With passenger traffic growing steadily, long-term profitability at SNCF will depend on the restructuring of its freight business which reaches a crucial stage in 2005. Robert Preston spoke to SNCF Executive Vice-President Guillaume Pepy in Paris

FRENCH NATIONAL Railways Executive Vice-President Guillaume Pepy expects to be able to report 'a substantial profit' when the company publishes its 2004 results this month. This will be 'better than break-even', he says, 'not just one or two million euros', and well ahead of the loss of €91m previously forecast for 2004. In effect, SNCF is running one year ahead of the financial projections in its current medium-term business plan.

Pepy reports that the long-distance passenger business is gaining market share from airlines and the private car 'slowly but surely', with SNCF continuing to pursue a volume policy as capacity on its high speed network grows by 3·5% per annum with the delivery of 11 extra TGV Duplex trainsets each year.

Passenger numbers on TER regional services are growing as a result of improved service levels and the arrival of new rolling stock. For example, ridership is up by 24% on routes in Brittany following the introduction of Z-TER EMUs dubbed 'mini TGVs' by their users.

The overall profit of €113m forecast by the 2005 budget is of similar magnitude to last year's result, and with revenue stable one key task will be to reduce the loss made by the freight business from €408m to €228m in 2005.

Freight challenge

At the midpoint of a three-year restructuring plan to secure long-term profitability (RG 6.04 p328), Fret SNCF will be the major focus of attention this year. The budget for 2005 assumes that the French government will start payments under a €800m support package on July 1, but as of early February the European Commission's Directorate-General for Competition had yet to approve this state aid.

Approval had been expected in 2004, and Pepy believed that the delay was due more to procedural issues than the contents of the plan itself, of which there had been 'no strong criticism' from Brussels. Asked if DG Competition was pressing for Fret SNCF to be set up as a stand-alone limited company without the state as its ultimate financial guarantor, Pepy replied that this was 'not discussed'. The only stipulation was that freight accounts should be separate from the rest of SNCF, which he described as 'natural'. He noted that the state aid package is intended as a one-off payment to finance restructuring, rather than long-term support for the freight business.

Fret SNCF will account for 75% of the 3 590 jobs that are to be cut under the 2005 budget, approved by the SNCF board on January 19 when 36·9% of its workforce went on strike in protest. But Pepy is convinced that Fret SNCF can be slimmed down, and that the restructuring plan is essential to ensure its long-term survival. 'The staff can see that we do believe in the freight business', he said, 'people do believe that we're going to get out of the tunnel'.

Fret SNCF lost business representing 20% of its turnover in 2003. The restructuring plan aims to improve service quality and reliability with investment including new locomotives, IT systems and a customer service centre running at record levels. 'We do forecast to have several competitors operating in 2005' said Pepy. He expected companies such as Europorte 2, Connex and possibly neighbouring national railways to be vying for traffic with Fret SNCF later this year. 'There will be competition', he stressed, noting that the opportunities for Fret SNCF to seek new business abroad would be limited in the short term. There will be 'no aggressive expansion in 2005 in other countries' as '95% of our energy is committed to the restructuring plan'. For international traffic Fret SNCF will continue its policy of 'selective co-operation' with foreign partners to offer seamless service.

Fret SNCF is abandoning some flows where it is not covering its operating costs, but the traffic concerned is 'not huge' according to Pepy, amounting to around 1·5% of total turnover. In these cases SNCF 'was subsidising the private sector', he said, 'which was crazy'. Such customers might turn to Fret SNCF's emerging competitors, but 'I doubt that a new operator would be able to make a profit'.

Infrastructure debate

July is due to see the publication of the infrastructure audit commissioned by RFF and SNCF last year, including a technical study by Professor Robert Rivier of Lausanne Technical University (RG 10.04 p661). Pepy expected this to provide an objective assessment of the current state of the French national network, what standards should be applied in the future and 'how much money is needed'.

The level of funding required for the upkeep of the national network has been the subject of 'a very big debate', with RFF seeking better productivity from SNCF which undertakes infrastructure maintenance and management on its behalf. SNCF counters that existing levels of funding are not sufficient to maintain track quality at the required level.

'France is not spending enough on renewal of the existing network' said Pepy. He would like to see more funding for the replacement of ageing components on a national basis, rather than local renewal schemes.

Passenger partnership

In contrast, 2005 promises to be a quieter year for the passenger business. 'We do expect to finalise the joint venture to operate TGV Est by the end of March', said Pepy; the new company will follow the same model as Eurostar and Thalys. Preparations for the opening of the first section of France's next high speed line form 'a huge project', with DB now seeking to obtain approval from the transport ministry for operating ICE trainsets at up to 320 km/h in France.

On the conventional network, refurbished Corail Téoz rolling stock will be introduced to the Bordeaux - Nice route, joining the routes from Paris to Strasbourg/Metz, Clermont-Ferrand and Toulouse where business is 'growing fast'. Deliveries of new rolling stock ordered by the regions for local TER services will continue, including 80 trains to the Bombardier AGC design which Pepy described as 'an incredible success'.

SNCF is working to secure a long-term funding solution for loss-making passenger services that operate across regional boundaries, such as the cross-country services that since January 1 have been grouped with the less profitable routes from Paris in the inter-regional sector of the main line passenger business. For any loss-making service 'you have to find public bodies who are willing to subsidise it on a contractual basis', said Pepy, who saw no contradiction between public service and the profit motive. 'We can be a public service and find a solid, long-term economic model'.

The international passenger market will be opening up to competition after freight, and again SNCF will be pursuing a policy of co-operation, building on the joint ventures established with neighbouring operators. Pepy thought it was 'difficult to say' what might happen in 10 or 20 years' time, noting that in the deregulated European airline market 'BA doesn't operate between Paris and Marseille, and Air France doesn't operate between London and Manchester'. It was 'theoretically' possible that DB might operate one day between Paris and Bordeaux, but 'frankly, I don't know'.

Rather than head-to-head competition, co-operation between different operators is a lesson from the airlines that could usefully be applied to European rail, Pepy believed. 'We should think about creating an alliance on the airline model', he said, one of his own personal projects being to bring together high speed operators in a 'RailTeam' inspired by the SkyTeam alliance of nine airlines including Air France, Alitalia and KLM.

Such an alliance would offer co-ordinated timetables, easier through ticketing 'and, of course, loyalty programmes'. Based on hubs that might include Brussels, Strasbourg and Amsterdam, such an alliance would be a major competitor for the airlines 'provided we are more and more customer-focused'.

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