Rail’s future runs on two separate tracks

Date: 21/01/1999

By Bruce Barnard

THE EU's rail freight industry is suffering from pre-millennium schizophrenia, with some member states embracing open markets while others take refuge in old-style protectionism.

The Union's two biggest markets, Germany and France, are going in different directions, with Bonn preparing for liberalisation and the privatisation of DB Cargo (the freight unit of the giant Deutsche Bahn) while Paris is staging a rearguard action to keep competition at bay and its rail company SNCF under state ownership.

By this time next year, there will be only one winner, according to industry-watchers. They predict that 1999 will be the make or break year for railways to claw back lost market share from trucking.

The contrast between the game plans of DB Cargo and SNCF over the coming year could not be more stark. The German company will cement Europe's first cross-border rail merger with Dutch rail freight group NS Cargo in the summer, creating a 2-billion-euro-a-year business, while SNCF will spend 1999 trying to slow the loss of its market share and assuring a resentful workforce that it is safe from competition edicts from the European Commission.

The good news is that continental Europe is within sight of a market-driven rail industry. The bad news is that the Union will be split in two halves, with liberalisation, stretching from Scandinavia through the Netherlands and Germany to Italy, while protectionism will become entrenched in France, isolating Spain and Portugal from the mainstream.

France will remain a 'black hole' for rail freight, according to Peter Jacobse, an executive with Sea-Land Service.

French transport executives agree. “The SNCF is changing slowly - very slowly,” said Pierre-Yves Collardey, commercial director of the port of Le Havre.

The balance of power has swung decisively in favour of the pro-market forces in the past year thanks largely to Germany's belated and grudging acceptance of liberalisation, nearly a decade after the Commission unveiled plans for improved market access. The French argument that Europe's railways should cooperate with each other to defeat their common enemy - trucking - instead of competing against each other, has been lost.

The Commission is treating the industry with kid gloves, yet its modest proposal to open 5&percent; of the system to competition immediately, rising to 25&percent; within ten years, drew howls of protests from rail unions and some governments and triggered coordinated strikes across six countries late last year.

Cooperation has failed to deliver the goods, literally. Rail's share of the Union's freight market has crashed from more than 30&percent; in 1970 to 14&percent; and is still falling, while trucking's share is over 70&percent; and growing. The railways have less than a 20&percent; slice of the rapidly expanding container market and they will disappear completely from some markets within a decade unless they get their act together, according to Transport Commissioner Neil Kinnock.

Solidarity among the Union's national railways was strained three years ago as companies did back-door deals which bypassed Intercontainer, the Basle-based container marketing unit for 29 European railways, from Turkey to Ireland.

The chief 'culprits' were DB Cargo and NS Cargo, which rocked Europe's railway establishment by forming a joint venture known as NDX Intermodal with US railroad giant CSX Corp, competing head-on with Intercontainer services.

Relations deteriorated after another Deutsche Bahn subsidiary, Transfracht International, teamed up with European Rail Shuttle, a private operator which had captured a large slice of Intercontainer business out of the port of Rotterdam.

The planned merger between DB Cargo and NS Cargo, announced last July, and the decision to fold NDX into Transfracht, signalled the effective demise of the Swiss company in its current form and the start of open warfare between Europe's railways.

Intercontainer said it “had to face the fact that Europe's railways are generally unhappy with the costs and quality of service of combined transport”. The fact that the rebellion was led by Deutsche Bahn, the Swiss-based company's biggest shareholder with 18&percent;, sealed its fate.

Intercontainer will become a holding company and hand over all its commercial operations to newly formed groups which will concentrate on specific routes. Each new business will be responsible for a single link and will ask individual national railways to become shareholders.

The restructuring, due to begin in February, is aimed at creating separate profit centres, but industry observers are sceptical that much can be achieved without a radical management shake-out. The quality of service is a “catastrophe”, according to Werner Kulper, president of the German combined transport operator Kombiverkehr in Frankfurt.

Ironically, the move by some railways to be more commercially orientated will undermine the Commission's campaign to promote combined transport - using a combination of rail, road and barge. “Nobody is making money from combined transport,” says Ed Smulders, managing director of NS Cargo.

In an attempt to move into profit, railways are sharply increasing their rates, effectively signalling the end of many routes. “There is a risk that this will undermine the overall policy of switching traffic away from the road,” said Tim Harris, chief executive of P&O Nedlloyd, the Anglo-Dutch container shipping giant.

But there is no reason why railways cannot make money on combined transport. “Every European railway could lower its costs by 30&percent; if it really wanted to,” argues Smulders.

In the UK, privatised railway companies such as English, Welsh and Scottish Railways (EWS), a bulk carrier, and Freightliner, a container transporter, are simultaneously boosting profits and market shares, at the expense of trucking. And more companies are thinking about moving into a market which is still largely off-limits to private players across the Channel.

Despite a dire track record, rail still commands rave reviews for its latent potential to become a major factor in Europe's transport system in the 21st century.

The biggest compliments come from the most exacting, time-sensitive sector: express delivery. “Rail is fast becoming the attractive transportation proposition for the future and will progressively become more attractive as the private sector gets its act together and becomes more entrepreneurial,” says Philip Rose, managing director of Lynx Express a top British parcels firm which has just acquired Red Star Parcels, a rail-based operator which was once a heavy loss-making part of state-owned British Rail.

The best advertisement for Europe's rail system is the decision by Atlanta-based United Parcel Service (UPS), the world's leading express operator, to launch an operation later this year with Deutsche Post to carry express freight packages across Germany.

UPS spends more than €430 million a year worldwide on rail transport and less than €2 million in Europe, but it has never given up on the industry.

Other courier companies are mulling over opportunities to follow in UPS' and Lynx Express' footsteps, despite earlier flops and the indifferent performance of Europe's state-owned railways.

While initiatives such as the DB Cargo/NS Cargo merger will help rail to meet the challenge from trucking, the industry's salvation lies in the establishment of private companies on the UK model.

So far, there has been little sign of serious private money moving in, despite openings created by liberalisation and the woeful performance of established operators.

As usual, the Netherlands is the laboratory for the industry, with all eyes on the progress of Short Lines, which operates between Rotterdam and Cologne.

Its model is the US, where some 550 short-haul regional rail firms operate in niche markets. Short Lines chief executive officer Rob Spierings says cost is the biggest problem for Europe's would-be rail freight entrepreneurs.

His company is run much more cheaply than the state railways, but operating conditions are light years away from those in the US.