Changing Trains

September 1 saw the official publication of a new study of the world railway market, conducted for UNIFE by Roland Berger Strategy Consultants and produced by Eurailpress. Updating an earlier study, the report finds that ‘the industry has grown tremendously’ since 2006.

Driven by several large orders in the rolling stock sector, the average annual volume of the world market has increased by €19bn in two years, or a nominal growth rate of 9%. And despite worries about a global economic downturn, the consultants predict that ‘robust growth will continue for the foreseeable future’. From today’s estimated €120bn a year, the market is expected to grow by between 2·0 and 2·5% per annum to reach €154bn in 2016. Within this, the 'accessible' element will grow by between 2·5 and 3% a year from €86bn to €111bn.

According to Roland Berger, Europe, NAFTA and the Asia-Pacific region remain the dominant markets, with Asia-Pacific expected to overtake NAFTA to become the second-largest ‘accessible’ market by 2016. Eastern Europe and the CIS region will also see above-average growth.

As an example of the current optimism and buoyancy in the rail sector, we need only to look at the forthcoming InnoTrans trade fair in Berlin on September 22-26, which has attracted more than 1900 exhibitors from 41 countries. And this is not to mention the REMSA and RSI events taking place in the USA at the same time.

I have remarked before on the fact that major investors are taking a greater interest in the rail sector, notably amongst the US Class Is as highlighted by the public battles between CSX and its activist shareholder TCI. But the phenomenon is not confined to the USA, nor to the bigger railways. Private-sector investment is flowing into many other railways, notably those serving mineral resources. When I talked discussed with him about the forthcoming sale of Central East African Railway, Railroad Development Corp Chairman Henry Posner commented that ‘the value of railways is significantly greater than it was’.

It is a far cry from a few decades ago when the very existence of railways was under threat. The death at the end of July of Sir David Serpell – at one time a senior civil servant in the UK’s Department of Transport – reminds me that it is 25 yeas since he chaired the Review of Railway Finances. This suggested - in all seriousness, that the British Rail network could be slashed from 16 000 to little more than 5 000 route-km in order to achieve profitability. Serpell never understood why his report was so roundly rejected, but the economic model he used was ‘pure’ to the point of lunacy. And although Serpell is reported to have recognised personally that rail offered wider social and economic benefits, they were not considered because they were not in his terms of reference.

Today almost all governments recognise that railway investment brings wider economic and societal benefits, which David Burns explores in the September issue of Railway Gazette International. It may be wishful thinking to believe that rising oil prices and environmental concerns are having a significant impact on modal choice, where the main drivers remain cost and quality of service, but looking further ahead, it seems likely that the rationing of carbon emissions and pressure on energy sources will have a fundamental effect on transport policy at the political as well as economic level.

Just how this will play out is by no means clear, but the scenarios developed by RSSB’s groundbreaking Foresight Studies project unveiled at the World Congress on Railway Research earlier this year present some possible directions. For rail to prosper, it needs to form part of a balanced transport strategy, and as the ongoing debate about the use of very large lorries in Europe highlights the risk that attempting to optimise each mode separately risks a seriously sub-optimal overall result.

Nevetherless, with market optimism and investment both running at high levels, it is, as Posner and others have remarked to me recently, ‘a good time to be in the rail industry’.

Making rail freight more competitive is an intrinsic element of the European Commission’s transport strategy, as most recently outlined in its official Communication on Greening Transport which was adopted on July 8. This sets out initiatives to 'make transport greener and more sustainable’, including measures to internalise external costs and changes to the Eurovignette lorry-charging rules – although ironically these do not address the crucial issues of road accidents and greenhouse gas emissions.

Boosting the market share of 'less congested’ modes like rail is seen as crucial if Europe is not to grind to a halt. According to EC figures, the demand for freight transport rose by 31·5% over the decade from 1995, and further growth is predicted. The Commission says it will 'come forward with actions that will have positive effects’ including legislative proposals on rail freight and revisions to the directive on infrastructure charging. Later this year we can expect legislation on reducing rail noise.

A belief in the efficacy of competition has underpinned European transport policy, with the presumption that this will provide better customer service. And it must be admitted that many of the former state railway monopolies do not score highly in this respect. Liberalisation saw small open access operators target specific niches, notably block trains of containers and chemicals. But three years after the EU rail freight sector was opened up to full competition, market forces are coming into play, and we are starting to see signs of consolidation.

This reflects experience in North America, and more recently Australia. Deregulation in the USA triggered a spate of mergers and spin-offs, leading to a marked polarisation between the seven big Class I railroads and a multitude of short lines providing local feeder services. In Australia, Pacific National is now effectively competing head-to-head with QR and there are few other major players in the general freight market.

Deutsche Bahn was early into the game with Railion’s takeover of NS Cargo and DSB Gods, followed by strategic expansion into the logistics and shipping industries that has made DB Schenker a global player. Having acquired EWS and Transfesa, DB is now increasing its stake in BLS Cargo to strengthen its place in the transalpine market. DB is also reported to be in talks with ÖBB to create a joint venture subsidiary known as RailSelect. Meanwhile, Rail Cargo Austria expects to receive approval from the competition authorities this month for its takeover of MÁV Cargo which RCA says would make it the third biggest rail freight operator in Europe handling almost 150 million tonnes a year.

DB’s purchase of EWS was driven by the desire to break into France through Euro Cargo Rail. SNCF is now starting to fight back, with President Guillaume Pepy putting freight at the heart of his 'Destination 2012’ vision unveiled last month. Fret SNCF is now expected to become profitable by 2010, with a 20% increase in traffic and a 15% to 20% improvement in productivity, raising its annual turnover to €10bn. Pepy wants to give Fret SNCF 'an international dimension’, with the re-purchase of logistics group Geodis and the acquisition of open access operator ITL 'just the start’.

Pepy would also like to see SNCF buying a US logistics group, and there are suggestions that he is courting Ferrovie Nord Cargo to expand in the Italian market. With Transport Minister Dominique Bussereau backing the creation of 'proximité’ operators to take on the local feeder business, Fret SNCF will be able to focus on more profitable long-haul flows.

Spain too wants a piece of the action, with RENFE’s freight business set to become a stand-alone company later this year. CD Cargo in the Czech Republic and ZSSK Cargo in Slovakia have also started merger talks, with the aim of forming a bigger and more competitive operation.

But without strong regulatory protection it is difficult to see some of the smaller national oper­ators surviving in an increasingly cut-throat market. If US experience is anything to go by, another decade could see European rail freight dominated by a handful of multinational operators, either state-owned or perhaps strong enough to break away from their national origins.