Europe View: Private companies rattle the rails

Europe View: Private companies rattle the rails

LONDON --- Europe's railroad operators are fast running out of time to stem the long-term decline in their share of the continent's freight market and reclaim traffic lost to trucking over the past three decades.

Rail's share of the European Union's freight traffic has sunk to less than 8 percent from 22 percent in 1970, a woeful performance compared to U.S. rail carriers which haul 40 percent of the nation's goods. Worse, a large slice of rail cargoes are composed of low-paying bulk commodities that rival transport modes either can't carry or are not interested in bidding for.

And all this after the EU's 15 year-long deregulation campaign aimed at forging a competitive cross-border rail sector out of heavily subsidized state-owned monopolies that behave more like an arm of government than a commercial money-making venture.

True there has been progress, but this been due more to policies pursued by national governments rather than as a result of a coordinated EU-wide process. Thus the United Kingdom has a totally privatized rail freight industry while France's SNCF remains firmly entrenched in the public sector. However, UK rail freight has a smaller slice of the domestic cargo market than SNCF, though it has grown traffic by a third in the past decade while the French company's business has shrunk. On the other hand, Britain's rail carriers are making money, while SNCF's freight unit, SNCF Fret, lost nearly $540 million last year and will close 2004 heavily in the red. Hardly a template for a single pan-European industry.

There are signs, however, that the EU's market-opening rules are finally have an impact as new private operators spring up to challenge the state monopolies across continental Europe. The newcomers have the law on their side: EU governments have been obliged since March 2003 to issue licences to any rail freight carrier that meets safety standards to run services on the key cross-border international routes. And from 2007 they must allow private firms to operate services anywhere in the 25-nation bloc.

Private firms can have an instant impact on high volume routes or niche markets, because it doesn't take much to improve on the product being offered by state railroads. The newcomers have captured as much as 20 percent of traffic on some routes, such as the container corridors to and from north European ports and trans-Alpine crossings. European Rail Shuttle, a unit of container shipping lines Maersk Sealand and P&O Nedlloyd, operates around 250 weekly shuttles between Rotterdam and inland European destinations as far away as Italy and the Czech Republic, and expects to grow its business by 15 percent over the next two years. It's also a hit with its shareholders' rivals, who account for around 30 percent of its projected 470,000 TEUs of traffic this year.

Smaller operators like Rotterdam-based Short Lines has captured local traffic from the former state monopoly and is extending its logistics chain across the Dutch border into Belgium and Germany, while Rail 4 Chem, a German chemical shipper-owned carrier, has established itself in the port with six locomotives and will start a service to northern Italy in December. The German Railway Industry Association says that one-third of the locomotives and rolling stock supplied by its members goes to a private company.

The private sector remains, however, a small-time player in one of the very few European industries still dominated by state-owned firms. Rail accounts for just 10 percent of the ocean containers transported to and from Rotterdam, a gain of one percent in the past two years, compared with inland shipping's 31 percent and trucking's 59 percent. And the new market-opening rules haven't spawned a single private operator in France, Spain, Portugal or Ireland.

But the private firms are punching way above their weight, forcing laggard state rivals to improve their performance. European shippers say Railion Nederland, the major Dutch freight operator now owned by Germany's state owned DB Cargo, was transformed after it lost some valuable contracts to private firms. SNCB, Belgium's national railway, also became more responsive to customers' needs following the arrival of its first competitor, Dillen & Lejeune. Industry watchers say a $640 million (government-funded, naturally)] restructuring of SNCF Fret is being fast-forwarded to prepare for competition.

On top of state-sponsored protectionism, rail freight companies, both state-owned incumbents and would-be private operators, face serious technical obstacles to cross-border services. Electric power and signalling systems vary from country to country, forcing changes of locomotives and drivers at border posts, a process that can take four to five hours on average, further eroding rail's competitiveness compared with trucking. There are even technical problems within national markets -- most of SNCF Fret's electric locomotives work on only one of the country's three electrified systems, and its diesel locomotives each average 30 years of age.

All this is about to change as RTC, a private Italian company, prepares to run a freight service between Italy, Austria and Germany via the Brenner pass in the Alps, using a single locomotive that can operate on electrical systems varying from Italy's 3,000 volts DC to Germany's 15,000 volts AC. As a result, the loco will stop only 10 minutes at border crossings to change drivers, greatly reducing voyage times and increasing rail's competitive advantage over trucks, which are facing tougher environmental restrictions on trans-Alpine transits.

These are small steps in rail's struggle to win back market share, especially for higher paying traffic like containers, but the persistence of the privately owned operators and enthusiastic response of pro-rail shippers could yet jump-start the industry's long-awaited revival.

But with time running out, the new European Commission that takes office on Nov. 1 must wage war on any attempt by EU member states to throttle the infant private rail freight sector.

Bruce Barnard is the European correspondent for The Journal of Commerce Online.