DB Schenker

March 6, 2013 |

Railfreight will return to growth says DB Schenker Rail

The global financial crisis has had a dramatic effect on railfreight traffic in Europe. Nevertheless, Dr Markus Hunkel member of DB Schenker Rail's management board tells Keith Fender he is confident that railfreight will once again become a growing business.

EUROPE's largest railfreight operator, DB Schenker Rail has ambitious plans to grow both the market and its share of it over the coming decade as part of an overall logistics service offering. "Ten years ago German Rail (DB) realised that railfreight needed to expand its role in the value chain to have a future, otherwise we could only see a limited outlook for railfreight," Dr Markus Hunkel, member of DB Schenker Rail's management board responsible for operations, who previously worked in DB's Strategy department, told IRJ.

In 2011 DB Schenker Rail accounted for €5bn of the €19.5bn turnover of DB Schenker's logistics business. While rail only accounts for a quarter of overall turnover, Hunkel is quick to point out that DB Schenker Rail was solely responsible for generating its revenue whereas his logistics colleagues had to make substantial use of third-party contractors to generate their turnover.

There has been substantial volatility in European freight during the last few years, and last year almost every market was stagnant or in decline, the one exception being Britain where there was slight growth. Nevertheless, Hunkel says DB Schenker Rail sees European freight as an expanding market over the long term. "We believe growth of 1.5-2% a year is feasible across Europe whilst delivering a high-quality pan-European network," Hunkel says.

In addition to the volatility, railfreight operators have seen an explosion in energy costs, track charges and labour costs. Hunkel describes the cost structure in DB's home market of Germany as "very challenging," and says that DB Schenker Rail has worked very hard on cost structures in recent years helping it to improve its financial results in the last few quarters despite traffic volumes falling in most countries.

In France and Poland - both countries where DB Schenker is now the number two player - volumes have fallen. Hunkel estimates that the French market is now 20% smaller than in 2008 and this was on top of a 20% contraction which occurred prior to the downturn. While the recent proposals by the French government to harmonise conditions across the railfreight sector are currently unclear, Hunkel says that anything that leads to higher costs would be a cause for concern, as DB Schenker's French subsidiary Euro Cargo Rail is not currently generating enough revenue to fund investment.

The French-based logistics provider Gefco was recently purchased by Russian Railways. Hunkel is unfazed by this as he says Gefco is a key customer for DB Schenker: "Whatever stabilises their strategy is good for both of us."

DB Schenker Rail takes a very different view of wagonload traffic from French state operator SNCF Geodis, which has abandoned wagonload freight. "Single wagonload, or less-than-trainload traffic is key to growth," says Hunkel. "Without single wagon traffic there will be no growth; rail can do much more than simply operate block trains." This was the thinking behind the decision to form the Xrail alliance, which was set up by DB Schenker Rail, Rail Cargo Austria, Swiss Federal Railways (SBB), and Green Cargo, Sweden, to develop a pan-European single wagon network which is able to compete with go-anywhere lorries.

In Poland, which weathered the initial 2008 global downturn much better than many other EU countries, there was a reduction in market size of around 9% in 2012 compared with the previous year. Nevertheless, unlike most EU countries, traffic in Poland was still above 2007 levels.

DB Schenker Rail Poland has received the first two of 23 Vectron 3kV dc electric locomotives from Siemens to replace much older units. Hunkel says this is a vote of confidence in Poland as the locomotives cannot be used in Germany or other countries with ac electrification.

DB Schenker Rail is watching developments in Eastern Europe where several state-owned national railfreight companies are for sale. However, Hunkel says that businesses with organic growth have proven to be the most successful companies within the group, which would appear to rule out acquisitions by DB of most former state railway freight companies.

dbschenkerHunkel singles out what he describes as their outstanding success story in Romania as an example of the type of business he wants to develop. DB Schenker Rail Romania operates nearly 10 times the number of wagons it did five years ago, and all the wagons are in use.

In both Romania and Bulgaria, DB Schenker Rail purchased specialist industrial railways which have provided a stable platform on which to expand and grow the business into other market sectors. Both rely heavily on locomotives imported second-hand from Germany, Denmark and Britain. The ability to move assets across Europe is one of DB Schenker Rail advantages. "We have more than 3500 locomotives all over Europe and we can move them as required, so British class 92s are now in use in Bulgaria, for example."

In addition to the Vectron locomotives for Poland, DB Schenker Rail is currently buying diesel locomotives from Voith for operation in Germany, while parent company DB has issued a tender for a long-term framework contract for new electric locomotives. Some of these could be acquired by DB Schenker Rail, but Hunkel is cautious. "We are investing carefully in our core business," he says. "While we want to cut costs and reduce carbon emissions, most new electric locomotives are too expensive. Much of our traffic is relatively low margin and cannot support the prices being asked." He believes the new generation of hybrid locomotives will become more widely used in the future.

Hunkel identifies a number of potential barriers to growth; most of which are regulatory. "Governments and the EU need to assist growth by having regulations that don't hinder it and there should be common, clear EU-wide rules for things such as noise reduction so individual countries do not introduce their own. Wagons cross borders after all."

While ETCS is supposed to be one of the key facilitators of cross-border operation, Hunkel is dubious of the benefits. He says it would cost around €500m to fit DB Schenker Rail's existing fleet of locomotives with ETCS. "In 10 years time the locomotives will still only be able to do what they can do today. The sector is not generating enough cash to fund this level of investment and will need financial assistance if it is to happen."

DB Schenker Rail has been looking beyond Europe to develop its business, and container trains are now operating several times a year between China and Europe. Hunkel says the trains were initially operated as block trains for single customers such as BMW but will develop into a regular timetabled service in much the same way as competing shipping lines, and that additional business will be sought from other customers.

While Hunkel says this is an attractive market, he believes rail will always be a niche player as it is best suited to high-value goods such as computers and major car components. This, he says, is because rail is twice as fast as ocean routes and half the price of airfreight. As yet, railfreight operators find it very difficult to compete on price with the container shipping lines despite their clear time advantage. This is something for DB Schenker Rail and its competitors to work on in the future if they want to be serious players in the Far East - Europe freight market.

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