Railway sector is 'not considered strategic'
Andrew F Saxe takes his annual look at the railway supply industry, and finds that prospects for profitability are being dented by poor performance among rail operators
Boston-based consultant Andrew F Saxe has been reviewing the railway supply industry for Railway Gazette International over the past eight years.
BOASTING to the financial community in April, Alessandro Pansa, the Chief Financial Officer of Italian state-owned conglomerate Finmeccanica, announced that the company had boosted revenues and profits in 2001, and declared its first dividend since 1992. Deep in Pansa's presentation is a page on Finmeccanica's Transport division, which includes Ansaldobreda. Revenues here were up 9%, and the division regained a (slight) profitability. But the company noted that restructuring 'should assist a gradual withdrawal from the sector.' The CFO concluded that for both Transportation and Energy, 'neither sector [is] considered strategic'.
The chieftains at Fiat, who sold a majority stake of Fiat Ferroviaria to Alstom, and Jürgen Schrempp of DaimlerChrysler, who sold Adtranz to Bombardier, clearly agreed with this assessment. Pierre Bilger of Alstom, Heinrich von Pierer of Siemens, and Laurent Beaudoin and Robert Brown of Bombardier apparently disagree. But have the remaining 'big three' been rewarded for their continuing faith in the rail sector?
A quick review of the major players' performance over the past 12 months presents a mixed picture.
STS recovery continues
Siemens has cut 30000 jobs and divested numerous companies, but rail has not been one of von Pierer's worries. While Siemens Transportation Systems has not been a star of the group, Herbert Steffen has continued the recovery from the steep losses incurred during his predecessor's tenure. External sales in the year ending September 30 2001 rose nearly 8%, and earnings before interest, tax and amortisation (Ebita) lifted from 2% to 4·6% of total sales. Orders rose by a significant 52% without any major acquisitions.
The most recent numbers continue the trend. For the six months since September, STS's external sales topped €2bn, a 5% increase from the prior year, and Ebit climbed to 5·5%. Steffen also scored several breakthroughs, scooping the Bangkok subway car order from Alstom, a first US heavy metro order for Boston's Blue line, and the new control system for Canadian National (p439). STS has also performed well in areas of traditional strength, wining orders from DB for 40 Class ET425 EMUs and a share in the latest batch of ICE trainsets, plus light rail vehicle contracts in St Louis, Houston and San Diego as well as several German cities.
Fraught times in France
Alstom has faced a year fraught with difficulties on all fronts. Quality problems burden the gas turbine business, and nearer to home the delivery of Coradia DMU and Juniper EMU sets in the UK. The bankruptcy of Renaissance Lines, a leisure cruise line, threw Alstom's Marine division into crisis when it was revealed that 13 vessels sold to Renaissance had been financed with loans from Alstom itself. While such vendor financing is fairly common, investors complained that Alstom's exposure to these guarantees had not been made sufficiently clear, and the markets hammered the company's stock, which hit a low on June 24.
Under its 'Restore Value' programme, Alstom is trying to turn around its sagging stock price. The 2001-02 results for the Transport division reflect the difficult year for the parent and problems of its own. Sales on a comparable basis (not including certain acquisitions) grew a paltry 1% compared to 2000-01. The company also finds itself more dependent on Europe and its traditional stronghold in France. European sales accounted for 71% of the total, with Asia 15%, and the Americas just 11%. Non-European business is down 46% from the level achieved in the previous year.
Of greatest concern is the operating margin. Alstom Transport had been one of the stronger performers in an industry marked by sometimes astonishing losses, such as those at Adtranz and Siemens. Operating margin rose nicely from 5·6% in 1999-2000 to 6·0% last year, but slumped to a disappointing 2·3% in 2001-02. To its credit, Alstom Transport has been reducing its exposure to lower-margin rolling stock manufacture, which has fallen from 82% of sales in 1996 to 60% in 2001. In exchange, it has boosted the share of reportedly higher-margin signalling and maintenance business. If so, margins should improve again next year.
Mixed year at St Bruno
Bombardier has also had a year of mixed fortunes. In the 12 months ending January 31 2002, sales rose from C$3bn to C$7bn, principally through the addition of eight months' revenues from Adtranz. There has also been increased activity for the New York City subway and Virgin Trains contracts.
The Adtranz acquisition has made Bombardier the world's largest rolling stock supplier, which has helped to win big orders such as the C$2·3bn contract to supply 500 regional express trains to SNCF, or the C$941m contract from Long Island Rail Road for M-7 EMUs. In the UK, Bombardier won a C$1·49bn order to supply another 460 Electrostar EMU vehicles for GOVIA in Britain and maintain the combined 700-strong fleet. It has just picked up an additional order from Connex for 228 more Electrostar cars, worth C$757m. Bombardier Transportation is also part of the Metronet consortium, which has signed two of the three PPP contracts to maintain and modernise infrastructure and rolling stock for the London Underground.
The results, while not stellar, have been solid. For the year ending January 31, the margin before special items, taxes and amortisation was 3·2%, compared to 2·9% in the previous year. However, the company may incur some substantial goodwill amortisation, as its results include C$2·6bn in goodwill related to the Adtranz acquisition. Bombardier formally notified DaimlerChrysler in February that it will file a claim for roughly €1bn, alleging that Daimler misrepresented the value of its rail unit. DaimlerChrysler called the claim 'absurd and groundless'.
Another success has also turned sour. Last November, Bombardier Transportation filed a US$200m suit against Amtrak for delays and cost over-runs in the delivery of the Acela Express trainsets. Originally, commentators believed that Acela marked the arrival of high speed rail in the United States, and by winning this first contract Bombardier would go on to dominate this growing segment. The delivery delays, squabbles with Amtrak, and the operator's own horrendous financial problems make a blossoming of high speed in the USA unlikely in the short run. And even if new projects do take off, Bombardier clearly has lost some of its appeal as a supplier.
Amongst the smaller players in the rolling stock markets, the year has also been mixed. Wagon builders Greenbrier and Thrall warned of retrenchment from their European ventures, as their baseload from the North American home market collapsed. Thrall subsequently merged with Trinity Industries, which announced in June that the York works was likely to close at the end of this year (p438).
So those corporate chieftains keeping the faith would at best regard the past year as a mixed one. But what are their prospects for the future, now that the top level of the industry has become so concentrated?
Viewed on the broadest metrics, the rail supply industry is a relatively low-growth, low-margin, capital and labour-intensive business. Despite enormous gains in productivity, stunning product designs, extensive acquisitions, exhaustive restructuring, and vigorous cost-cutting, the big players still remain modest performers within their corporations. I believe that they will remain so until the industry they serve turns itself around. And that appears unlikely any time soon.
For years, commentators have spoken of the renaissance of the railways. Growing congestion on the roads and in the air would lead industrial nations to rediscover the benefits of rail. There was certainly some evidence of this in Europe, where substantial investments have been made in rolling stock and infrastructure. New high speed lines sprouted across the continent, and the sleek trains captured the public's imagination and the business traveller's wallet.
Efforts were made to improve freight transport too, as an environmentally-friendly alternative to choking lorry traffic. Yet, the European Commission's white paper European Transport Policy for 2010 presented some disturbing analysis. Despite all the efforts which have been made, rail's share of the European freight market slipped from 21% of tonne-km to barely 8% between 1970 and 1998. Although passenger traffic grew from 217 billion passenger-km in 1970 to 290 billion in 1998, its modal share actually dropped from 10% to just over 6%.
In the United States, mergers have not brought the promised radical improvements in rail freight volumes, nor the better financial results for the big carriers (p417). Freight traffic for the first half of 2002 is still trailing the 2001 figures slightly. In the US passenger market, several conurbations have added new metro and light rail lines and equipment, creating a steady flow of smaller contracts.
But the high speed effect has clearly failed to help turn Amtrak around. Despite increased traffic following the September 11 attacks, Amtrak lost $1·1bn last year. Reform Council member Joseph Vranich called the system 'hopelessly dysfunctional'. Individual anecdotes validate some of the assertions that new trains like Acela Express cannot save a railroad burdened by bad management.
Your columnist travelled by Acela Express from Boston to New York recently. The train is attractive and comfortable. But the planned 3h journey time succumbed to insufficient investment in track, and the train runs at its maximum 240 km/h for less than 20min, so the scheduled time is now 3h 30min.
Performance problems in both directions delayed each journey by more than half an hour. When challenged, the crew explained away the 'slight delays', commenting convincingly 'hey, things like this happen'. The actual 4h journey time was only half an hour better than that achieved in the early 1980s. Of such performance a rail renaissance is not made.
Overcapacity depresses prices
Suppliers are captive to their customers. At present, the rail sector has simply not convinced the world of its power as a mode of transport, except in congested urban centres and on a few inter-city routes where genuinely high speed running coupled with high quality service has been implemented. In such cases new lines can and should be built. Over the last few months Barcelona has launched a 282 km expansion of its metro, and France has started work on TGV Est.
But elsewhere, rail operators have been slow to improve performance where it is possible, and cut routes where it is not. As rail continues to lose share and money, investments are deferred. Suppliers maintain unneeded capacity, and the market will continue to depress prices - and thus profits.
Acquisitions have not reduced capacity; only plant closures can do that. Credit is due to Bombardier for biting the bullet, and announcing the closure of Ammendorf, Vetschau and Doncaster. But even there, it was forced to cave in to the German government and retract at Ammendorf. There is no doubt that overall the rolling stock supply industry still has far too much capacity.
The sector can never expect to be a high-margin business without a substantial increase in demand from major economies. The Russians are signalling a desire to rebuild their network which suffered from complete neglect during the 1990s. For the United States to achieve its potential as a rail market, it needs a president who views it as vital to national development - in the way that President Eisenhower viewed the expansion of the interstate highway system in the 1950s.
In the meantime, the suppliers must continue to streamline costs and must battle for each contract until politicians, populace and corporate boards begin to consider that this sector really is 'strategic'.
- CAPTION: Bombardier aims to concentrate its German main line bodyshell building at Görlitz, but the planned closure of the Ammendorf plant has now been rescinded
- CAPTION: Virgin's Pendolinos are rolling off the Alstom production line at Washwood Heath, but the company is still having problems with acceptance and reliability of Juniper EMUs and Coradia DMUs supplied to other UK franchisees
- CAPTION: Siemens Transportation Systems has concentrated itsGerman bodyshell work at one Centre of Excellence in Uerdingen, which builds both tram and main line vehicles