INTRO: German Railway is on course for a stock market listing as it reaches the final stages of restructuring begun nearly a decade ago

BYLINE: Hartmut Mehdorn

Chairman, German Railway

WHEN THE railway reform programme was launched in 1994 a major step was taken in the history of Germany’s railways. Changing the old Federal Railway into a going commercial concern called Deutsche Bahn AG was a massive task, and only now are we reaching the final stage of the process, nearly 10 years later.

The changes in the organisation and structure of the railway have already borne fruit. Compare the traffic carried in 1993, the last year before the reform began, and 2002. Passenger traffic, measured in passenger-km, has risen by 11%, while the growth in freight traffic in terms of tonne-km is more spectacular at 21%. Despite the competitive disadvantages it suffers compared with other modes of transport in terms of taxes and infrastructure costs, DB has been able to take advantage - if belatedly - of recent growth in the transport market.

Now we are on the last lap of the reform process. The final phase of a reorganisation is often the toughest, as there are no quick wins left. As a commercial business, the railway must be truly competitive and be able to stand on its own financial feet in terms of the capital markets. The measures we are taking to achieve this do not always win us applause, but we are determined to become a healthy and economically-successful business.

We do not pretend that this will be an easy task. Just as we are entering this final stage of reform, the bottom has fallen out of the German economy. Of course, this affects our competitors too, but we shall not slacken the pace of reform. Our aim is to be in the black in the 2004 financial year, and I can assure you that we will achieve this objective.

Becoming the best

Building the capability for an entry into the capital markets is one core objective. Another is to become ’the best railway’ for our customers. We have launched an ambitious programme to promote our services, called ’Offensive Bahn’, and this has already achieved several important successes. For example, in 2002 DB enjoyed record capital investment totalling €10bn.

Priorities for our passenger business include improvements in punctuality, cleanliness, reliability, information and customer service. At the same time we must defend our market share. This means that we must win future tenders for the operation of local services, and in turn that requires us to reduce our costs so that we are more competitive.

The scope of tenders for local and regional services is increasing, and the number of calls for tender is also rising. Our competitors have often been able to exploit their advantages in terms of lower wage costs to win business. And the time is coming in a few years from now when almost all local rail operations will be put out to tender.

This must act as an incentive for DB to reorientate its business structure. If we are to survive in this market, it is vital for agreement to be reached - in co-operation with the trade unions - on conditions of employment that will make us more competitive. At the moment DB is almost alone in offering conditions that are very generous in social terms.

Despite the success of the reform programme, which has saved taxpayers €90m since 1994, much more needs to be done. We will stay strictly on course for a stock market listing, to ensure that the business can continue to invest and fund its own needs. That means reducing our debts from past investment to an acceptable level, and we are insisting on tight management of costs. We also plan to strengthen our market position, using all the opportunities for growth in the domestic and international markets. We are currently reviewing our commitments in cross-border traffic and looking at the potential for expansion of local services in and around many German cities.

Stinnes drives freight growth

By taking over Stinnes in 2002, DB increased its presence in the logistics business across the world. Stinnes was already one of the leading logistics companies with 65000 employees and an annual turnover of €11bn. Freight forwarding company Schenker is part of the Stinnes group, which now also includes Freight Logistics, Intermodal and Railion, previously DB Cargo. The group has become the largest single rail freight operator in Europe, and it also enjoys a leading position in the international maritime and air freight sectors.

As a profitable company, Stinnes contributes significantly to DB’s ability to enter the capital markets. DB is now the only railway in Europe with a marketing and logistics capability in almost all countries. This means that we can serve our direct customers and freight forwarders in the most appropriate way, making the best use of different modes to suit the circumstances.

With Stinnes we shall be exploring a new dimension for the rail freight business, a move that I believe is essential if the railway is to move seriously into the international markets where customer expectations and requirements have increased significantly in recent years. The key here is to be able to offer a comprehensive network of services across the whole logistics spectrum. Stinnes has international marketing expertise that can offer customers an entire freight and logistics service, including rail elements where appropriate. This therefore puts us in an ideal market position.

Following the changes which took effect on September 1 (RG 10.03 p610), Railion is now the leading rail freight operator in Europe, with business units based in Germany, the Netherlands and Denmark. As an international operator with high standards of performance and an optimised cost structure, Railion is able to offer fast services across Europe’s borders. The close working relationship with Schenker under the Stinnes umbrella extends the group’s territory to cover the whole of Europe, and this should allow us to reduce the number of empty wagons simply being hauled back to their origin as it will be easier to find return loads.

Without Schenker, rail freight would be losing market share. At the moment rail has only one-fifth of the European freight market, with two-thirds moving in lorries. Within the old national boundaries, admittedly, rail has a bigger share of domestic traffic, but this means in effect that its share of international business is much smaller. This should not be the case, as rail is ideally suited to the longer hauls across Europe. So Railion has been specifically charged with developing international traffic.

Trade and industry is becoming increasingly multi-national, and transport operators must be international too, not simply stopping at the border to hand over to another company, be it road or rail. We believe that Railion has outshone Europe’s other railways in developing international freight traffic, but compared with our biggest competitor, the lorry, rail still has much to do.

Of course, we also need to be able to compete on fair terms, and for this reason we welcome the introduction of lorry access fees on German motorways. The level at which the fees are set at the moment (RG 7.03 p428) is too low to have any real effect in switching traffic from road to rail. Among other developments, we need rail freight to be liberalised elsewhere in Europe. At the moment Germany is far ahead of other countries like France; we also need to harmonise our technical equipment.

Growth rates of 3% a year have been forecast in both the logistics and transport markets until 2005. So we see real opportunities for Schenker and Railion as part of the Stinnes group, and we are determined to use this potential.

The economic railway

Throughout the reform process, the ’economic railway’ has always been our central objective. The railway must be able to pay for the investment needed for its own business. If such investments cannot be paid back, then the door to future spending will close. Interest payments would be driven up, limiting the room for manoeuvre, and causing productivity and customer acceptance to suffer. The consequences would be losses in turnover and worse financial results.

It was precisely this vicious circle into which the old Federal Railway fell. The result was that government money was being spent to keep the business going, rather than being used for investment.

So all our efforts are targeted at becoming a customer-oriented international company able to offer a full transport and logistics service, with a view to entering the capital markets. This is what we aim to do, and this is the express wish of our owner, the German federal government.

CAPTION: TOP: An ICE3 near Montabaur on the new line between K