EUROPE VIEW: RAILWAYS STILL ON THE DOLE

EUROPE VIEW: RAILWAYS STILL ON THE DOLE

Europe's airlines are sinking deeper into crisis but few governments think reviving state aid and retreating to protectionism will pull them out of their nosedive. Europe's land transport industries also are mired in crisis, but the same governments are taking refuge behind state aid and protectionism.

In the same week that France was completing an 'open skies' aviation accord with the United States to completely liberalize air services between the two countries, it was hailing a European Union agreement to liberalize its postal market after 12 years of talks as a 'victory,' because it will only open up an additional 90f services by 2006.So while United Parcel Service and FedEx have total freedom to fly between the U.S. and France, they can't move freely inside the EU mail market. The reason? Air France stands to gain from an open skies deal, but politically powerful and militant French postal workers will lose out in a free EU mail market.

Europe's state-owned airlines, who accept that the days of state handouts and protection are surely coming to an end following the Sept. 11 terrorist attacks, have presented a timely excuse for the basket cases to get one final tranche of taxpayers' money. But for Europe's railways life goes on as normal, helped by subsidies in the 15-nation EU of around $200 billion since 1995.

The rail industry has a history of liberalization dating back to 1991 but nothing much has changed. Rail freight is steadily losing market share to trucking, and the long-promised cross-border services that would create a single European rail market have yet to materialize. The EU has now agreed to a phased opening of cross-border cargo services starting in 2003 but few industry watchers are betting on a big leap forward.

Rather than preparing for liberalization, the state-owned rail monopolies are trying to nip it in the bud. The European Commission has just initiated proceedings against Germany's Deutsche Bahn, Europe's largest railway operator, for violating EU competition rules by refusing to provide locomotives to a small German competitor, GVG. As a result, the latter's rail service from Berlin to Malmo, Sweden, operated with SJ, the Swedish railway company, risks collapse.

What makes the case even more depressing is that the CVG/SJ service marks the first time a state railway has joined forces with a private company in competition with another state railway - eight years after the market was officially deregulated. Since then ' there has been almost no competition,' says the commission.

Unfortunately, the advocates of liberalization and competition are on the retreat following the turmoil in Britain's totally privatized rail industry which was a role model for the rest of Europe over the past decade. That's all changed after a year of track closures following two fatal accidents, late and cancelled trains , culminating several weeks ago in the collapse of Railtrack, the owner of the tracks and other infrastructure, burdened with debts of around $5 billion.

The unraveling of the U.K. system has had an immediate impact on Europe, as the German government has decided to take a much more cautious approach to privatization, originally scheduled for 2005.

But there's little doubt privatization and liberalization are the best tonic for Europe's monopoly transport industries. The opening of the Netherlands mail market forced the monopoly operator to seek new businesses, resulting in the creation of TPG, one of the world's leading global mail, express and logistics operators. TPG's success inspired Germany's Deutsche Post to become a global transport firm though it still relies on its domestic mail monopoly for the bulk of its profits. Britain privatized almost every state-owned company but couldn't let go of the Royal Mail, and has paid the price: While its rivals grow, the Britain's postal operator is expected to lay off 200f its staff within weeks in a bid to shave $1.75 billion off its $11.6 billion in annual costs.

Of course, the privatization of Britain's railways has been a success despite Railtrack's demise. The 25 train-operating companies have increased passenger numbers by 7% annually, reversing a 30-year decline, and private freight operators have won traffic from trucking, also reversing an apparently irreversible long-term trend.

The European Commission , meanwhile, continues to pump out policy papers which are immediately round-filed and to issue warnings which are similarly ignored. Its latest document includes 60 measures aimed at shifting freight off congested roads, cutting pollution, boosting transport technology and improving safety. It paints a depressing picture of the EU transport infrastructure where roads accounts for 440f goods transported while rail's share has collapsed to 8%, from over 30 0n 1970. Without substantive initiatives, it warns, truck traffic will increase by 500ver its 1998 level by 2010.

But EU governments are too busy tackling the airline crisis to give a thought to the commission's White Paper published in the week of the terrorist attacks in the U.S.. But they will be making a big mistake if they consign it to the waste bin because in five years' time, the cost of subsidizing the rail system and the delays on gridlocked motorways will make the airline crisis look like small change.