December 19, 2016

Industry anticipates positive start to 2017

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SCI Verkehr’s latest poll of around 100 representative companies from the global railway industry indicates cautious optimism for the rail market for the next six months. David Briginshaw explains.

THE latest SCI Rail Business Index, a periodic survey of about 100 top railway managers around the world published in December by rail consultancy SCI Verkehr, Germany, points to a positive business outlook for the next six months. While demand for goods and services has lost some of its momentum, this is cushioned by the majority of companies reporting a satisfactory order backlog.

While 57% of managers polled expect the current business outlook to remain unchanged, 21% say they are increasingly confident about the next six months, and only 11% have reservations. Although the outlook has deteriorated since the second quarter of 2016, the confidence in the future is much stronger than it was for most of 2015.

“The industry has started to cope with the current uncertainties and challenges,” says Ms Maria Leenen, CEO of SCI Verkehr. “In particular, digitalisation is progressing fast.”

table Jan17The demand for products and service is clearly an important indicator of performance. SCI says 4% of top managers polled are positive about the outlook. While more than a quarter of companies report growing demand, around 20% complain that demand is falling. Nevertheless, 56% of companies say they are satisfied with their current order backlog and 6% expect to benefit from a relatively large backlog of orders.

SCI says the current soft slowdown in demand is far from being alarming and is typical for the highly cyclical nature of the railway industry.

The results of SCI’s Rail Business Index since the beginning of 2010 demonstrate this clearly. Current business confidence was evenly balanced in the first quarter of 2010, and steadily grew to reach a peak during the middle of 2011. Confidence in the current situation then declined fairly steadily until the first half of 2013 when around 28% of managers polled were positive about the future compared with only around 15% who were negative. Confidence in the current state of the rail market started to grow again and reached another peak in the second quarter of 2014 when nearly half of managers polled said they had a positive outlook, compared with only around 5% who remained negative. The situation then returned to a fairly equal split between managers with a positive or negative outlook for the next three quarters, followed by an upsurge in confidence in the second quarter of 2016. Confidence took a nosedive in the next quarter and remained poor until mid-2016 when it returned to a balanced outlook.

Employment is another strong indicator of business confidence, and the current situation may give some cause for concern. Employment was at a peak in the third quarter of 2016 with around 38% of companies saying that they had taken on extra staff compared with about 28% of companies reporting cutbacks in employment. However, the outlook became negative in the last quarter of 2016, with only 18% of managers polled saying they planned to expand employment compared with around 37% who say they intend to reduce staff numbers.

SCI says the assessment of the employment situation shows a significant slump. “The spontaneous recovery of the last two quarters has not been sustained, suddenly falling back to the negative levels of the previous quarters,” SCI Verkehr reports.

However, SCI says that companies do not appear to be concerned about the decline in outlook for employment, reflecting a consolidation in the railway industry rather than a fall in workload. SCI says the consolidation started during last year with companies seeking to reduce overcapacity in order to remain competitive internationally.

Finally, SCI Verkehr asked managers what their strategic objectives were for 2017. Optimising their location and regional expansion were the two most important objectives for the year ahead with 46% of companies citing these goals. Around 21% of managers cited financial engineering as an important objective.

Intriguingly, 25% of mangers say that mergers and acquisitions are a strategic objective for 2017. Clearly the appetite for further consolidation in the rail industry has not diminished despite the completion of several major deals during the last couple of years. These include Hitachi’s acquisition of AnsaldoBreda and Ansaldo STS in Italy, the Alstom-GE power industry deal which resulted in Alstom acquiring GE’s signalling business, and the recently completed takeover of Faiveley by Wabtec. CRRC’s proposed takeover of Skoda might be one of the big deals of 2017.

With just 17% of companies saying that they intended to strengthen their business activities outside rail, this is a tremendous vote of confidence in the future of the rail industry, as clearly most companies involved in rail do not see a need to switch their focus to other industries or even to jump ship.

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