We like to play competitive games - if the rules are fair

Dr Klaus Kremper is Chairman of Railion Deutschland and is responsible for the whole Railion group within Stinnes AG

ONE YEAR ago the operating arm of German Railway's freight business, DB Cargo, was renamed Railion Deutschland. Part of a sweeping restructuring of DB's freight business following the acquisition of logistics firm Stinnes in 2002 (p565), the move set the scene for DB to expand its freight activities across Europe and even beyond.

Piloting Railion Deutschland on this ambitious course is Chairman Dr Klaus Kremper, who joined DB in 2000 and before that worked for DaimlerChrysler. Describing the background to Railion's ambitions, Kremper explains what lay behind DB's decision to acquire Stinnes and integrate it into the national railway's activities.

'Why did we do it? First, we would have lost contact with the customer. We wanted to be able to offer a full service worldwide with sea, air, truck and rail capability that would give us economies of scale. If we had not made this move, we would have been squeezed out by the truckers, who were taking more and more of the market. And we also needed to offer added value on a worldwide basis. This is what our customers such as DaimlerChrysler were doing, and we needed to do it too.

'Second, we had a real railway problem. We were suffering from poor load factors, with many trains running around with empty wagons. Load factors were about 50%. Railways are stuck with very heavy assets, and combining poor loadings with cash-hungry assets is a recipe for disaster. We needed a partner to fill the wagons.

'And then we had another railway problem. We had no proper regional sales force, just key account managers. Now we have Schenker with 35000 staff all over Europe - and they are all marketers. So that will help ensure that trains sent out fully loaded can more often return without empty wagons.

'There is another reason too. We wanted a better image, and we wanted to transfer that image to the rail business. We also wanted to get rid of Germany from the company name as we are a European business.'

Acquisitions

So the Stinnes acquisition strategy is really working?

'Yes, it is, but so far we have had just 11 months of experience, and there are many things outstanding. Take Schenker, for example. It is the world's third largest sea freight operator, bringing large numbers of containers into the ports of Rotterdam and Hamburg, maybe from Korea. We take those containers on to their final destination such as Warszawa for distribution by lorry to the end customer. We are looking at moving those containers by rail through Russia via the Trans-Siberian. In fact, we have rerouted some traffic already, and Schenker sends around 1000 trainloads a year to Eastern Europe and Asia, including traffic for Afghanistan. And we have just started a Malmö - Milano service, taking traffic from lorries. Personally, I feel we could have done more than we have, but these are early days.'

Has Railion taken over the former Ikea Rail train to Duisburg?

'Yes, we started operating that service between Padborg and Duisburg in June.'

And that involves Railion Danmark? How does the relationship work with Railion's subsidiaries in other countries?

'You are raising the issue of legal entities. Historically, the national railways each ran their own domestic services, and that worked well on the national level. But overall, for traffic crossing frontiers, it was a different matter. Price and quality are the issues, and they were not right for rail traffic, so not much went by train. The big question for us has been how to get the price and quality right.

'In June we introduced a new matrix organisation, which we had been planning for about two years. There are three businesses with full commercial responsibility: Trainload, Wagonload and Intermodal. Each operates to provide a total service and each contracts with our subsidiaries or affiliates for the local arrangements, for example with Railion Nederland in the Netherlands. The Trainload management team negotiates with its partner company in the other country and buys in the necessary service.

'But there is an important caveat. There has to be a basic assumption that we do those things centrally that need to be done centrally. Central control is essential, otherwise the trains do not run. You can decentralise terminal management and shunting. So Trainload buys shunting service from Railion Nederland - if the price and quality are right. In Italy, we work with Strade Ferrate Mediterraneo, in which we acquired a 95% stake on June 8, and the same process applies.

'There is another point. The railway must not be too Germanic. In the Netherlands, the service must be Dutch - you can only win business if the local company has autonomy and plays by the local rules. But control of the long haul must be central.

'All this means that we need different forms of co-operation. In the past railways were afraid of other railways, and co-operation was poor. Now we work with partners in different countries, and we are quite flexible. We already work with around 100 other operators, who all achieve the standards we require, for example in terms of punctuality. Options range from the 100% stake we have in Railion Nederland to the 20% we hold for the moment in the Swiss BLS Cargo AG. The aim is not to acquire 100% ownership, but to get the price and quality right. If that is OK, then all forms of co-operation are possible.'

Is Railion buying Green Cargo, and do you have acquisition plans in Poland and elsewhere?

'We are in discussion about Green Cargo at the moment. But I stress that the aim is not to take ownership, but to deliver on price and quality. You need to co-operate to achieve the right balance, and no model of co-operation is ruled out. Yes, we are looking at other countries, including Austria.'

Government objectives

In terms of business freedom, is Railion entirely free commercially, or does the government have a measure of control, setting objectives for example?

'As our owner, the government is interested in profit. It has a direct interest in seeing traffic transfer from road to rail, but we are relatively free to do what we want, and the government leaves us alone. It understands that if we are to be profitable we can withdraw loss-making services. It provides the infrastructure - a requirement of the basic law (Grundgesetz), but not a single euro is paid to us otherwise.'

But surely intermodal traffic is subsidised?

'Not any more. The state grant for rolling motorway traffic has ceased, and as a result we have withdrawn the last services. It is not economic to haul lorries by rail in a market economy.' The exceptions are the Ralpin rolling motorway services subsidised by the Swiss government between Freiburg im Breisgau and Novara and the Austrian RoLa route from Ingolstadt to Brennersee.

'Going back to the question of objectives, it is DB AG's objective to be financially fit for a stock market listing. It is our job to make sure that we meet that objective, and we will meet it.

'One of the questions is how would DB be privatised, but that will be a decision for Parliament as the representative of the owner. We are sure that we could meet the conditions to achieve a stock market listing next year, but that is not up to us.'

So Railion could be sold off as a separate entity?

'Again, this has to be decided by the owner. Our job is to meet the conditions for a stock market listing. The issue is whether DB should be split between infrastructure and operations. We believe it should stay as an integrated railway because the technology demands simultaneous development of wheel and rail equipment, for example in the field of signalling. '

Competition

In any case, you have plenty of competition. How serious are your competitors?

'Yes, there are more than 200 competitors attacking us, but most of them are small fry. Nonetheless, they are very active and enjoy relatively fast growth. So we have to take them seriously.

'On the other hand we work with 100 partners, so we compete and co-operate, and that is quite normal for any industry. We see liberalisation as a very positive step, but to succeed you have to move first. You see, we are good sportsmen, and sport is good if you play by the same rules and have a level playing field.'

You imply that sometimes the rules are unfair.

'Indeed, and sending traffic to Spain through France is not economically possible, nor is the quality satisfactory. There are legal rules about competition, but in practice it does not work, and that's what counts. In France there is just one company, and that is SNCF.'

But elsewhere competition is working?

'You have to learn how to compete, and the earlier you start, the faster you learn. Initially there was a wave of euphoria, and we were really quite concerned about what would happen. Since then there has been a consolidation effect, and even a bankruptcy or two. The smaller companies do not have enough flexibility; you need a minimum size to operate. When the Karsdorfer Eisenbahn went bust earlier this year, we were able to take over the traffic they were hauling for Shell within 24h - and Shell did not even notice they were using a different carrier.

'The railway system demands high investment, which is best handled by a large company, and politicians who want to break the railway up into small pieces should take note of what happens. There are lessons from the USA, where the freight railways have merged into four big groups. Our view is that in Europe there will be two or three, with smaller operators providing feeder services. Without the big operators, there is no future for rail freight.'

So who are the big international competitors?

'We take Swiss Federal Railways very seriously, but the future is very open. SBB is running its own trains between Basel and K?€?ln, and that means there's a bit of sport in the business. We are now running our own trains in Switzerland, both on the BLS route and on SBB's own Gotthard line. We like to play competitive games, and we will play them if that's what everyone wants.'

Future plans

Where do plans for ETCS/ERTMS fall in all this? Will the programme be funded?

'Rail needs to operate over long-distances to be economic, and the question is how best to get into other countries. First of all, you must have liberalisation and fair competition, and then you can deal with the technology. If ETCS were available, there is no doubt that it would be a big help to inject fresh life into the rail business. Railways have to invest in locomotives, but train control equipment makes electric locomotives even more expensive. The issue is whether or not the market will pay when margins are just 2% or 3%. If the margin were 30%, there would be no problem.'

Railion already has a large fleet of modern electric locomotives, but you are planning to place a major order for diesel locomotives. What is the situation at the moment?

'We expect to place the diesel contract in the fourth quarter of this year, and we are currently verifying the number of locos we need to replace the present fleet. The contract will be for far fewer than the 400 locos envisaged earlier in a joint order with DB's passenger division. As for electric locomotives, we have no further procurement need at the moment. And with wagons, we place orders for around 1000 a year.'

You have just implemented a big cost-cutting programme called Mora C. How effective was it?

'Yes, we decided to withdraw service from 637 out of 2100 depots and terminals which are tariff points, but we left the track in place so that the customer could decide whether or not to retain rail service. We then offered them to other rail operators, and about 60 of them were taken over. Two years later some of these have lost their rail service, some are subsidised by grants from the Länder and local authorities, and only a few are still operational. I make no comment about whether they earn money or not.

'We retained €45m of revenue by using alternative transport, and in some cases we were able to concentrate flows at a single terminal. For example, a large forest might have been served by 10 sidings for timber traffic, and these would be cut to just three or even one. Overall, we estimate that we lost just 2% of revenue.'

How do you see the future for intermodal?

'Well, the good news is that the growth of intermodal traffic is enormous. The bad news is that we earn nothing from it. For many years road haulage has forced prices down, and if we cannot charge the prices we need to, then we must cut costs. So in 2003 we set up a low-cost subsidiary, Railion Intermodal Traction, with different production methods in an attempt to break into different markets. RIT runs two groups of services at the moment, Albatros and KombiNet. But we still need the motorway lorry fees to be introduced.'

What do you mean by 'different production methods'? Can you be specific?

'The aim is to increase productivity, but it will take a few years to become effective. Half the costs are personnel costs, and we want to improve productivity by increasing flexibilty, especially for the loco drivers. And we want to make better use of our locomotives, keeping them in service for 24h a day. We are also planning to achieve higher load factors. RIT will be the low-cost carrier for the intermodal business.'

• CAPTION: Multi-system locomotives such as this Class 189 are designed to run across frontiers, but the market is unlikely to pay the high cost of fitting them with ETCS/ERTMS
• CAPTION: In June Railion restructured its activities into three business units: Trainload, Wagonload and IntermodalCAPTION: Intermodal traffic has great potential, but Railion currently makes no money from it. Low-cost carrier Railion Intermodal Traction aims to break into new markets
• CAPTION: During July Railion tested a Vossloh G2000 locomotive hired from Neusser Eisenbahn. It is seen here at Utrecht in the Netherlands bound for Emmerich with a container train from Rotterdam
• CAPTION: Railion's traffic, measured in tonne-km, has grown steadily over the 10 years since 1993. The company's move into the international arena from 2000 added around 8% to the total
• CAPTION: In June this year Railion took a 95% stake in Italian operator Strade Ferrate Mediterraneo. The first SFM-Railion Italia train ran on July 27, hauling grain between Savona Parco Doria and Casano Spinolo on the Genova - Milano main line
• CAPTION: Railion has seen huge growth in its intermodal business, but competition from road means it is not earning anything; low-cost subsidiary RIT began life with 50 leased locomotives

Stinnes and DB

German Railway (DB AG) is structured as a private company, but all shares are owned by the state.

Stinnes AG is a logistics company that went public with a stock market listing in June 1999. At that time the owner, VEBA AG (now E.ON AG), announced its intention to sell all its Stinnes shares in stages. By 2002 Stinnes was operating in 130 countries, providing logistics services in transport, chemicals and other industries. In July 2002 E.ON AG sold all its remaining Stinnes shares to DB AG.

The process was completed in May 2003 when the shares of Stinnes AG minority stockholders were transferred to the principal shareholder, a DB subsidiary called DB Verm?€?gensverwaltungsgesellschaft mbH. On the same day Stinnes AG was delisted from the stock market.

In September 2003 Stinnes was integrated into DB AG, which set up the Group Transport & Logistics Division to handle all its freight activities. Stinnes AG became a holding company within the DB group with its headquarters in Berlin. It now oversees four business units: Freight Logistics, Schenker, Intermodal and Railion (below).

The structure is designed to ensure strict separation of sales to end customers and retailers. Schenker and Freight Logistics handle sales to end customers, while Intermodal and Railion are responsible for sales of rail services to retailers.

• Schenker acts as an international provider of logistics services, offering land, air and sea transport services and global supply chain management.
• Freight Logistics provides logistics services for bulk goods mainly to the coal, iron and steel and construction industries.
• Intermodal provides pan-European combined transport services.
• Railion is the rail carrier, acting as a service provider for the sales companies of Stinnes AG, and for external freight forwarders who require neutral access to the rail network.

TABLE: Railion in 2003

Tonnes carried million 282

Tonne-km million 80000

Private sidings1 4500

Depots 1600

Principal yards 11

Secondary yards 43

Locomotives 3300

Own wagons 109000

Leased wagons 2400

Private-owner wagons 58000

Turnover kbn 3·9

Drivers 6000

Other employees 20000

1. Includes private sidings in the Netherlands (Railion Nederland) and Denmark (Railion Danmark)

We like to play competitive games - if the rules are fair'

Setting up a low-cost intermodal subsidiary and fighting off competition in Europe's liberalised rail freight market are part and parcel of Railion's strategy to win traffic to rail. Railion Chairman Dr Klaus Kremper briefed Murray Hughes at Railion's Mainz headquarters on progress since Stinnes was fully integrated into the DB fold last year. Acquisition of Stinnes will ensure that road haulage does not squeeze rail out of the freight market, at the same time paving the way for higher load factors and better sales and marketing

'Nous aimons les jeux compétitifs - si les règles sont équitables'

Monter une filiale intermodale à bas coût et entrer dans l'arène de la concurrence dans un marché ferroviaire du fret européen libéralisé fait partie intégrante de la stratégie de Railion afin de gagner du trafic ferroviaire. Le Dr Klaus Kremper, président de Railion explique à Murray Hughes, dans les locaux de la direction de Railion à Mainz, les progrès enregistrés depuis que le transporteur routier Stinnes à été complètement intégré au sein de la DB l'an dernier. L'acquisition de Stinnes permettra d'assurer que la route n'éjectera pas le fer du marché du fret, préparant en même temps la voie vers des taux de remplissage plus élevés, de meilleures ventes et un meilleur marketing

'Wir spielen gerne Konkurrenz - wenn die Regeln fair sind'

Mit der Schaffung einer Low-Cost Tochter im kombinierten Verkehr und einer aktiven Rolle in der Konkurrenz im europäischen liberalisierten Güterverkehrsmarkt auf der Schiene zeigt sich die Strategie der Railion, um Verkehr auf die Schiene zu bringen. Dr Klaus Kremper, Vorsitzender von Railion informiert Murray Hughes am Hauptsitz der Railion in Mainz über die Fortschritte seit der Integration des Strassentransporteurs Stinnes durch die DB im letzten Jahr. Die Übernahme von Stinnes stellt sicher, dass die Strasse die Bahn nicht aus dem Güterverkehrsmarkt verdrängt, und ebnet gleichzeitig den Weg zu h?€?heren Lastfaktoren und besserem Vertrieb und Marketing

'Nos gustan los juegos competitivos, si las reglas son justas'

Organizar una filial intermodal de bajo coste y competir vigorosamente en el liberalizado mercado europeo del transporte de cargas por ferrocarril es el pan de cada día de la estrategia de Railion para atraer tr? fico hacia el tren. El Presidente de Railion, Dr Klaus Kremper, ha comentado estos temas con Murray Hughes en la sede central de Railion en Mainz, apuntando al progreso realizado desde que se integró completamente el transportista Stinnes en el conglomerado de DB el año pasado. La adquisición de Stinnes asegurar? que los camiones no expulsan el ferrocarril del mercado de transporte, al mismo tiempo que allana el camino para mayores factores de ocupación y mejores ventas y marketing