STANDING proudly, and roughly 1.5m apart, Germany’s federal minister for transport and the heads of German Rail (DB) and Siemens, enthusiastically announced a €1bn order for 30 high-speed ICE trains on July 15.
The minister for transport and digital infrastructure, Mr Andreas Scheuer, praised the investment for providing a “turbo boost” to the German economy during the era of coronavirus. He said the order reinforces the German government’s longer-term commitment to sustainable transport.
The new trains will offer 25,000 additional seats and support a 30-minute service frequency between major cities as DB expands its ICE fleet to 411 trains by 2026.
“With investments in our entire fleet of €12bn by 2026, of which €8.5bn is in long-distance traffic alone, with massive expansion and consistent modernisation of the railways, we are jointly creating the conditions for a substantial shift to climate-friendly rail transport,” said DB CEO, Dr Richard Lutz.
Although the tender was announced in October 2019, critics have questioned the timing of the contract award. An equivalent private company, they say, simply would not make such a huge investment in assets at the height of the largest crisis in living memory.
“Our rail business is fixed-cost heavy, so when people stop travelling and revenues fall, that has an almost direct impact on our bottom line.”Levin Holle. DB
Indeed, DB, along with all public transport operators, suffered a crash in traffic after the coronavirus lockdown was instituted across Germany on March 22. DB introduced only minor adjustments to the long-distance domestic timetable, operating 70-90% of its usual services while it was carrying less than 10% of normal passengers. In contrast, its largest long-distance competitor, FlixTrain, was forced to suspend all services on March 20 until July 23.
There have been mixed messages about the rationale for this policy - DB said it was following government instructions to maintain the service to prevent overcrowding, something the government has consistently denied. While they might continue to agree to disagree, this is one certainty: the damage done to DB’s finances is unprecedented.
“Covid has pushed us into the red - from an operating profit of €757m in the first half of 2019 to an operating loss of €1.8bn in the first half of 2020,” DB’s CFO, Dr Levin Holle, said on July 30. “Our rail business is fixed-cost heavy, so when people stop travelling and revenues fall, that has an almost direct impact on our bottom line. Our group revenues fell roughly 12% to e19.4bn in the first half of 2020.”
While the outlook is uncertain, overall DB is predicting a €3.5bn loss by the end of the year with sales dropping to €38.5bn. Long Distance reported an overall 44% drop in volumes in the first half with passenger numbers recovering to around half of their previous levels in July. DB Cargo experienced a 13% drop in volumes in the first six months of the year while regional operator DB Regio witnessed a 41% fall compared with the first half of 2019.
DB Regio’s situation is mirrored by its competitors in the regional market. Transdev, Germany’s largest private rail and bus operator, which operates 23 rail contracts in six federal states, covering more than 45 million train-km per year, experienced a 90% decline in passengers during the lockdown. Keolis, which operates four contracts in North-Rhine Westphalia and a cross-border service to the Netherlands accounting for 16.5 million train-km per annum, reported a similar fall.
“On average we are back to around 50-60% of pre-crisis,” Mr Christian Schreyer, president and CEO of Transdev North and Central Europe, told IRJ. “What is a little frightening is that it has frozen at this level. We had a strong recovery in May and we still saw a bit of recovery in June and then not a lot has happened. It is a little different from state to state, passenger numbers are lower in the south where Covid was stronger, like in Bavaria, we are still around 50%, whereas in the eastern parts of Germany, such as Saxony, we are at 70-80% of ridership.”
Mr Thomas Prechtl, CEO of Bavaria Railway Authority (BEG), which oversees a network of roughly 6000km and traffic approaching 130 million train-km per year across 35 separate contracts, likens the impact of Covid-19 to driving a car at 180km/h into a brick wall. “We lost 80-90% of our passengers year-on-year, so the trains were nearly empty, but at the same time we tried to maximise the available capacity by running 60-70% of the trains,” Prechtl says. “This is to ensure the transport of people who must travel by train could do so at a safe distance.”
Mr Dirk Gründler, personal assistant to the board director and head of the in-house legal team at BEG, says regular talks and meetings were held with the operators in the early days of the pandemic to establish a stable timetable, which the operators guaranteed to maintain for the duration of the crisis. In turn, BEG guaranteed that it would continue to pay normal fees without the penalties for late running or not meeting the contractually agreed level of service.
“Our greatest fear at this time was if employees were to become ill,” Prechtl says. “If that happened some of the trains would not be able to operate. We were successful in doing this. Traffic was stable and after Easter we increased traffic back to the normal level.”
Prechtl says the total losses incurred is a “very big sum.” With operators suffering from a lack of liquidity due to the fall in ticket revenues, BEG continued to pay regular monthly instalments at the same level as before despite the reduction in service level. This would normally result in a reduction in the payment, or a penalty for the operator.
Indeed, nearly all of Bavaria’s contracts are operated on a net contract basis, whereby the operator takes on the risk of operating the service and receives income from ticket sales and other commercial ventures. Six of Transdev’s 23 contracts in Germany are operated on this basis, and their continuing viability is a concern to Schreyer.
“The margins are low in our business and if you have a net contract with 60-70%, you are just dead,” says Schreyer, who is also president of Mofair, which represents private and independent rail operators in Germany. “If you have less passengers on a lasting basis you must take out capacity or renegotiate the contract otherwise you will not survive.”
In contrast, all of Keolis Germany’s contracts are concessions, whereby the operator is paid a set fee by the transport authority to deliver the service. CEO, Ms Anne Mathieu, says the company can live with the current arrangement, although she says the operator has looked to cut costs where possible, including a non-essential worker hire freeze.
Mathieu says Keolis reduced its offer in coordination with the local public transport authorities and ministries of transport to around 65% of previous levels during the crisis and passenger numbers have since recovered to an average of 65%.
This close coordination has continued since the lockdown was lifted. Mathieu says ‘Focus Bahn’ meetings, which previously considered employment issues, now discuss the consequences and recovery from the pandemic, and how they might bring passengers back.
“We could see that most passengers left public transport during the lockdown but that 86% want to come back. Already two-thirds feel safe on the train and at the station.”Anne Mathieu
Mathieu says Keolis’ approach to encouraging a return has been to inform passengers of the situation, what instructions they should follow, and as restrictions have been lifted, to offer reassurance that travelling by train is safe.
Safety is also reinforced by the legal requirement for German public transport passengers to wear face coverings with fines for passengers who do not conform. A national campaign to support the measure is underway and is backed by the roughly 600 members of the Association of German Transport Companies (VDV).
“Keolis Germany conducted a survey of our passengers to try and understand what they were worried about,” Mathieu says. “We could see that most passengers left public transport during the lockdown but that 86% want to come back. Already two-thirds feel safe on the train and at the station, but the biggest worry is about other passengers not wearing masks.”
Another campaign recently launched by VDV is the #BesserWeiter initiative to convince the public that trains and buses are safe and that they should return to using them but only while wearing a mask. As part of the campaign, VDV has also launched a ‘bus and train trust index’ to measure the mood of the public using public transport in Germany in monthly representative surveys.
BEG is also using a variety of techniques and campaigns to encourage Bavarians to return to the train. However, Gründler admits there is still some way to go. “We don’t have to tell their minds, we have to bring it to their heart,” he says.
Schreyer and Mathieu say a major test of whether the current ridership figure will further recover is expected this month. The end of the summer holidays and the return of schools and universities should normally result in a surge in public transport use in Germany. Many people who have been working at home since March are likely to be encouraged to return to the office as Germany attempts to return to something approaching normal.
This month the federal states should begin accepting applications for compensation promised to transport companies for lost revenues experienced between March 1 and August 31. The European Commission (EC) approved a €6bn scheme from the German government to support local and regional public transport operators on August 10. In reality, it is a €5bn programme, with the federal government contributing €2.5bn and the states €2.5bn.
Schreyer says this figure is calculated on the assumption that the operators will return to 90% of their previous revenues by the end of the year. The federal funds will account for approximately 50% of lost income. It could be 100% but this depends on how the states will distribute their €2.5bn share, with different states taking different approaches.
In Bavaria the compensation programme will supersede the regular instalment payments offered by BEG Prechtl says the process has two phases. The first phase comprised an application for the refund from the government by August 31. In the second phase, BEG is accepting applications for compensation up to September 30, at which point teams at the authority will go to work to check the losses against gains from the agreed limitations of service during the lockdown to calculate what they might be owed. He estimates that the state will have €387m available, which the Bavarian state government will match, taking the total to €774m, which should cover up to 90% of an operator’s losses. He expects the process to conclude by September 30 2021.
Whether other states take the same approach remains to be seen. For example, Schreyer says Saxony, which also has a lot of net contracts, has not yet stated whether they will use their part of the funding to help the private operators.
“If this process is not fair, it will be tough for us,” Schreyer says. “We are concerned right now that a big portion of these funds will go to municipal transport companies in cities which have not been able to reduce costs during the crisis. Will there be any money in the end for private operators? We don’t know yet.”
There are also questions over how or whether DB will benefit from this fund. DB Regio could receive up to €800m and is potentially the biggest single beneficiary. However, the government said DB will receive its own separate €5bn capital increase from the government due to the coronavirus losses, which is set to be followed by up to €3.6bn next year. The company’s debt ceiling has also been increased to €30bn from €25bn previously.
Mofair believes that using taxpayers’ money in such a way could have serious implications for future competition by providing DB with an unfair competitive advantage. They argue that covering losses incurred by DB Long Distance is the equivalent of a direct award and that FlixTrain or other competitors should have had the opportunity to fill this gap.
For commuter and regional services, the government argues that the cash injection is equivalent to a private company increasing capital into its business. However, Mofair does not feel that DB should be able to benefit twice.
“It is a little bit strange when the CFO of DB says that we are steering through the crisis while talking about the new trains for DB Long Distance and not adding where the money came from,” says Dr Matthias Stoffregen, Mofair’s managing director. “It comes directly from the state, which is state aid that other competitors do not get. It is a really huge problem that questions the principle of competition in German rail generally.”
“They are using taxpayer’s money but are saying to the private operators to ask their shareholders for the same capital increase, where their shareholder is not a taxpayer and doesn’t have unlimited funds,” Schreyer says. “All normal shareholders expect a return one day on their investment. The taxpayer does not have the same expectation. This is why this comment is so arrogant and has made us really furious. It shows the mindset of DB currently.”
Dipl-Pol Oliver Mietzsch, executive director of Greater Leipzig Transport Authority (ZVNL), shares the concern that the capital injection could potentially distort future competition. He says ZVNL has appointed the consultancy KZV, which has a good handle on DB’s finances, to monitor how the €5bn will be redistributed throughout the company, although it is too early to say what the outcome will be.
Stoffregen says the European Commission is also closely engaged in the process and could yet rule against it if it is deemed to offer an unfair advantage to DB. “The federal government must not do the capital increase before the commission has allowed it,” he says. “That is forbidden by European law.”
Another area where Mofair feels that DB is distorting the market is the use of its recently-established low-cost carrier, Regional Transport Start Germany, to compete in tenders where it is looking to regain market share, already winning back one contract from Transdev in Saxony.
In addition, it has been common in recent tenders for three, two, or sometimes only one bidder to come forward compared with five or six for previous contracts.
Mietzsch says Start was founded to help DB compete more effectively because it discounts overheads that its competitors don’t have, such as the large blue-collar workforce. However, he says the reduction in bidders competing for contracts is not a consequence of the pandemic but an overall trend in the market.
“The parent companies of both the private and the state-owned operators like Abellio are in difficulty because they do not make too much money in the German regional rail market,” Mietzsch says. “For 5-6% margins, they are asking themselves whether they need to do all of this work? There is an argument that we have gained all of the possible gains in the competition process - we the authorities but also the companies, so there is not much left to get any more money out of it.”
This view is shared by Prechtl and Gründler. They believe that several firms could withdraw from the market altogether. Takeovers and mergers of smaller players are also likely as operators seek synergies between contracts to drive efficiency improvements.
They also believe that several reforms are possible, which could support participants which do not have the backing of the state, potentially reinvigorating the market.
For example, in Bavaria the state currently guarantees the finance of new trains, providing an equal opportunity to all bidders. This is a unique arrangement, but other states have similar initiatives - Baden Württemberg for example owns the trains which are rented to the operator. Similar guarantees could be offered in other areas where operators take on risk or are exposed to large costs, such as train maintenance. Many of the operators are expected to renegotiate contracts sometimes agreed 12-15 years ago so the terms are more favourable.
“Maybe now we need to think a little bit faster to resolve these issues and stabilise future competition because the problems are increasing, and the need is really urgent.”Dirk Gründler, BEG
“The way we have organised competition in public transport in Germany has been good, but it is not perfect,” Gründler says. “We have some problems. We thought this before but maybe now we need to think a little bit faster to resolve these issues and stabilise future competition because the problems are increasing, and the need is really urgent.”
The problem for BEG and other authorities to introduce reforms could be a lack of capacity to innovate. A significant proportion of BEG’s staff will be taken up with the compensation process, limiting their ability to come up with and institute new ideas.
Nevertheless, Gründler feels the pandemic offers an opportunity to reset. If passenger numbers remain down in the medium-term, he says this is a chance for the rail operators and authorities to focus on offering a higher quality and more reliable service, which will strengthen the sector in the long term, ultimately encouraging both old and new passengers to use the train.
Likewise, Mathieu says that as well as safety, the pandemic is forcing Keolis to rethink how it might attract passengers to use its services. “We have to put ourselves in their position and really rethink what our offer is,” she says. “For me this is positive.”
Mathieu says it could be an opportunity to accelerate digitalisation projects, an area where she says there is room for improvement in Germany. “Other countries might be more advanced, but the pandemic is pushing us in this direction,” she says. “Things like buying your ticket with a card and making this a contactless payment will be accelerated by the pandemic.”
The big question that no one yet has the answer to is what happens next. With coronavirus cases on the rise again in Europe as IRJ went to press, there are growing concerns about the prospect of a second wave and what this might do to rail businesses if the unthinkable happens: a second comprehensive lockdown.
This would cast doubt on whether third party and private operators are able to continue to operate on a risk basis, let alone compete for future contracts. The German market is seemingly facing its biggest challenge since it was conceived in the mid-1990s.
“We are waiting to see what happens,” Mathieu says.