THE recovery from the economic crisis has been a protracted and often painful process for many in the railfreight industry. Some smaller operators have been acquired by larger players or even gone out of business, while some of the biggest operators scraped through the worst years of the downturn with heavy losses.
One of the most remarkable stories to emerge from this turbulent period is that of Austrian Federal Railways (ÖBB) freight subsidiary Rail Cargo Austria (RCA). In the years prior to the recession RCA grew into a major international player, and its expansion strategy culminated with the acquisition of Hungarian State Railways' railfreight unit MAV Cargo in 2008, a move that unfortunately coincided with the start of the economic crisis and the sudden plunge in freight volumes in the fourth quarter of 2009.
Yet even before the crisis hit, RCA was facing problems. Figure 1 shows RCA's Ebit figures for the last 10 years, and while the most obvious feature of this chart is the collapse in earnings in 2009 and 2010, a more subtle trend that can be traced back much further has been instrumental in RCA's turnaround plan. At the height of the economic boom in 2004 and 2005, RCA was only able to achieve slim Ebit margins, which in turn reduced the company's capacity for investment and hamstrung its ability to compete with other modes and smaller railfreight operators.
RCA views this as a life-or-death issue for the business, and one that will take time to address. Figure 2 shows Ebit margins for Europe's major incumbent railfreight operators, with RCA achieving 3.2%. While this makes the company one of the stronger performers, RCA emphasises the need for the industry to go much further.
"It's clear that railfreight businesses need a margin of 4-5% to be sustainable, and that journey is far from over," Dr Georg Kasperkovitz, RCA board member for operations and finance told delegates at the International Union of Railways (UIC) Global Rail Freight Conference in Vienna earlier this year. "Companies need to continue to restructure, continue to grow, and continue to find synergies in order to reach that point. This is an industry that is not sustainable. Cross subsidies from passenger operations are no longer allowed, so if railways don't start to make money from their freight businesses they won't be able to invest."
Kasperkovitz points to the air freight industry as a portent of what the future might hold for European railfreight. He notes that air freight carriers were dependent on external forwarders, dealing with only a handful of end customers directly, and had insufficient margins to enable reinvestment, which ultimately led to value destruction.
"The message is that there is no future for you if you are a pure carrier," Kasperkovitz says. "If you look at air freight, 20 years ago many airlines offered carrier services, but consolidation means very few such carriers remain today because logistics companies such as DHL claimed the market. Pure carriers are at a serious disadvantage because they have to shoulder the cost of expensive assets. We fear that the railfreight market could develop in a similar way to air freight."
The primary aim of RCA's turnaround plan is to achieve a sustainable Ebit margin by establishing the company as an international logistics provider with a range of services based around railfreight. Using a "simple and transparent business model" RCA has been restructured under the Rail Cargo Group (RCG) umbrella into five business units:
• Rail Cargo Logistics: responsible for rail forwarding services and is focused solely on railfreight logistics, developing rail-based freight solutions for end customers
• Rail Cargo Operator: provides high-frequency long-haul shuttle services and sells capacity on its trains to the market. This unit does not own any assets
• Rail Cargo Carrier: is the international operations arm, encompassing RCA and Rail Cargo Hungary
• Rail Cargo Wagon: wagon rental business which owns RCA's fleet of 26,500 vehicles, and
• Maintenance services: including rolling stock maintenance subsidiaries in Austria, Hungary, and Slovakia.
Kasperkovitz says that these five units collaborate with each other to achieve better results. For example, Rail Cargo Operator utilises wagons from Rail Cargo Wagon and traction from Rail Cargo Carrier whenever it is economic to do so.
With the focus on rail-based logistics, RCA shed its Express Interfracht road distribution business and it no longer provides air freight or shipping services.
Around half of RCA's operations are outside Austria, covering 16 countries and a territory stretching from the North Sea to the Mediterranean and the Black Sea. RCA carried 109.3 million tonnes of freight and generated sales of €2.3bn in 2013, with 60% of revenues coming from non-domestic operations. In 2013 the company achieved its best-ever results, with Ebit surpassing forecasts to reach a record €76m. Kasperkovitz says RCA is on target for even better this year, with Ebit of €100m looking like a real possibility.
RCA's international growth strategy is based on connecting strategic terminals on four railfreight corridors linking the North Sea ports with Austria, eastern and southeast Europe and a key focus is the underdeveloped Europe - Turkey market, where rail currently has a market share of just 1%. Working in partnership with Turkey's Balo Logistics, Rail Cargo Carrier runs five return block services per week between Duisburg, Germany, and Kapikule in Turkey via Austria, Hungary, Romania, and Bulgaria with a transit time of four-and-a-half days.
RCA says its approach for tapping into this market is centred on offering high-frequency shuttles between key economic centres, providing its own traction along the entire route to ensure consistent service and reliability, developing advanced intermodal hubs to speed up container handling, and finding a strong local partner in Turkey.
RCA will increase its services from Germany to Kapikule to 10 trains per week from the end of this year and it sees potential to add Paris, Warsaw, and Bucharest to the network.
At the heart of RCA's plans for the Europe - Turkey corridor is a new €300m intermodal terminal at Inzersdorf near Vienna, which is under construction. In addition to the two intermodal terminals for containers and swapbodies, there will be a wagonload loading area and a warehousing and distribution centre.
Inzersdorf is better located for links to the road network than ÖBB's existing terminals at Freudenau and Praterstern, and the site is also large enough to facilitate expansion if required.
The first phase of the terminal will be completed in mid 2016, when four 700m loading tracks will be commissioned providing capacity to handle 210,000 TEU per year. This will increase to 420,000 TEU when the site is fully operational in 2017.
While challenges remain, particularly around infrastructure quality in eastern Europe and interoperability, RCA is confident that its new business structure and international strategy will strengthen its bottom line, give it capacity to invest, and enable it to survive in a consolidating market.