demand .............................................................. 68

6.1.3.2. Price Differentiations ............................................................................................. 70

Frequent user discounts ......................................................................................................... 71

Student discounts .................................................................................................................... 71

Over-demanded and Under-demanded trains ........................................................................ 72

6.2. Drawbacks of the Research .......................................................................................... 72

6.3. Conclusion and Recommendations ............................................................................. 73

6.3.1. Summary of suggestions on the pricing strategies and the roadmap ................... 73

6.3.2. Summary of suggestions on the transport schedule .............................................. 75

References ............................................................................................................................... 81

Appendix 1 ............................................................................................................................... 85

Appendix 2 - The Survey ......................................................................................................... 86

Appendix 3 - Baku-Sumgayit-Baku Monthly Usage ............................................................... 87

Appendix 4 – Corporate Structure of ADY ............................................................................. 90

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Table of Figures

Figure 1 - World: Urban and rural Population 2010-2100. ...........................................................................10

Figure 2 - Interconnection. Philosophical worldview, Design and Research Method ( (Grover, 2015) ........15

Figure 3– Legal Structure of ADY .................................................................................................................18

Figure 4 – Major railways lines......................................................................................................................19

Figure 5- The distribution of passengers across months for 2017 and 2018 ...............................................22

Figure 6 - (i) The distribution of passengers over the origin-destination combinations on Baku-Sumgayit route

for 2017, (ii) The distribution of Standard and Business ticket purchases. ...................................................22

Figure 7 - The distribution of passengers across months for 2017 and 2018 ..............................................23

Figure 8 - (i) The distribution of passengers over the origin-destination combinations on Sumgait-Baku route

for 2017, (ii) The distribution of Standard and Business ticket purchases. ...................................................24

Figure 9 – Structure of goods exported and imported ..................................................................................28

Figure 10– Share of economic sectors in the gross domestic product (GDP) from 2007 to 2017 ...............29

Figure 11 – The Financing Plan ....................................................................................................................33

Figure 12– Country overview ........................................................................................................................36

Figure 13– Passengers journey by financial year .........................................................................................40

Figure 14– Rail passenger transport performance, EU-28, 2013-2017 ........................................................40

Figure 15 – Presentation of cost/revenues in a railway system ....................................................................42

Figure 16 – Railway infrastructure utilization by countries, 2011..................................................................44

Figure 17 – Personnel productivity ...............................................................................................................45

Figure 18– Structure of railway infrastructure performance indicators .........................................................45

Figure 19 – Pricing Strategy Matrix ...............................................................................................................47

Figure 20 - For Baku-Sumgait train (i) Proportion of one-way users to round-trip users, (ii) Proportions of

daily users to rarer users, (iii) Proportions users for each alternative ways of transportation ......................50

Figure 21 - For Sumgait-Baku train (i) Proportion of one-way users to round-trip users, (ii) Proportions of

daily users to rarer users, (iii) Proportions users for each alternative ways of transportation ......................51

Figure 22 - Frequency distribution of passengers’ ideal time of departure from Baku to Sumgayit based on

the actual usage of the current trains on weekdays .....................................................................................61

Figure 23 - Frequency distribution of passengers’ ideal time of departure from Baku to Sumgayit based on

the actual usage of the current trains on weekends .....................................................................................62

Figure 24 - Frequency distribution of passengers’ ideal time of departure from Sumgayit to Baku based on

the actual usage of the current trains on weekdays .....................................................................................62

Figure 25 - Frequency distribution of passengers’ ideal time of departure from Sumgayit to Baku based on

the actual usage of the current trains on weekends .....................................................................................63

Figure 26 -for Baku-Sumgayit train proportions users for each alternative ways of transportation, (ii) for

Sumgayit-Baku train proportions users for each alternative ways of transportation ...................................65

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Figure 27 - Number of passengers on Baku-Sumgayit trains during August 21st-October 15th, 2017, (ii)

Number of passengers on Baku-Sumgayit trains during October 15th-December 30th, 2017 ..................65

Figure 28 - Number of passengers on Baku-Sumgait trains during August 21st-October 15th, 2017, (ii)

Number of passengers on Baku-Sumgait trains during October 15th-December 30th, 2017 ....................66

Figure 29 – Price increase Roadmap ...........................................................................................................74

List of Tables

Table 1 - Porter’s Five Forces analysis of ADY ............................................................................................27

Table 2 – Economic statistics........................................................................................................................35

Table 3– Cost/Revenue drivers for train operations and infrastructure ........................................................42

Table 4 - Ranking of the most efficient countries in train transport services in 2018 ...................................44

Table 5 – Difference between the interview and questionnaire ....................................................................48

Table 6 – Pros and Cons of Quantitative Research .....................................................................................49

Table 7 - Options for ideal time of departure proposed for Baku-Sumgayit trains on weekdays and

weekends (on weekends first three trains don’t operate) .............................................................................51

Table 8: Options for ideal time of departure proposed for each Sumgayit-Baku train on weekdays and

weekends (on weekends first three trains don’t operate) .............................................................................52

Table 9 - Relative frequency distribution of passengers’ ideal time of departure for each Baku-Sumgayit

train on weekdays (first row) and weekends (second row in green). .....................................................56

Table 10: Relative frequency distribution of passengers’ ideal time of departure for each Sumgayit-Baku

train on weekdays (first row) and weekends (second row in green). .....................................................57

Table 11 : (i) Actual number of passengers on each train, (ii) Frequency distribution of passengers’ ideal

time of departure for each Baku-Sumgait train based on actual usage of current trains on weekdays (first

row) and weekends (second row in green) ..............................................................................................58

Table 12 - (i) Actual number of passengers on each train, (ii) Frequency distribution of passengers’ ideal

time of departure for each Sumgayit-Baku train based on actual usage of current trains on weekdays (first

row) and weekends (second row in green) ..............................................................................................60

Table 13 - Proportions of One-way users that use Taxi and Bus as alternative means of transportation....65

Table 14 - Prices of all combinations of routes on Baku-Sumgayit-Baku trains ..................................68

Table 15- Change in number of passengers on each route for each class of Baku-Sumgait-Baku trains

right before and after the price increase on 3rd of March 2017. ............................................................68

Table 16 - Price elasticity for each route and each class of Baku-Sumgayit-Baku trains right before

and after the price increase on 3rd of March 2017 ........................................................................................69

Table 17 - Optimal Schedule for Baku-Sumgayit route for weekdays. There are 16 trips in each direction,

with optional 17th trip if above-mentioned 25-minute difference is allowed ..................................................75

Table 18 - Allocation of the trains in optimal schedule with 16 trains in each direction to 4 Stadlers in use

......................................................................................................................................................................76

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Table 19 - Allocation of the trains in optimal schedule including, B17 and S17 trains in each direction to 4

Stadlers in use. Highlighted are the adjustments that need to be made to the allocation Table 13 .............77

Table 20 - Allocation of the trains in optimal schedule with 16 trains in each direction to 5 Stadlers in use 77

Table 21 - Allocation of the trains in optimal schedule including, B17 and S17 trains in each direction to 5

Stadlers in use. Highlighted are the adjustments that need to be made to the allocation Table 15. ............77

Table 22 - Optimal Schedule for Baku-Sumgayit route for weekends ..........................................................78

Table 23 - Allocation of the trains in optimal schedule with 9 trains in each direction (with optional 10th train)

to 4 Stadlers in use .......................................................................................................................................79

Table 24 - Allocation of the trains in optimal schedule with 9 trains in each direction (with optional 10th train)

to 5 Stadlers in use .......................................................................................................................................79

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1. Introduction

1.1. Rationale of the Research

Today urbanization and globalization has become a constant process, which has a huge impact on the

lifestyle of people. According to the modern research, more that 50 % of worlds’ population live in cities and

by 2030, 6 out of 10 people will live in cities. The tendency will only grow and reach 7 out of 10 by 2050

(Marijan Rajsman, 2013). These trends are demonstrated on the Figure 1 below. Moreover, modern terms

of doing business almost omit distances, people travel worldwide for their business aims, and many of them

do the business internationally or even globally. Additionally, people more and more choose to live and work

distantly – they may live in a suburb and work in the business downtown skyscrapers, or even work in

another city or country, which is very popular in many EU countries. Growing tourism trends are also to be

to mention. All these have become a big challenge for passenger transportation, bringing additional needs

for infrastructure development, schedule and routes optimization, pricing strategies flexibility and different

social discount programs.

Figure 1 - World: Urban and rural Population 2010-2100

(Source: United

Nations, Department of Economic and Social Affairs, Population Division (2012): World Urbanization

Prospects, the 2011 Revision. New York)

Increasing cities result in increased need for public urban transportation, which includes metro, rail, buses,

trams and, in some cities, water trams. Every city develops its transport systems due to its technical,

geographical, economic, infrastructural and legal factors, as well as amount of population, their level of

income, national culture and preferences.

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According to Rajsman the main transportation system in cities with up to 100.000 inhabitants is the bus

transportation system, but the increase of city's size and transport demand, the dominant system becomes

the tramway. In developed countries, such as EU and US, local and regional trains are the most popular

way of passenger transport (Marijan Rajsman, 2013)

Azerbaijan in located on the shore of the Caspian Sea, with its capital – Baku, being the main seaport of the

country, as well as the largest air and railway hub. Being one of the main oil extractors in the Soviet Union,

Azerbaijan, after its collapse, inherited a large and developed transportation infrastructure, along with the

staff education system. Thus, there are Maritime Academy, preparing staff for Marine freight and passenger

transportation, National Aviation Academy of Azerbaijan, Baku College of Communication and Transport.

But after the collapse of Soviet Union Azerbaijan faced such challenges as lack of supply, repair and

operational support, old coach fleet with 20% of the rail operating fleet 11-15 years old, 65%- 16-20 years

old and 15% more than 20 years old. Out of a total fleet of 729 passenger coaches, only 490 were

operational, with the rest being out of use awaiting repair or beyond their standard permitted service life

(Wilson, 2006)

Azerbaijan Railways (further – ADY) is the national state-owned rail transport operator in Azerbaijan. Since

2010 ADY has been implementing different reforms in order to improve railway transportation system, meet

the demands of the economy and citizens in Azerbaijan. One of the initiatives was the introduction of Baku

– Sumgayit speed train. Sumgayit is located 30-40 km to the north from Baku and is the third largest city in

Azerbaijan with population of 339 thousand people. It was founded in 1949 and became an industrial center

in a short period during the Soviet period. After the collapse of the Soviet Union industries stopped their

activities, however, new industries have lately been created.

Even though railway network of ADY is rather wide and still in the process of broadening, for the aim of this

Research I have decided to analyze the optimization of operation of Baku-Sumgayit- Baku speed trains,

launched in 2015.

1.2. Problem Statement and Research Objectives

The formulation of the problem of scientific research is, in fact, the crystallization of the intent of scientific

work. Therefore, the correct problem statement is the key to success. In order to correctly detect a problem,

it is necessary to understand what has already been developed in the chosen topic, what is poorly

developed, and that nobody touched at all, and this is possible only on the review of the available literature.

The clear problems statement often has no less importance than the solution of them. Essentially, it strongly

determines the research strategy in general and the orientation of the scientific research. It is assumed that

formulating a scientific problem is to demonstrate the ability to distinct the paramount from the secondary,

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to observe the existing progress of science in this field and what is still to be investigated about the topic of

the research.

The literature on railway scheduling is very broad. Optimization of railway scheduling can be made in several

ways: through minimization of the costs, through minimization of passenger waiting times which increases

customer satisfactions, through maximizing revenues and so on. Some papers tried to estimate the most

commonly used routes and tried to increase the satisfaction of those users. The approach taken in those

papers was to estimate origin-destination matrix through simple counting method at each railroad or through

surveys/interviews with passengers (Jörnsten K., 1993)

Another method of optimization is to increase the customer satisfaction. One way to do so, is to decrease

the amount of the heavy crowding in the trains. This can be done through estimating maximum number of

travelers in a certain period, so that correct number of trains would be scheduled during that period

(Bussieck, 1996) More detailed analysis of such optimization would require taking cost constraints into

account as well (Claessens, 1995)

As we discuss in the methodology section, the optimization problem we face has natural constraints due to

the number of trains available and the structure of the railways. Therefore, the problem we face is more like

a constrained optimization. Several papers have dealt with such constrained optimization problems in public

transportation (Serafini, 1989)

One of the aims of this Business Consultancy Project is developing the optimal schedule for Baku-Sumgayit

trains. However, due to some unpredicted changes such as preferences of people, prices of close

substitutes, number of the trains available, and so on, the calculations made based on collected data may

not be perfect. Therefore, once the optimal schedule is designed and implemented for several months, it

can be re-optimized based on the collected data. In fact, this becomes a current trend in the railway industry:

they shift from planning in advance and in detail to effective real-time control method (Caprara A., 2007)

The main Research Objectives of this Business Consultancy Project are:

Developing Optimal Schedule: Based on the data we will obtain from ADY and the ideal time of departure

that we will estimate through the surveys, we will construct optimal schedule both for weekdays and

weekend, which will minimize the waiting time of the passengers and maximize revenue without increasing

costs as much.

Defining Pricing Strategy: Based on the past behavior of the passengers on both price and schedule

change and based on the information on frequency of usage collected through survey, we will design several

pricing strategies which will mainly differentiate frequent users and students from the remaining customers.

Thus, the Problem Statement of this BCP can be formulated in the following way – The Optimization of

Baku-Sumgayit Passenger Train’s Operational Activity.

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1.3. Research Question

A research question is the core of any research project. It outlines the main questions that should be asked

by a researcher in order to achieve the research objectives, defines the methodology and guides the

researcher during all stages of his work. It usually begins with the research problem and covers the areas

of concern, conditions to be improved, challenges to be overcome and questions that need answer.

As we know there are three types of the Research question - Descriptive, Observational-Relational, and

Causal (Kirkpatrick, n.d.)

For the aims of this Research the Descriptive type of Research question has been chosen.

Below we can see the main characteristics of good research questions:

✓ Feasible

✓ Clear

✓ Significant

✓ Ethical (Writing Research Questions, 2009)

For the aims of this Research, I have addressed the following research question: How to optimize the

Baku-Sumgayit Train operational activity and enhance the efficiency?

To answer this research question, the following sub-questions will be used:

1. What is the frequency of the usage of Baku-Sumgayit-Baku speed trains?

2. Do our customers prefer one-way trips or round trips? Who is our current and potential customer?

3. What are the alternative methods of transportation? Who are our main competitors on the market?

4. What is the ideal time for the departure for our passengers?

Each of these questions should be deeply analyzed.

The frequency of the usage: For each train, we want to estimate what percentage of the users are daily

users and what percentage are using this train rarely. This proportions will be an estimator for the true

proportion of the daily users for each train. Given the actual usage levels, using these proportions, we will

be able to estimate the number of daily users for each train. This information is useful in analysis of new

pricing strategies Monthly pass card users that we discuss in that section purely depends on the daily users,

as they are the ones who are target audience for these pass cards.

One-way or round-trip: We want to estimate the overall percentage of people who use this train in both

directions. Once again, this information will be useful in analysis of new pricing strategies.

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Alternative methods of transportation: We want to understand the percentage of the users who use our

trains, and those who use alternative methods of transportation, and which ones. This analysis will help us

in several ways. First, it will help us to understand the price elasticity of demand: if people treat this trains as

their only option, they are less price sensitive as opposed to the people who may use bus or taxi as

alternative method of transportation. Secondly, it will help us to estimate the percentage of the users that we

may attract by optimizing our schedule. That is, if a person uses a bus as an alternative method of

transportation, then since the price of the buses are cheaper and the schedules are pretty much fixed, the

main reason to use this alternative is the low price of the buses. On the other hand, taxi prices are at least

as much as the train price, but their schedule is more flexible. Therefore, if a person uses taxi as alternative

method of transportation, this maybe mainly due to the convenience of the schedule. Therefore, re-

optimizing the schedule, may help us to attract the people who use taxi as alternative method of

transportation.

Ideal time of departure: Although the previous three items will be useful for us for the reasons described

above, the main purpose of the survey will be to collect the ideal time for departure. Information ADY possess

is the number of passengers using each specific train. Changes in the schedule are usually done based on

the actual number of users. However, without knowing the ideal departure time for the passengers, it is

impossible to estimate the usage level under new schedule. For example, it is possible that some

passengers who are using 8:00am train would prefer to have used an earlier train, if there was one, and

some passengers using this 8:00am would use a later train. Therefore, for some passengers the ideal time

of departure maybe earlier than the actual time of departure, but since there is no train at that time, they wait

for this one, and for some passengers the ideal time of departure maybe later than the actual time of

departure, but since the later train is too late for them, they take this train and arrive earlier than they need

to. For each train, we designed train-specific time interval, so that people can pick their ideal time of

departure for this train. Except for the first and the last train, and also for the trains just before and just after

the afternoon break, for each train we designed an interval of 40 minutes (20 minutes before and 20 minutes

after), giving 9 options with difference of 5 minutes, including the actual time of departure as one of the

options (Aslanov, 2018)

1.4. Research Approach, Research Design and Research Methods

Before starting to write any academic paper, it is essential to define certain research approach, research

design research methods, data collection tools, data processing and interpretation and techniques in order

to be able for the systematic study of a problem. Therefore, a research approach means the strategy for

research that combines the steps from broad assumptions to certain methods of data collection, analysis,

and interpretation. First, it is essential to decide which research approach will be used to study the problem.

COMPONENTS OF RESEARCH APPROACH: There are 3 (three) basic components of a research

approach- philosophical world view, research design and research methods. Moreover, the chosen research

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approach must match the selected research design and methods. Research design is the overall strategy,

chosen to approach the problem and integrate various components of the study in a logical way, leading to

the efficient problem solving.

Finally, the research methods are ways to get the information and address the research question. The

choice of these methods may differ due to the nature of research problem. For example, when choosing a

qualitative research approach, the researcher must also choose a qualitative research design. This

interconnection is demonstrated on the Figure 2 below (Grover, 2015)

Figure 2 - Interconnection. Philosophical worldview, Design and Research Method ( (Grover, 2015)

As we know, there are 3 (three) methods of research approach:

✓ Quantitative - approach, measuring in numbers. The data is collected by individual or group

interviews, using participatory research, documents analysis and ethnographic study;

✓ Qualitative – approach, using words and images. The data is collected by written surveys and is

preferred for demographic study, statistical analysis and experimental study.

✓ Mixed – combining both previous methods.

For the aims of this Business Consultancy Project the quantitative method has been chosen, because the

Research questions of this study implies working with numbers and figures, making the statistical analysis

of the data collected and statistical interpretation of the data. The primary data was collected by means of a

short survey (Appendix 2), designed particularly for this research and combining all necessary questions. It

was spread among the passengers of Baku-Sumgayit-Baku speed trains by the employees of ADY. The

Questionnaire consists of 4 (four) multiple choice questions, which make the survey very strict and

monosemantic. This method of survey has its pros and cons – it gives a respondent enough time to think

over his answer, but it is cost effective when reaching a large audience.

In this Research the Case Study Design was used, as we are applying a particular research problem of a

particular company and doing an in-depth study of it. Even though this design is often criticized for being

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biased and requiring longer time, it is gaining popularity among the researchers, because it is not restricted

by a certain research approach, but, being empirical, can be applied to both qualitative and quantitative

research, depending on a case studied (S. Teegavarapu & J. D. Summers, 2008)

1.5. Scope and Limitations

Since the objective of this BCP is to optimize the train schedule and to propose new pricing strategies, the

following data was collected:

- The information about usages of each train for past 3 (three) years. For years of 2015 and 2016, we

only have daily total number of passengers using the train. However, for 2017 and 2018 we have

the number of passengers using each of the trains during the day, and the distribution of the stations

“from which - to which” they were travelling.

- The schedule changes made during past 3 (three) years

- The price changes made during past 3 (three) years

However, ADY does not possess some other important information about passengers, such as what

proportion of passengers are daily users, what proportion use round-trip/one-way, what is the ideal time of

departure for people and so on. In order to obtain this information from passengers, we plan to conduct

survey among the passengers for period of 2-3 weeks. The main purpose of this survey was to give us

information on:

- The frequency of the usage of passengers: whether they are daily users or one-time users.

- Whether people use the train for one direction or for round-trip.

- The alternative methods of transportation people use.

- Ideal time people would like to take the trains.

1.6. Feasibility and motivation

Given that I have obtained most of the data from ADY directly, analyzing those data would not require much

of the time. As for the survey, I needed 2-3 consecutive weeks to conduct it in every one of 11 (eleven) trains

in each direction. Since we have not required same people to fill the survey twice, I believe most of the

customers who are daily users were surveyed within the first week of surveys, while the surveys from

remaining customers was collected during following 2 (two) weeks. Once having collected all the data, I

needed 2-3 months to analyze the data, design optimal schedule for the trains, which requires solving

constrained optimization problem, and design new pricing strategies.

I was appointed as a Deputy Chairman at Azerbaijan Railways in July 2016. As a curator of finance

department, I have full access to all database that can be used as a research material. Therefore, obtaining

past data on usages and any other necessary information for ADY would not be an issue.

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Moreover, it allowed me to organize the surveys in the trains where ADY stuff appeared to be very helpful

in conducting it.

1.7. Outline of the Thesis

This Thesis consists of 6 (six) chapters in the following manner:

Chapter 1 makes introduction to the Research Paper, explains the rationale of the study, gives information

about the Problem Statement and research objective, states the research question and sub-questions,

outlines the research approach, as well as highlights scope and limitations of the research, followed by

feasibility and motivation description.

Chapter 2 gives the information about the Company (ADY), its history and background, main and secondary

fields of operational activity, organizational structure, products and services provided. In this Chapter the

information about Baku-Sumgayit Stadler is provided, as well as some graphics and charts, describing the

amount of the passengers in this direction, the monthly tendencies, and preferences. SWOT analysis and

Porter’s 5 Forces analysis are included into this Chapter.

Chapter 3 is dedicated to the role and governmental support in the development of railway in Azerbaijan.

This Chapter also includes PEST analysis.

Chapter 4 is called Literature review, because it highlights what has already been done in the field of the

study, concerning railway efficiency, optimization and passenger transportation and pricing strategy.

In Chapter 5 the Methodology of the research is described, research instruments selected, as well as the

ways and methods of data collection and data processing are depicted. Here we analyze validity and

reliability of the research and pay attention to the ethical issues.

Finally, the Chapter 6 we dedicate to findings and discussions, data analysis, conclusions about preferable

pricing strategy and optimal schedule, and give final conclusions and recommendations. Thus, here we try

to answer our main research question.

2. Company Portfolio

2.1. History of ADY

Azerbaijan Railways SJSC (ADY) was first established in 1880. It is a national freight and passenger

transportation services provider in Azerbaijan, being one of the largest State-owned entities (SOEs) with the

sole shareholder – The Government of Azerbaijan. The development of railways in Azerbaijan started in

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late 1870s due to the oil extraction boom and necessity for oil transportation. In 1878 the first railway of 20

(twenty) km length was built between Baku-Surakhani-Sabuncu.

Since then, the Azerbaijan railways have been developing and improving following the growing demand for

cargo transportation. At present, the total length of railroad tracks is 2910.1 km, operational tracks are 2079.3

km long, 802.3 km of which are double tracks. 1241.4 km or 59.7% of the total length of the railroad are

electrified, while 40.3% are still operated by diesel traction. 1527.7 km of tracks are equipped with the

automated signaling system (Our History, n.d. )

The legal structure of ADY has been changing several times. During the Soviet period it was submitted to

the “center” in Moscow. Later, after the collapse of the Soviet Union, it was submitted to the Ministry of

Transport of Azerbaijan Republic. In its present form ADY was established in 2009 by the Decree of the

President of Azerbaijan to reorganize the national rail operator into a separate state-owned legal entity. The

current legal structure of ADY is shown on the Figure below.

Figure 3– Legal Structure of ADY

ADY includes several fully owned subsidiaries:

✓ Nakhichevan Railways LLC – provides freight and passenger transportation services on the territory

of Nakhichevan Autonomous Republic;

✓ ADY Express LLC – provides freight forwarding services and its marketing;

✓ Capital Repair LLC – designs investment process with other units and facilitation of operational

management of capital construction and repair works;

✓ Demiryolservis LLC – provide repair and reconstruction services, railways installation, production

and sale/purchase of equipment and materials;

✓ Specialized Railway Enterprise 5 and 11 LLC – focuses on designing and construction works of

bridges, subways, side streets, accesses to railway stations and other infrastructure projects;

✓ Other legal entities, such as “Office supply and services” LLC, Medical Sanitary Services, “ADY

Property” LLC, Azerrail SCJC, Locomotive, ADY Container LLC and others (PWC, 2018)

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The organizational structure of ADY is demonstrated in the Appendix 4 to this Research.

2.2. Products and services

ADY is providing freight and passenger transportation services. Freight transportation accounts for 83 % of

ADY’s 2017 revenue. This revenue is separated into four segments – transit (32 % of ADY’s 2017 freight

revenue), import (37%), export (25%) and domestic (7%).

Passenger transportation accounts for 5 % of ADY’s 2017 revenue, separated into two segments – local

(57% of ADY’s 2017 passenger revenue) and international (43%) passenger transportation (PWC, 2018)

In terms of local passenger transportation ADY offers transportation services to:

✓ Baku-Sumgayit (introduced in 2015)

✓ Baku-Suburbs (excluding Sumgayit)

✓ Regional lines. Below we can see the Map, demonstrating major railways lines of ADY

Figure 4 – Major railways lines

In terms of international transportation services ADY provides transportation to Ukraine, Russia and Georgia.

During 2013-2017 the revenue from passenger transportation has declined due to the several reasons:

✓ The closure and frequency reduction of several international routes as a result of lower occupation

rates of these routes;