LAST year proved very difficult for German Rail (DB). In the spring it suffered a bruising strike by train drivers, which turned out to be the longest in its history, and cost the company €252m. To add to DB’s misery, severe storms caused serious damage and disruption to the rail network. Finally, DB was faced with the daunting task of transporting hundreds of thousands of refugees. This was all at a time when competition was becoming fiercer.
DB’s first half results for 2015 were bad: passenger journeys were down by 1.6% and freight tonne-km were even more badly affected with a 6% reduction. Ebit fell by 18.2% and after-tax profits plunged by 39% from €642m to €391m.
In August 2015, DB’s CEO Dr Rüdiger Grube announced a major restructuring of the organisation and pairing down of the top management with the departure of four board members, along with the head of DB Schenker Rail, to be replaced with only two new board members. Restructuring involves the merger of DB’s freight and passenger divisions into one unit, abolishing the technology and environment division, while DB Mobility and Logistics (DB ML), which was set up with an IPO in mind, is being merged back into the DB group.
The latter is now being finalised. “By dissolving our two-tier holding structure, we are eliminating red tape at DB, reducing complexity and making reporting lines shorter and more straightforward,” Grube says. “Over the medium term up to 2020, we will be cutting costs at the corporate level by €710m.”
DB’s final results for 2015, announced in March, made grim reading. While revenue increased by 1.9% to a record €40.5bn, Ebit dropped by 16.6% to €1.76bn, and DB’s profit of €988m in 2014 became a loss of €1.3bn in 2015. The final bill for the strikes and storms came to €370m. As Grube admitted, DB failed to meet both its financial targets and the quality targets it had set itself, which was making it even harder to fight ever fiercer competition from other modes - road transport, for example, has been benefitting from lower fuel prices.
Thankfully, DB has started to see the first signs of recovery during the first half of 2016 with a 13% increase in Ebit to €1bn. This has given Grube cause for cautious optimism. “Despite the fact that competition became even fiercer across all our business segments and the price war intensified, our Ebit still rose some 13% year on year,” he says. “This makes us confident that we will meet our financial targets for the 2016 fiscal year.”
However, as DB’s CFO Dr Richard Lutz points out, net financial debt increased by €670m to €18.2bn compared with the situation at the end of 2015, driven mainly by the €850m dividend payment which DB is obliged to pay the federal government, its sole shareholder. Nevertheless, Lutz does not expect net debt to exceed €19bn for the full year.
Despite DB’s improved first-half performance, Standard & Poor’s (S&P) Global Ratings was unimpressed and downgraded DB’s long-term rating from AA with a negative outlook to AA- with a stable outlook. While Lutz maintains that DB continues to have a very good rating despite the downgrading, he admits that DB would have “preferred to avoid this adjustment.” Lutz says he had expected S&P to have given DB more time for measures to improve profitability and financial stability to bear fruit. “It is regrettable that things turned out differently,” Lutz observes. However, he says DB is committed to achieving financial stability: “DB will continue to be a stable, dependable and trustworthy partner for investors.”
Long-distance passenger, which has been facing an onslaught from deregulated buses, recorded a 10.6% increase in patronage in the first six months of 2016, with 6.4 million more passengers compared with the same period in 2015, to reach a total of 66.7 million journeys. The increase is due in part to the opening of a new high-speed between Halle/Leipzig and Erfurt in December 2015, and the introduction of special saver fares.
“We still face a very price-sensitive market,” Grube says. “We sold a total of 2.3 million saver fare tickets in the first half of the year. However, these tickets accounted for less than 6% of all the tickets sold.
“We are doing very well in the fiercely-competitive long-distance market in Germany, winning back market share and even continuing to expand it,” Grube continued. “In contrast, the situation is different now on the long-distance bus market in Germany, which is not growing nearly as fast as it once was, and in fact it stagnated in the first half of 2016. This development is reflected in the average number of bus kilometres per week, which has remained almost unchanged since the beginning of the year.”
The introduction of concessions for regional passenger services 20 years ago has left its mark on DB. With 100% of the market at the outset, DB could only lose ground to private operators; the only question was by how much. Grube believes DB has done reasonably well even with another 3.3% drop in passenger-km during the first half, due mainly to lost tenders. “We have held our ground well, with a market share of some 70%, and we will continue to fight for each and every tender,” Grube says. “We want to offer attractive services to win back lost contracts. We will only be able to tackle the competitive pressure in regional and local rail passenger transport if we make major changes to our business model and continue to improve the quality of our products.”
DB Cargo is still suffering from the effects of the strike and bad weather in 2015, compounded by the collapse of coal traffic in Britain and a decline in steel movements in Germany. DB Cargo recorded a 2.2% drop in tonne-km during the first half of 2016, on top of the 4.3% reduction it suffered in 2015 which had reduced tonne-km to 98 billion.
DB is now trying to reinvigorate its DB Cargo rail freight business by reorganising its sales organisation, optimising terminals, and improving productivity and competitiveness. “Unfortunately, the results of our work are not yet visible in our figures,” Grube concedes. “Here we continued to feel the effects of last year’s strike, which led 8 to 10% of our customers to shift their business to our competitors. We are fighting for every single order here. But we made major progress year-on-year in terms of punctuality, which rose by some 2% to 75.7% in the first half of the year.” Grube says this is the best punctuality performance for many years.
DB Arriva, which operates passenger trains in 14 European countries, saw a 5% increase in patronage to 854 million journeys in the first half of 2016, due in part to winning the Northern Rail franchise in Britain, which it began operating on April 1. This increases the number of British passenger franchises which DB Arriva operates to four, plus a fifth which is currently a joint venture with MTR but will become a purely Arriva franchise under a new contract which starts in November. Arriva also owns two open-access operators, Grand Central and Alliance Rail, runs the Tyne and Wear Metro, has a train maintenance company, and operates 5400 buses and 451 patient transport vehicles. In addition, DB also owns Britain’s largest rail freight operator, DB Cargo.
Overall, DB employs 33,000 people in Britain and had a turnover of €3.7bn in 2015. As Grube points out, DB is one of the largest foreign employers in Britain, and Britain is DB’s most important market after Germany.
Naturally, Britain’s decision to leave the European Union is of considerable concern to DB, as Grube explains: “As the second-largest economy in the EU, the UK has played, and continues to play, a very important role for Europe as a whole. Naturally, we are disappointed that the UK plans to leave the EU, but we will of course respect the decision.
“It is hard to predict at the moment what the long-term political, economic and social consequences of Brexit will be, but we expect that the considerable rise in uncertainty on the financial markets will have a negative impact on our business. However, what is essential now in our view is that the situation be stabilised as quickly as possible in order to minimise negative economic consequences. What that means for us at DB is that we will remain committed to our strategy, our international business and networks, and our targets for quality and financial performance across all our business units.”
But as Lutz observes, Brexit has already had an effect: “The positive operating performance at DB Arriva has been weakened by the weakness of the British pound.”
DB is preparing a detailed implementation plan to attract third-party equity interests in DB Arriva and DB Schenker by the end of the year. “It is still too early to say whether the Brexit vote will have an impact on an IPO at DB Arriva,” Grube says.“We are currently in the analysis phase, but we will of course take the situation on the financial markets into account when we make our decision.”
DB’s strategy for the future centres around a beefed up version of its DB 2020 initiative to boost performance. “We have now launched DB2020+, transforming our objective of becoming a profitable market leader into that of becoming a profitable quality leader,” Grube explains. “DB2020+ places the quality we offer our customers at the heart of our corporate strategy.”
DB has also made its environmental targets more ambitious. “We will strive to raise the share of renewables in our traction power from 35% to 45% by 2020 and lower our specific CO2 emissions by not just 20%, but at least 30%,” Grube says. Furthermore, DB has launched its Zukunft Bahn or Future Railway programme to raise quality in four key areas: punctuality, passenger information, rolling stock, and stations. “For punctuality, our focus is on our large hub stations,” Grube explains. “The special teams we assigned to those stations have already made major improvements to on-schedule departure rates. Cologne, Leipzig and Stuttgart have even seen increases of over 15 percentage points.
“Average overall punctuality in long-distance transport was 78.4% in the first half of the year, and we have witnessed a further clear upward trend in the first few weeks of July.” Grube says he remains committed to achieving 80% punctuality in long-distance passenger this year, but admits it will be a challenge because of the amount of infrastructure upgrading underway across the network.
Digitalisation will play an important role in Future Railway, with three key areas to be tackled:
- customer interface to make travel even more convenient, comfortable and attractive
- digitalisation of internal processes and workflows to improve asset availability, and
- the development of new digital, data-driven business models.
In order to make rapid progress with the latter, DB plans to set up a new company before the end of the year called DB Digital Ventures which will develop data-driven business models and prepare them for market launch.“We want to take our collaboration with start-ups to the next level and offer our customers new business services,” Grube says.
Grube is also very keen to implement driverless operation on the railway. “Such a development will not happen overnight; rather, it will be an evolving process,” he says. “Nevertheless, we expect to be running fully automatic trains by 2025 at the latest and playing an important leading role in digitalising rail traffic. This is not as a threat to our train drivers. On the contrary: fully automatic driving on rail will offer many opportunities for us to continue to enhance train driving as a profession. It is also our aim to use the opportunities afforded by technology to reduce costs and power consumption, raise punctuality and generate more rail capacity.”
Grube says the focus for the second half of 2016 will be on improving DB’s “bread and butter business.” Lutz says he is confident that operating profit “will be above €1.8bn” and that net profit will be positive again. However, he warns that the cost of group restructuring will only become clear during the second half. “Overall, we still expect that expenses for the entire group restructuring will not exceed the €2bn already announced in December 2015.”
Clearly, DB is not out of the woods yet, and faces some tough challenges ahead to return its financial and operating performance to acceptable levels, and it certainly cannot afford any more own goals such as the devastating strike in 2015.
DB steps up security in response to incidents
GERMAN Rail’s CEO Dr Rüdiger Grube announced on July 27 enhanced security measures in the wake of an axe attack on several passengers on a train in Würzburg by an Afgan asylum seeker, an attack at a shopping centre in Munich, and an explosion near a music festival in Ansbach, all of which occurred during the same week in July.
DB already spends around €160m a year in security measures to ensure the safety of its customers and employees in Germany, and Grube has now pledged additional spending of more than €85m to improve video surveillance at stations.
Prior to this DB Board Member Mr Ronald Pofalla charged a security technology task force with deploying new technology to make the railway even more secure. “We are currently testing body cameras for our security forces, and we plan to issue them to all our security staff members starting January 1 next year at the latest,” Grube says.
DB employs 3700 security staff supported by 5000 officers of the German Federal Police. “In response to the threat of terrorism, we at DB have long since stepped up our partnership with law enforcement, and we will be extending it further,” Grube says. “Our medium-term planning also includes plans to raise headcount by several hundred employees at DB Security over the coming years. We will also be adapting the training we offer to address the new circumstances, and continuing to expand it.”
Germany’s interior minister, Mr Thomas de Maizière, announced on July 25 that the presence of federal police patrols at all German railway stations and airports would be stepped up with immediate effect.
Even with these additional measures, Grube acknowledges the limitations of what can be done to improve security. “Even the most sophisticated security plan will never be able to completely eliminate the possibility of such acts of violence. And yet, our trains and stations are some of the safest public spaces there are, and we at DB will work incredibly hard to ensure that they remain so.”