The continuing rise in overall passenger train-km operated in Germany, combined with price inflation in the cost of paths have helped infrastructure manager DB Networks to strengthen revenues and profits in recent years. The picture has been less rosy for the freight business. Strikes affecting DB in 2015 combined with rationalisation of the European coal and steel industry have led to poor financial results for DB Cargo, which is now cutting costs at home and abroad in a bid to stabilise its business.
Overall group Ebit increased 13.1% in the first half of 2016 on turnover that was almost the same as the first half of 2015. Average load factors on long-distance services have increased to around 60%, compared with just 51.8% in 2015, as extensive promotional fares helped to drive a 10.6% year-on-year increase in long-distance ridership, which reached 66.7 million.
With improving finances, the part-privatisation of international passenger subsidiary DB Arriva and DB Schenker Logistics, which was expected to net €4bn, has dropped off the agenda. Less than six months after the DB Board approved the sale, the plans were cancelled when DB’s sole shareholder - the German federal government - agreed to invest €1bn directly as a capital increase using above-forecast federal tax revenues, and a further €1.4bn by setting future dividend payments at much lower rates than previously planned. This means that in 2017-2020, DB will pay €350m annually, compared with the €500m minimum previously envisaged.
While the part-privatisation plan was intended as a means of raising funds, DB also saw third-party investors as a good guarantor of overall financial rectitude. “If we don’t take action, the group’s debt will increase substantially by 2020,” DB supervisory board chairman Professor Utz-Hellmuth Felcht said in May 2016. “A third-party equity interest limits the level of debt and creates the financial scope necessary to continue the quality and investment campaign in Germany.”
Of the €55bn the DB Group will invest in 2016-20, €20bn will be financed by DB itself. Most of the balance will be provided by the federal government for infrastructure and over 90% of the total will be spent in Germany.
Overall public transport usage in Germany grew by 2% during the first half of 2016 according to the German Federal Statistical Office (Destatis). Long-distance rail passenger numbers in Germany grew by 10.6% in the first half of 2016 and the impact of competition from inter-city buses appears to have levelled off. Based on the 2015 figures, long-distance buses now have a 15% market share compared with 10.9% in 2014.
DB’s double-digit growth in long-distance passengers reflects the release of cheaper advance purchase fares, new rolling stock, and a wider range of digital and retail options. While 2016 lacked the strikes and severe weather of previous years, long-distance service punctuality and availability of certain amenities remains poor. DB has acknowledged these problems and is working to ensure all coaches are fit for purpose, while retrofitting the entire ICE fleet with new Wi-Fi and phone repeater systems during 2017.
There is also the imminent prospect of greater competition. While HKX has reduced its Hamburg - Cologne service to weekend-only, new entrant Locomore launched Stuttgart - Berlin open-access services in December while RDC Deutschland has finally started its Autozug Sylt car-carrying service competing with DB’s long-established Sylt Shuttle - a reliable source of profits.
DB Regio has defended some regional contracts and won back others. However, it failed to win the new Rhein Ruhr Express (RRX) network to Abellio and National Express. Legal challenges prevented National Express from securing the Nuremberg S-Bahn contract.
Passenger growth, regional contract success, and cost reductions at DB Cargo, suggest 2017 is likely to be a successful year. The introduction of new ICE 4 high-speed trains will further boost the long-distance sector while the opening of the final section of the Erfurt - Nuremberg high-speed line in December means DB will finally be able to compete with airlines on Berlin/ Leipzig - Nuremberg/Munich route.
The willingness of the German government to fund infrastructure investment and pay for regional train operation on the current level are crucial to DB Networks’ continuing viability - and therefore that of the DB group itself.
