TWO years ago Finnish national train operator VR Group embarked on an ambitious programme of efficiencies and fare reductions as it sought to revive ridership and profitability in the face of a stagnating economy and increasing competition from long-distance buses.
Watching passengers pouring off inter-city trains at Helsinki Central station on a chilly November morning, VR Group certainly appears to have been successful in its bid to improve load factors, which by 2015 had fallen to 20% or less on almost half of long-distance services. Total passenger journeys increased 9% in 2016 to 82.1 million, with long-distance trips up 2.8%. Growth remained strong in the first nine months of 2017, with total passenger journeys (including bus) increasing 11.3% to 93.4 million, while rail passenger-km increased 9.3% to 3.11 billion. Average load factors now exceed 40% and are above 70% on the most popular trains.
This helped to swell group net sales for January-September, which rose by 5.8%, while operating profits climbed to €82.5m, compared with €25.5m for the corresponding period in 2016.
Lower fares, the increased availability of Saver tickets and the reintroduction of the multi-ticket, which boosted sales in this segment by 81% during the Autumn campaign period, have helped to drive up ridership, while the introduction of new double-deck driving trailers has increased capacity, adding 1700 seats to the long-distance fleet while improving operational efficiency, particularly at the busy terminus at Helsinki Central.
In the boardroom at VR Group’s soon-to-be-vacated headquarters in the east wing of the station, president and CEO Mr Rolf Jansson told IRJ he is extremely satisfied with the company’s progress in 2017. “In February 2016, we made quite a bold move by cutting fares by 25% on long-distance services, and, for the second year in a row, passenger numbers have increased 8-10%,” he says. “The revenue has turned around, the profitability has turned around, and a few weeks ago, we announced that we will make an additional 10% reduction of the cheapest ticket prices.”
Alongside an aggressive cut in fares, VR Group withdrew 6% of long-distance services in October 2015 and altered stopping patterns on many more trains as part of its quest to boost profitability. The Ministry of Transport and Communications also made cuts on publicly-subsidised routes.
However, services are now being stepped up on key routes to meet rapidly-rising demand. In June VR Group added 49 extra trains to the timetable, primarily on routes serving Ostrobothnia on the west coast. In December 2017, 12 extra trains per week were added between Helsinki and Turku and 10 on the Turku - Tampere line.
As passengers return to the railway, VR Group is investing in rolling stock. In August the company placed a €50m order with Škoda Transportation’s Finnish subsidiary Transtech for 20 additional type Ed double-deck coaches, which will add 2300 seats on the busiest long-distance services from 2019. Older single-deck coaches are also being refurbished and returned to service to address the need for greater fleet capacity.
“The efficiency project has been a tremendous success, and we have cut a lot of cost as a consequence - some €50m,” Jansson says. “This year we have a run rate of €55-60m compared with the baseline of 2016. And this is only for passenger and maintenance activities.”
In August the government revealed plans to liberalise the market for passenger rail services in the 2020s, giving authorities at city, county and regional levels more involvement in the specification and procurement of train services.
The current agreement between the Ministry of Transport and Communications and VR Group, which gives the operator exclusive rights to run passenger rail services, is due to run until the end of 2024, but the government intends to renegotiate this agreement.
Market opening will begin in the south of the country, covering commuter services from Helsinki to Tampere, Lahti, Kouvola, and Kotka, and the process will run in parallel with the competitive tendering of suburban rail services under the jurisdiction of Helsinki Regional Transport (HSL). The ministry says the first concessions will come into effect in the early 2020s and the new procurement model will be rolled out across Finland by June 2026.
As part of the liberalisation process, VR Group’s rolling stock, train maintenance and property activities will be split off into three new state-owned companies with the aim of ensuring that all transport services are available to all operators on what the ministry describes as “competition-neutral terms.”
Jansson is confident VR Group’s drive to reduce operating costs will put the company in a stronger position to compete when the market opens.
“Since 2009 our focus has been to make this company more efficient,” he says. “We had just experienced an economic collapse at the end of 2008, which was a challenge in itself, and then competition from other modes tightened things up, so our strategy isn’t changing. We’re still focussed on efficiency, because in this industry that will always be a major part of what makes a company successful. We have also been focusing more and more on customer orientation, making sure that we can offer the best services and using that to achieve growth.”
To this end, VR Group is harnessing new technologies to improve the passenger experience. “We’re investing heavily in IT, especially in sales channels,” says Jansson. “Today some 80% of tickets are sold through digital channels, and that’s a change that happened very quickly, but we still need to make improvements to make it as easy as possible to buy tickets. We also need to invest in systems to improve service levels, give more information to customers during the trip, and provide more value-added services.”
Jansson says infrastructure-related delays have been a major source of frustration for VR Group and its customers in 2017. According to statistics from the Finnish Transport Agency, an average of 47.6% of delays in the first 10 months of the year were infrastructure-related, compared with an average of 37.4% for the corresponding period in 2016, and reached a peak of 64% in September 2017.
“Punctuality has been a challenge for us in 2017 and we have had tremendous problems, particularly in long-distance,” Jansson says. “In Finland we’ve always had a rule of thumb that one third of delays will be infrastructure-related, one third are caused by the operator, and one third are the result of external factors. If two-thirds of delays are caused by infrastructure problems, that’s a clear sign that the Finnish state needs to invest more. We need enhancements and we need additional track, because capacity is limited where we really need it. This is a 90% single-track network, which is well above the European average.
“During the rush hour, trains leaving Helsinki for Tampere are totally full, and this is a problem for us. Freight, commuter and long-distance trains are sharing the same infrastructure and during peak hours we have real constraints on capacity. Ideally we would like to have a fast train to Tampere and an inter-city train with more stops but it’s impossible to combine these two types of operation.”
One of the objectives of liberalisation is to raise rail’s share of the inland passenger transport market from 5.3% to 6% in the 2020s and 8% in the 2030s, bringing Finland in line with the current EU average. Jansson argues that this is unlikely to happen unless capacity issues are addressed in parallel with liberalisation.
“I don’t disagree with the 8% target, I think it’s a great thing to aim for, but the circumstances in Finland are different from other European countries,” he says. “You have 5.5 million people living in an area almost the size of Germany, and most of them are in the south, so most of the potential is on a few key routes. Looking at what we have achieved in the last few years, I think we can reach 6% now because we have cut prices, we have improved services, we have faster trains and we invested in rolling stock. But if we want to get to 8% we will need to invest in more track capacity to enable operators to run more trains at peak times.”
Jansson is critical of the government’s response to the everyday infrastructure issues facing Finland’s railways. “Very few politicians want to talk about ‘boring’ investment in track and safety equipment, where gradual linear improvements make a real impact on the performance of the whole system,” he says. “Many prefer to discuss hyperloops, a tunnel to the Baltics, a high-speed line to Turku, building a line up to the Arctic Circle. We’ve been underinvesting in the track for 10 years and we have to address this. Of course, you need to have a vision for the long-term, but when you look at the performance statistics it’s clear that we need to close the gap on our maintenance deficit. We invest approximately half the European average in track. Everyone agrees this is a fact - whether you are a politician or you work for the Finnish Transport Agency, people can see what is going on.”
According to EU forecasts, Finland’s GDP is expected to increase by 3.3% in 2018, faster than the European average, and economic growth will support a continued improvement in the public finances.
“Our objective is to continue the very positive trend we have seen in recent years,” Jansson says. “If you look at the market context and the economic environment, I think they will still be on our side in 2018. We have a great team, very ambitious targets, and we’re committed and excited about the changes coming up in the industry. If you look at our customer satisfaction scores, profitability, growth in turnover, and efficiency KPIs, everything shows we are on the right track and our strategy is the right one. It’s great to see how the people in this industry have the drive to make things better. We are able to combine 155 years of experience in transport with a lot of new thinking, and that’s really a key strength.”
Freight: building on the strengths of rail
BEFORE his appointment as CEO of VR Group in 2016, Jansson oversaw a programme to improve the competitiveness of the company’s logistics subsidiary VR Transpoint. The business continues to see growth, with volumes increasing 5.6% to 32.1 million tonnes in January-September 2017.
A new fleet of Siemens Sr3 Vectron electric locomotives, which are equipped with last-mile diesel engines for operation on non-electrified sidings, entered service last year, helping to improve the efficiency of freight operations, and a contract is also due to be awarded this year for the rebuilding or replacement of the residual diesel fleet.
International traffic to Russia is increasing, particularly paper and pulp products, and investment in new pulp plants in central Finland is generating new opportunities for rail.
Transpoint has focussed on closer integration of its road and rail activities to take full advantage of the respective strengths of the two modes and offer end-to-end logistics solutions. “This means we can move small flows flexibly by road into a hub with a block train to the port,” Jansson explains. “We also manage harbour operations as well through our partners, so you get a smooth, seamless operation throughout the chain. This is a huge change at a strategic level in logistics because traditionally there’s always been a view that you optimise one small step in the chain. Now the focus is on optimising the whole chain and passing the benefit on to the customer.”
“It’s clear that while there’s an element of competition between road and rail, both modes have strengths in certain segments and you shouldn’t try to shift tonnages to road in areas where it doesn’t make sense, or vice versa.”