WHILE Greece, Spain, and Italy have dominated press coverage of the Eurozone crisis, Finland's economic woes have gone largely unreported, yet this Nordic outpost of the single currency is still suffering more than most.

Seven years after the collapse of Lehman Brothers the economy is still 5% smaller than it was before the financial crisis and the country has been mired in recession for the last three-and-a-half years. Unemployment has continued to increase since 2012 and has now reached almost 10% but Labour costs remain a fifth higher than those in Germany or Sweden.

Following the election of a new centre-right government in May, prime minister Mr Juha Sipila revealed plans to reduce wage costs by 5% by 2019 in a bid to restore the competitiveness of the workforce, but this has been met by demonstrations and strikes.

VRIn the face of such austere conditions, the country's national train operator VR Group has remained remarkably resilient. Comparable group turnover declined by 2.1% last year (and has continued to decline in the first half of this year), but improved productivity, and strong performance by the VR Transpoint logistics unit and infrastructure maintenance subsidiary VR Track helped to boost group profits from €70.6m to €90.4m. This generated a €100m dividend for VR Group's sole shareholder, the Finnish state.

However, VR Group expects profits to weaken this year and the company is facing major challenges in its passenger business. In the first half of this year long-distance passenger traffic declined 6.2% year-on-year and net sales for the passenger business fell 5.5% to €132.1m, resulting in an operating loss of €1.9m.

Economic sluggishness is not the only factor fuelling this downward trend. With the deregulation of long-distance buses, road competition is in the ascendency and capitalising on the price-sensitivity of the market, with operators such as Onnibus advertising fares as low as €1 (plus a €1 booking fee) on some routes.

In a bid to reverse the decline in ridership, VR Group announced at the end of August that it will implement a programme of efficiencies with the aim of reducing operational spending by €50m per year, which in turn will enable it to price fares more competitively. With the launch of its new timetable on October 25 VR Group will purge many of its unprofitable long-distance services, withdrawing 6% of long-distance trains or 120 services per week and revise stopping patterns for many other services.

"We need to adapt services according to demand, which means cuts in some areas," explains VR Group's senior vice-president for communications and the environment Mr Otto Lehtipuu. "To put it bluntly, we can't be running empty trains. Load factor on long-distance trains is not what it should be - almost half of our long-distance trains have a load factor of 20% or less, which in itself is reason enough for structural changes in the timetable and shorter trains."

Lehtipuu is convinced that reducing fares is the key to halting ridership decline, even if services have to be cut to meet this objective. During June and July VR Group cut average fares by 30% on one of its key routes, Helsinki - Tampere, to "test the elasticity of the market." The result was a 40% surge in ridership.

While reducing fares to this extent might seem like a drastic step, Lehtipuu insists VR Group will not be engaging the bus operators in a price war. "Our experience from this summer shows that we don't need to beat or even match bus prices because the quality of our services means passengers are prepared to pay a little bit extra," he explains. "We want to be number one in long-distance passenger transport and despite the competition that position is still ours to defend. Rail is six times bigger than domestic aviation. The biggest bus operator carries around 2 million passengers a year, we carry 12 million and we want to increase that next year with our new prices and products. This is not a sign that we're giving up, it's a sign that we want to compete. As market leader we can't dump prices - we need to be profitable and we need to be transparent on how we will achieve that."

In addition to train operations, the ticket sales network is also coming under scrutiny and Lehtipuu argues that this no longer reflects passenger requirements. "Ten years ago most of our tickets were sold at stations, now the figure is less than 20%," he explains. "We still have 23 ticket offices throughout the country and we are looking at the network to see how we can make it more efficient."

VR Group is already making extensive use of alternative sales channels and its most frequently-purchased ticket types are now available through the R-Kioski chain of convenience stores, which has 630 branches throughout Finland. The company's website www.vr.fi has become the principal sales channel and now attracts around 1.7 million users per month. "We are focusing on developing digital channels because we have to be present where our customers are," Lehtipuu says. "The world has changed, customers have changed, and we need to do the same."

Around three quarters of the services operated by VR Group run on a purely commercial basis, giving it the flexibility to make significant changes to the timetable. However, under its contract with the Ministry of Transport and Communications, which runs until 2024, VR Group is obliged to provide certain services, including overnight trains and branch line services, in return for the exclusive right to operate passenger trains on the national network.

On September 15 the ministry announced it had reached an agreement with VR Group which allocates €110m for public service obligation (PSO) train services over the next four years, or €27.5m annually. This represents a reduction of €12.3m per year compared with the current contract, and perhaps inevitably such a substantial saving comes with service reductions. At the end of March, 28 of Finland's most lightly-used stations will close and passenger services will be withdrawn on several branch lines. The government has indicated that trains on these routes could be replaced with higher-frequency bus services.

Some main line stopping services such as Lahti - Riihmäki will be reduced while in Helsinki Line Y suburban services will be withdrawn and Line H will be merged with Line R. However, the agreement also includes provision to accommodate rising demand in some areas, such as a new Riihmäki - Helsinki express commuter service.

Efficiency is also prioritised in the new operating contract for Helsinki suburban services. In May VR Group signed a letter of intent with Helsinki Regional Transport (HSL) and rolling stock leasing company Junakalusto and this provides a basis for a five-year contract, which will start in April.

The proposals put forward to HSL by VR Group for 2016-2021 offer a saving of €30m compared with the current contract, and HSL says the price being offered is roughly the equivalent of what it would expect to achieve through a competitive tender. In VR Group's offer, the biggest savings would be achieved at the end of the contract period.

According to HSL, the measures included in this transitional contract will create more stable conditions for competitive tendering of the network for the period from mid-2021 onwards.

The deal is also expected to accelerate the renewal of the train fleet. Last year Junakalusto exercised a €200m option with Stadler for 34 additional Sm5 Flirt EMUs, which will supplement the fleet of 32 similar trains already in service. This means that by the end of 2017 these trains will operate all Helsinki suburban services.

VR Group hopes investment in new locomotives and rolling stock will help to further reduce operating costs and make rail a more attractive option for passengers. Last year VR Group placed a €300m order with Siemens for 80 200km/h Sr3 Vectron locomotives, the first of which is due to be delivered early next year. Finnish rolling stock manufacturer Transtech is also supplying additional IC2 double-deck coaches including sleeping cars and driving trailers, which have helped streamline operations at Helsinki Central, the country's busiest station.

With fewer services and more modern rolling stock, VR Group also anticipates a reduced requirement for maintenance facilities and staff. As a result of these changes to its operations, VR Group is planning to lay off up to 570 of its 9000 staff in its passenger, maintenance, rail services, and catering units by next year. "The trade unions understand the situation and recognise that something needs to be done," Lehtipuu says.

A key advantage of rail over the buses is journey time. Most of VR Group's long-distance fleet is capable of operating at 200km/h or more, but infrastructure is a constraining factor, particularly on a network that is largely single-track. The new government is expected to decide over the next few months how much it will invest in road and rail infrastructure in the coming years, although ministers have already indicated that maintenance spending will be a priority, indicating that major improvements in journey times may remain an aspiration for now.

Nonetheless, Lehtipuu is confident VR Group has a strong basis for a successful passenger business. "It's up to us whether we take the opportunities to grow our business," Lehtipuu concludes. "We have all the assets in place, now we need to get the price right. We're fully aware it will be a long and hard process with a lot of changes in how we operate, but the target is clear."


Freight defies cooling EU-Russia trade

VR GROUP's logistics unit VR Transpoint bucked the economic trend in 2014, generating profits of €24.9m despite a 1.5% fall in turnover and the railfreight business remains healthy with volumes increasing 1.8% last year to 37 million tonnes. Rail has a 29% share of the inland freight market, substantially higher than in most other EU member states.

Traffic to and from Russia accounts for around a third of railfreight volumes in Finland and despite the declining trade between the EU and Russia due to political tensions, volumes grew by 4.7% in 2014. "We have achieved a turnaround in our logistics business in recent years," Lehtipuu explains. We are running fewer trains but carrying higher volumes and we have agreed changes to collections and deliveries with many of our customers, which means we are moving a trainload a week where we used to move one or two wagons a day. Both sides are happy with this - it's more efficient for us and results in a better price for the customer."

Lehtipuu believes the prospects for growth are good with "quite a few promising industrial investments" including a major new wood pulp plant in central Finland, which looks set to become a key railfreight customer.

"The growth of our market share over the last few years is proof that we have a major role serving our major industries and linking them to markets, which in many cases are very distant," Lehtipuu says. "That's one of our major achievements. We are confident we can retain market share with the industrial developments that are planned."