Arnie WeissmannA seemingly minor change in regulations regarding pets onboard trains run by Italy's national train service, Trenitalia, is actually just the latest development in a business drama involving a billion-plus dollars, industrial espionage and economic crisis.

The cast includes the president of Ferrari and thousands of Americans traveling in Italy.

Its story pits old-think vs. new-think, entrepreneurs vs. bureaucracy and dogs weighing less than 10 kilos vs. those weighing more.

And, since this story originates in Italy, it involves style.

In its most basic outline, this is an update of "The Little Engine That Could," but it has enough complexity that it could conceivably end up as a case study in the Harvard Business Review, examining the impact of deregulation and the underlying benefits of competition.

It all starts three years ago, when the European Union decided to allow the private sector to compete with incumbent state-owned rail conglomerates.

Most European train services enjoy acceptable levels of customer satisfaction. The glaring exception is Italy, where the reputation of the train service has long taken a beating -- so much so that in the 1940s, poet Ezra Pound famously justified his support of fascism because, under Mussolini, at least the trains ran on time.

Though the current economic downturn was at one of its darkest points in the spring of 2009 when the deregulation occurred, Luca di Montezemolo, the president of Ferrari, and Diego Della Valle, CEO of the luxury goods group Tod's, saw an opportunity. They pulled together other investors and launched Nuovo Transporto Viaggiatori, a new train service that would operate under the brand Italo to challenge Trenitalia.

Italo would connect major cities with high-speed, stylish trains and place a strong focus on customer service and comfort. Although the investment was made by di Montezemolo, and not Ferrari, trains would be painted in the same hue as a red Ferrari.

In response, Trenitalia awoke from complacency almost immediately. Because Italo would need to negotiate with Trenitalia for use of its tracks, a newly energized national carrier first put considerable bureaucratic effort into making things difficult for Italo, according to Edmondo Boscoscuro, who is responsible for Italo's marketing and distribution.

But what happened next is where things get interesting. At the point where it became clear that Italo was not going to be dissuaded, stodgy Trenitalia decided to compete in the very areas where Italo seemed to be most innovative.

Italo came out with three levels of service, but rather than calling them "classes," Italo prefers the term "ambience." All levels offer leather seating and complimentary WiFi, movies and live TV.

Not to be outdone, Trenitalia came out with four "ambiences."

Italo employed yield management pricing from the start; Trenitalia immediately adopted similar technology.

After Italo published its agent commission levels, Trenitalia enhanced theirs (following three years of reduced commissions).

Italo came out with attractive promotional prices and, uncharacteristically, Trenitalia began to launch "sales."

Trenitalia further announced it was ordering new train cars, and it refurbished others.

Trenitalia had always banned any dog weighing more than 10 kilos, but Italo's management decided it would not set any weight limits. A Trenitalia spy in Italo's ranks, however, leaked the information to its competitor, and Trenitalia quickly issued a press release welcoming larger dogs before Italo could.

Italo subsequently issued a press release with the headline, "Hooray for competition!" It congratulated Trenitalia on eliminating the restrictions on large dogs, and it claimed a share of the credit for Trenitalia's newfound customer focus.

Boscoscuro dismisses past battles as "chapter one -- and now we are into chapter two."

Chapter two is all about growth. Frederic Langlois, CEO of Rail Europe, which sells both Italo and Trenitalia in North America, has been frustrated in the past about a lack of inventory in Italy. Particularly in the summer months, there has been more demand for seats than supply. He hopes that this will change with Italo's market entry and that the entire rail market for Italy will grow.

Currently, Italo offers a Milan-Naples line with stops in Rome, Bologna and Florence. It intends to add Turin, Venice, Padova and Salerno before the end of the year.

Boscoscuro's view of competition is, simply, that "the traveler wins."

"Right now, whatever we do, they try to do," he said. "I hope the day comes when we will copy them."

Email Arnie Weissmann at [email protected] or follow him on Twitter.

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