Operating as a joint stock company since January 2003, Czech Railways is learning to cope with the challenges of independence and competition. Chairman & Director General Petr Kousal talked to Murray Hughes in Praha

CZECH REPUBLIC: Waving gently in the breeze, the Czech and European Union flags offer a splash of colour in front of Czech Railways' austere headquarters on the bank of the River Vltava in Praha.

The Czech Republic acceded to the EU on May 1, introducing the freedoms that western Europe has for decades taken for granted. Almost immediately, CD found that it was obliged to withdraw a rolling motorway service between Lovosice and Dresden - with the elimination of border delays, the traffic simply switched back to the roads.

It was a harsh lesson that did not augur well for the railway, and a question to Petr Kousal, Chairman & Director General, about the effects on CD of his country joining the EU prompted an explanation of the structural changes made in the pre-accession period. To bring the national railway into line with European legislation, the government decided that CD would be split in January 2003 into an operating company, Ceské Drahy, and a Railway Infrastructure Administration, Sprava Zeleznicni Dopravní Cesty. As in other EU countries, the arrangement sees CD pay a fee to SZDC for use of the tracks.

In practice, says Kousal, SZDC does not have enough staff to carry out all its allotted tasks, so it contracts various services back to CD. These include maintenance, operational control and, since May, allocation of capacity on the 9365 route-km network. CD will allocate paths initially for three years, but it hopes to negotiate a longer contract.

The access fees are set by the Ministry of Finance, confirms Kousal, with CD paying SZDC KC1·5bn a year for passenger traffic and KC4·6bn a year for freight. CD enjoys full commercial freedom to set freight tariffs or negotiate rates with its customers, but fares for passenger traffic are regulated in that a ceiling is set on the fare per km. Within this, CD is able to offer different fares for different types of service, and discounted prices in particular.

It comes as no surprise that CD does not cover the cost of operating its passenger services from the farebox. Kousal says the loss on passenger traffic in 2003 amounted to KC6·7bn, a sum that the government reimburses as provision for operating socially necessary but unrenumerative services. However, auditors Deloitte & Touche calculated the figure to be as high as KC10bn. 'So we are missing KC3bn', says Kousal, 'KC2bn of which will be covered by profits from freight traffic, leaving KC1bn as a pure loss.' He adds that he expects the position to be similar in 2004.

Rail's share of the passenger market in the Czech Republic is less than 7% of passenger-km. Buses and trams carry 21%, and private cars 63%. Earlier plans to split the passenger business have been abandoned, and at the moment CD makes no distinction between the different segments of its market.

For years CD has struggled to deal with the problem of unprofitable services on regional routes, and Kousal concedes that this remains a big problem. 'Of course, we are trying to cut costs on regional lines, by using smart cards for ticketing, by reducing the number of employees and by use of less operationally-demanding rolling stock.' Another thread of CD's strategy is to work closely with the regions to set up common tariff areas, where a single ticket can be used on trains, trams and buses. This already applies in Praha, Brno and Ostrava, and is planned for Karlovy Vary.

Partnerships planned

More ambitious, perhaps, is CD's decision to seek partners who are willing to help run the regional routes more cost-effectively. Kousal says that CD is talking to the French companies Keolis and Connex, and to Germany's Vogtlandbahn. Already CD faces some competition from private operators, which Kousal says are able to offer better rolling stock, and he considers that this could be countered by having 'a strong strategic partner'. However, CD has no intention of transferring responsibility for the routes to the regions.

Partnership opportunities also exist in the freight business, and here Kousal names Railion as one potential partner. With a 25% market share of freight traffic, CD has been doing well in comparison with EU countries in western Europe, and Kousal 'would be glad to maintain that level'. Measured in tonne-km, CD hauls 98% of all rail freight, the rest being handled by a handful of open access companies.

While Germany is planning to introduce electronic charging of fees for lorries to use the national motorway network, no such plan exists in the Czech Republic, says Kousal. 'State transport policy on road and rail is not balanced', he claims, pointing out that the access fees that CD pays are five times higher than the amount that hauliers pay for use of the road network.

But surely CD is cutting costs to try and compete more effectively? 'Of course we are trying to reduce our costs. With 80000 staff, wages amount to half of the total cost, and in 2003 we cut 3000 jobs. We want to cut another 6500 jobs during 2004, and according to preliminary figures, we are being successful', says Kousal. With the help of a state-funded programme, CD is offering early retirement, with employees leaving three years earlier than usual.

'We are also cutting costs by organising our work better, and we have a strategy to restructure the business over the next 10 years', adds Kousal. This programme has been endorsed by CD's General Assembly and Supervisory Council. The main element will be the contracting out of much traditional activity to a family of subsidiary companies in which CD would retain a majority share. Ultimately, Kousal hopes that CD can move to a holding company structure, which 'would allow us to keep the synergy effects but give the subsidiaries a certain independence'.

Kousal identifies research and development, telecommunications and information technology, staff training, healthcare and recreation, and procurement as likely activities for separate companies to take over. 'We also want to use our fixed assets better', he says, suggesting that station premises could be leased out as commercial operations.

Another proposal would see a subsidiary set up to carry out maintenance and renewal of the infrastructure, initially with a three-year contract.

While implementing these ideas may take 10 years, 'the important thing is to begin', Kousal asserts. 'We have spent a lot of time approving the procedures for all this, and our programme for cutting costs will be more effective once we get the process underway. We expect the programme of establishing subsidiaries to lead to a rise in productivity and a fall in the number of employees, but at the moment we face very strong trade unions. But we do have support for the plans from the government, and there is KC400m available for retraining - although we really need KC500m.'

Investment funding

A slight increase in tonnes carried in 2003 compared with 2002 suggests that CD's policy of investing in the freight business to attract more business is successful. Despite the withdrawal of the cross-border rolling motorway service, emphasis is firmly on raising the share of intermodal traffic to compete more effectively with road.

Funds have also been allocated to modernisation of the passenger fleet, and during 2004 CD expects to spend KC45m. One-third of this will go on 26 new inter-city coaches being supplied by Siemens, and one-third will pay for more Class 471 double-deck EMUs for suburban services. These are being built by Vagonka Ostrava.

CD has just ordered a fleet of 20 tri-voltage locomotives from Skoda (RG 5.04 p250), and it has taken delivery of three out of seven Pendolino trainsets from Alstom. Destined for international inter-city services between Berlin and Wien and Berlin and Bratislava, these tri-voltage sets have 'unfortunately run into technical problems', and Kousal says 'we have had to postpone the start of operations'. Current plans envisage that they will enter service on December 13 this year with the start of the next timetable.

CD's fleet of railcars for regional trains is being refurbished, and there are also plans to acquire a small fleet of modern sleeping cars. Kousal hopes that CD will be able to obtain up to KC45m as a loan from Eurofima to fund this project.

Czech Railways in profile

2002 2003

Net tonne-km million 16 130 16396

Tonnes carried million 82·6 85·4

Freight revenue* KCm 21 084 18 822

Average length of haul km 195.2 192.1

Passenger-km million 6 562 6 483

Passengers carried million 175 172

Passenger revenue KCm 5 176 5 051

Government grants for

passenger services KCm 9 683 7 243

Total income KCm 44 932 n/a

Total costs KCm 49 751 n/a

Net profit (loss) KCm (4 819) (998)

* includes grants for intermodal traffic