September 06, 2016

Crowdfunding kick-starts German open-access service

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Tickets for Germany’s first crowdfunded train service go on sale at the end of this month following a successful online campaign to finance the venture. Locomore managing director Derek Ladewig explains to Keith Barrow how alternative financing will reshape the relationship between operator and passenger.

IN recent years crowdfunding has surged in popularity as an alternative means of financing for small and medium-sized businesses looking to launch new ventures. According to the Massolution Crowdfunding Industry 2015 Report, the amount raised by the global crowdfunding industry grew from $US 2.7bn in 2012 to $US 16.2bn in 2014 and an estimated $US 34bn last year.

A potential application for crowdfunding in Germany’s liberalised long-distance passenger rail market was identified by entrepreneur Mr Derek Ladewig. In 2007 Ladewig founded Locomore with the aim of offering alternatives to incumbent inter-city operator German Rail (DB), a goal the company went on to achieve through its involvement in the creation of Hamburg-Cologne Express (HKX).

LocomoreLadewig and his business partners subsequently pulled out of HKX due to “insurmountable differences” with majority shareholder Railroad Development Corporation, but Locomore’s enthusiasm for long-distance trains remained undiminished. Ladewig remains majority shareholder in Locomore with a 61.5% stake. The remaining shares are held by other team members (16%) and silent partners (22%).

In October 2015 Locomore launched a web campaign through online crowdfunding platform Startnext with the objective of raising at least €450,000 to cover start-up costs for a new Stuttgart - Berlin open-access service. In an initiative dubbed “crowd ticketing” each backer of the crowdfunding campaign effectively purchased a ticket which can be used flexibly without restriction when the service is launched.

The aim of the project was to establish a co-operative arrangement with passengers which would benefit both sides. If the service achieves load-factors of 75% or more a profit sharing arrangement will be activated with a 3% discount on tickets, rising to 7% if full capacity is reached.

“Crowdfunding gave us an advantage from the early stages of the project because it allowed us to build relationships with our customers before we launched our services,” says Ladewig. “The people backing us through the crowdfunding campaign are not shareholders, they are supporters buying the product in advance. This means they are something in between a shareholder and customer. During the development phase they can interact with us and propose things they would like to see, which gives us a good opportunity to test ideas and products before the launch.”

Ladewig says the whole development of the business model was moulded around crowdfunding. While around 20 shareholders have invested in Locomore, the bulk of start-up capital required to launch the service came from the Startnext campaign.

By the end of the crowdfunding campaign in May 2016 Locomore had secured €539,000 in basic financing and by late June the total funding available for the project had reached €577,761.
Locomore continues to accept subordinated loans with a minimum value of €1000 and a duration of five years, which keeps the door open for new supporters following the end of the crowdfunding campaign.

Services

From December 14 Locomore will operate one service a day in each direction between Stuttgart and Berlin Lichtenberg, operating via Darmstadt, Frankfurt am Main South, Fulda, Hannover, and Berlin Main Station. The northbound train will leave Stuttgart Main Station at 06.40, arriving at Berlin Lichtenberg at 13.27. The southbound train will depart at 14.29, arriving back at Stuttgart at 21.19.

A five-year binding framework agreement for track access was agreed with infrastructure manager DB Networks last year, which Ladewig regards as a key achievement for Locomore. “Getting good-quality train paths is not trivial,” he says. “Our team has been dealing with the issue for years and we have built up a certain knowledge of the system, but as an open-access operator you have to invest time in this process. I wouldn’t say it is easy.”

Obtaining suitable rolling stock has also been a challenge, but despite the use of older coaches, Ladewig is confident the service will offer an attractive alternative to DB’s ICE high-speed trains. Each train will be formed of an electric locomotive and a set of inter-city coaches. Hector Rail, Sweden, will provide Siemens Taurus locomotives and drivers, while Locomore has leased eight 200km/h compartment and saloon coaches from SRI Rail Invest. These will be refurbished with tables, power sockets, and passenger Wi-Fi in all vehicles.

Each train will include a compartment for business meetings as well as a quiet coach and family compartments with toy boxes and children’s books. An at-seat catering service will offer hot and cold meals as well as snacks and all trains will accommodate bicycles, albeit on a reservation-only basis.

Tickets will be available online via Locomore’s website and smartphone app with a three-month booking horizon and it will also be possible to buy tickets onboard. In addition, Locomore is currently seeking sales partners to provide an additional distribution channel in the towns and cities along the route.

Fares will start at €7 for short trips, €13 for medium-distance journeys, and €22 for long-distance travel and children under the age of 14 will travel free-of-charge when accompanied by an adult. Locomore says the maximum price will always be less than half the German Rail (DB) BahnCard 50 Flexprice fare.

While this might appear to be targeting the incumbent operator’s inter-city business, Ladewig stresses that growing the overall rail market is a primary objective of Locomore, and one that is likely to benefit both operators. Indeed, Locomore revives a number of direct connections, such as Heidelberg - Berlin, which were previously abandoned by DB. “Our focus is to get people from cars and planes onto our trains,” Ladewig says. “Long-distance buses have taken a lot of traffic from cars and trains - we should be trying to get that business back onto rail.”

Locomore says it can afford to keep fares low because it is a “lean and efficient” startup business, and because seat occupancy will be high, with a load factor of 60-70% forecast for the Stuttgart - Berlin service. Track access fees are also comparatively low because Locomore will only operate one return service a day.

While attention is currently focussed on the launch of the initial route, Locomore is eyeing its next steps. Options under consideration include a second daily Stuttgart - Berlin train if the initial service is commercially successful as well as services from Berlin to Cologne, Frankfurt am Main, Munich, and the Baltic island of Rügen. “We have a roadmap for expansion but naturally that depends on the success of the first service,” Ladewig says. “We are open to various possibilities, but we are prepared to expand if this works well.”

The withdrawal of DB’s remaining overnight services at the end of this year raises the question of whether Locomore would consider filling the void. Locomore says it is “confident there will be steady demand for overnight trains on popular routes,” and these services could be operated on a commercial basis without subsidy. Locomore has called for a reduction in track access charges for overnight trains as it wants this sector to have a future, and says that DB should “openly and fairly give up rolling stock to companies who want to continue running the overnight segment.”

Even if it does not take these services on, Locomore’s example offers hope for the future of the overnight sector in Germany, and with considerable support for the retention of these trains, a crowdfunded venture supported by night train users may succeed where DB has failed.

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