Dearie me! There seems to be a lot of messy thinking here... There seem to be some market-force purists around here who feel that any rail service should be a commercial one (or possibly any sleeper service?). Very hard to see the logic - if you want a pure free market where consumers pay a price that covers the cost (plus whatever profit margin) of a commodity and there are no external benefits or disbenefits to society, you are in the wrong place in transport!
And if we are competing against road and air, as clearly we are in rail, and the objective is to achieve modal shift in the context of the climate crisis, then the most direct fiscal options to deliver this policy / strategic aim are (a) to subsidise (in some form) the rail operation beyond what it already gets directly or indirectly - or to remove artificial costs such as where tickets bear VAT or train operators have inflated costs due to vertical disintegration or the like; or (b) to reduce the subsidy or increase taxes on cars and aviation.
You may object to that policy of course, but it's perverse to think that in transport any tax / subsidy changes are anything other than a rebalancing exercise, rather than removing all taxes and subisidies, to "purify" the market to fit an A-Level economics textbook!
Dare I speculate that in fact those who object to subsidy / grant / PSO / whatever for rail (sleeper, local, intercity, freight, whatever!) are actually objecting to the implication that environmental and social objectives should drive a move away from road and aviation for the journeys in scope...?!
I don't think that there is anybody in this thread that is believing that any form of transport is operating in a market that fits an A-Level economics textbook.
However, there are two points being made:
1. In the current economic framework, the revenue from users of Sleeping Car services do not cover the cost of operating such services. In which case, the current expansion of such services is a political decision rather than a commercial decision. There is not a 'renaissance' of Sleeping Car services based on normal commercial principles. Government subsidies can be easily turned off.
2. Transport services being funded by governments have to compete for those funds with other activities, both inside and outside of transport. Within (rail) transport, is subsidising Sleeping Car travel (at a relatively high cost per passenger) the best use of this money compared to improving day trains, infrastructure, re-opening or new lines etc?
In many cases no. The following are two main examples:
Where there is very good rail infrastructure (i.e. HS lines) - Distances that are inconvenient to the passenger (e.g. Beijing to Shanghai in 6 hours by daytime HSR, 12 hours by conventional express sleeper, London Nice at 10 hours by day train alone whereas a more reasonable timing would be to leave London at about 7 or 8pm, take the LGV Nord to Paris then rejoin the sleeper line, arriving the following morning in Nice.
Where the infrastructure is not so good (No HS lines, much of the route at ≤200km/h) - Building a HS line would not be viable in all cases and may be extremely expensive but journeys may be too far between common city pairs. The sleeper, making time usage more acceptable would increase market share over road and air.
For the small number of passengers, either travel by day train or, if inconvenient, travel from London to Paris in the evening, get a good nights' sleep in a hotel, and continue on a fast day train in the morning.
It would be not be value for money paying such subsidies to capture the tiny amount of market share that a Sleeper train would get.