Back on track

Left: China’s CRH3

Above: Bombardier produces its Traxx locomotive in a number of diesel and electric variations. DB has just ordered up to 200 of a multi-engined diesel design

Right: Siemens has received the biggest order in its corporate history for ICx long-distance trains for DB in Germany.

A return to growth is signalled in Europe’s railway equipment market. James Abbott reports.

The barometer is set fair for Europe’s railways. The economic fundamentals favour the mode: soaring petrol prices are tempting more people to travel by train, while the return to economic health of the core eurozone countries in the aftermath of the 2008 financial crisis has pushed up freight traffic.

Passenger demand forecasting measures used by the UK rail industry indicate that a 5 per cent rise in petrol prices can lead to around a 1 per cent rise in journeys on the rail network. So the rising cost of fuel has been a contributory factor in a 4.8 per cent increase in passenger numbers on British railways in the first three months of 2011: 316 million journeys were made in the first quarter of 2011, compared to 301 million over the same period last year.

Growth over the entire financial year 2010–11 was 6.6 per cent in Britain’s passenger rail market. It is little wonder, then, that the British government is promoting the construction of a new high-speed line from London to the north of England: the existing transport corridors are simply becoming full up. The protracted planning processes in the UK mean it will be some years before construction can start, but the plan is to reach Birmingham by 2026 and Manchester and Leeds by 2033.

Meanwhile, in Europe’s manufacturing heartland, exports are booming as the euro has gained a competitive edge after being dragged down by the problems in the peripheral countries. As a result, rail freight carryings in Germany are up 21 per cent in the past year, clawing back the tumble they took following the financial crisis.

Looking to the long term trend, DB Netz, the infrastructure division of the German state railway, expects tonne-km to grow by as much as 65 per cent between 2004 and 2025, with passenger-km rising by more than 25 per cent. (A tonne km is one tonne moving one kilometre, a passenger km is one passenger moving one km.)

A sharp rise in intermodal and international freight traffic has prompted DB Netz to bring forward planning for a new eastern corridor line running from Hamburg and Bremen to south Germany via Uelzen, Stendhal, Magdeburg, Reichenbach, Hof and Regensburg. The Ministry of Transport is supporting the eastern corridor with a view to DB Netz completing the project by 2019.

The German passenger market, too, is growing strongly, prompting the largest order in Siemens’ corporate history in May 2011: the manufacturer will build up to 300 new ICx long-distance trains for DB, with the first trains due to be delivered in 2016.

World demand rising

These examples of expansion in Europe reflect a pattern that is being repeated globally. Increasing urbanisation favours the rail mode and demand for railway equipment is rising around the world.

That is good news for Europe, as the continent is a global leader in railway equipment manufacture. The headquarters of the railway divisions of the two biggest companies in the railway equipment supply industry in the world, Bombardier and Alstom, are located in Berlin and Paris respectively.

A recent study by German consultancy SCI Verkehr estimated that the global railway equipment market is worth €131 billion, 53 per cent of which is from after sales. The company’s Maria Leenen and Andreas Wolf project that sales will grow by 22 per cent over the next five years, to hit €160 billion by 2015.

One key factor identified by the consultants is the increasing importance of Asia – and more specifically, China – in global equipment demand. “The Chinese railway technology manufacturers are increasing their turnover and market share at a breathtaking speed, and more recently outside their domestic market. We predict a clear shift in the overall market balance in favour of Asian players in the next five years,” say the consultants.

China has become the biggest investor in railways in the world, overtaking the USA, where investment in new locomotives and freight wagons dropped off in the wake of the financial crisis. So rapid has been the increase in output in the Chinese railway

equipment sector that the two largest Chinese manufacturers, CSR and CNR, have overtaken the third of Europe’s ‘Big Three’, Siemens, in terms of the number of railway vehicles they produce. Their output is overwhelmingly for the Chinese domestic market at present, but industry observers expect the export sector to become increasingly important for them.

The western manufacturers have some share in the buoyant domestic Chinese market, as the big European and Japanese manufacturers have joint ventures in China. The same is true for the western European companies in Russia, the third biggest market in the world after China and the US. Strong commodity prices have sparked investment in the long-haul freight railways that traverse the vast Russian land mass, and the newly-resurgent country has made some trophy investments in the passenger sector as well. The key Moscow–St Petersburg corridor now boasts ‘Sapsan’ (‘Falcon’) high-speed trains from Siemens; these utilise the latest west European technology.

These booming markets provide confidence for the manufacturers when peripheral countries, such as Greece and Romania, are withdrawing services from large swathes of their rail networks in a bid to contain their budget deficits. Ireland, which was bullish on railway investment in the ‘Celtic Tiger’ boom years, has put the brakes on expansion: there are still projects in the pipeline, especially urban transit in Dublin, but timescales have lengthened.

These countries are all small beer in terms of the global railway equipment market. The same cannot be said of Spain, the eighth largest investor in railways in the world (larger than Britain and Italy), which has built a high-speed network of a size to rival that in France and also invested in its urban rail networks. If budgetary problems here result in a slowdown in spending, order books of the big suppliers would be adversely affected.

Strong order books

As it is, the rosy outlook in many of the developing markets has boosted the order books after a trough in the wake of the financial crisis. The backlog at the world’s biggest manufacturer, Bombardier, stood at a record US$33·5 billion at the end of January 2011, compared to US$27·1 billion the year before.

The Transportation business “delivered a strong performance,” said Bombardier Inc. president & CEO Pierre Beaudoin when presenting the company’s results in May. Margins increased from 6.2 per cent to 6.6 per cent – a creditable result in a notoriously low-margin sector. Mr Beaudoin said the target is an 8 per cent margin by 2013.

It was similar story at the number two manufacturer, Alstom, where the margin in the May annual report was 7 per cent. Here too, orders were up on the previous year. Alstom chairman & CEO Patrick Kron reported that much of the growth came from emerging markets, with for example large orders for locomotives from Russia and Kazakhstan, and high-speed trains ordered by Morocco. Developing markets account for 60 per cent of Alstom’s booked orders and Mr Kron said demand is expected to continue to grow in these areas, opening ‘a new business phase’ for the group.

Orders from developed economies have not been so prevalent and Alstom Transport has announced workforce reductions in Italy, Germany and Spain – while protecting its core factories in France.

DB on the march

As for the operating side of the European railway industry, the story remains one of the dominance of the big state railway companies, with DB of Germany in particular enlarging its zone of influence by acquisition. In the second half of the 20th century, the convention was that the Germans, with their extensive industrial base, were number one in freight, while the French dominated the passenger sector with their high-speed trains. But of late DB has sought to expand in all areas.

Thus not only has the freight arm of the German state railway dominated in the UK,

the Netherlands and Denmark as well as Germany, it has also acquired one of the biggest regional passenger train operators with its purchase of Arriva in the UK.

Arriva was interesting as it was the one group fostered by the 1990s privatisations in Britain that took expansion in continental Europe seriously, running local transport concessions in Denmark, the Netherlands, Germany and elsewhere. When it took over Arriva last year, DB was forced by the competition authorities to divest itself of Arriva’s German operations. These have been purchased by a consortium featuring another state railway: FS of Italy.

Italian resistance

Meanwhile, in Italy itself, the state railway has been fighting tooth and nail to keep competitors off its turf. Last year, a consortium of ÖBB of Austria, DB of Germany and Italian regional operator Le Nord introduced a Munich to Venice service, replacing a service in which the Italian state operator had previously cooperated, but from which it had decided to withdraw.

In December 2010, the Italian rail regulator URSF said intermediate stops in Italy were not permitted on this international service, as they might take traffic from the state railway’s services. This made it likely that the international service would have to be withdrawn, as it would be unsustainable without traffic from the Tyrol.

A legal challenge from the Germans and Austrians led to the stops being retained, at least for the present, but it was clear where the regulator’s sympathies lay.

Further battles are likely in future, as some heavy competition on Italian domestic routes is expected later this year when new operator NTV, owned by a consortium of Italian private investors and the French state railway SNCF, starts running services on Italy’s high-speed lines. NTV is a serious player, having ordered 25 of Alstom’s latest generation of high-speed train, the AGV, for its Italian services. In the spring, NTV complained that the Italian state rail infrastructure owner, RFI, was obstructing its efforts to obtain track access – this is unlikely to be the last such grumble.

Similar stories can be heard from elsewhere on the continent, as state-owned incumbents seek to exclude newcomers from their territories and frustrate the European Commission’s stated aim of introducing more competition to the rail market.

The French, for example, have sought to obstruct DB’s plans for instituting direct trains from London to Frankfurt through the Channel Tunnel by arguing that the Siemensbuilt trains DB is proposing to use do not meet the Channel Tunnel’s safety rules. They seem to be losing the battle on that one, not least because the main cross-Channel operator Eurostar, in which SNCF has a majority stake, is proposing to use the same Siemens trains itself. All being well, London–Frankfurt direct services will start in 2013.

And what of the UK domestic market, the home of the most radical attempt to introduce competition with the break-up and privatisation of British Rail in the 1990s? The irony here is that, having banished their own state railway, the British now play hosts to everyone else’s: the continental state railways are some of the most important players in the British franchised railway.

While DB failed to make the shortlist for a new franchise on Britain’s busiest route, the West Coast main line, to be let next year, the Dutch and French state railways did. What George Stephenson would make of it, let alone Adam Smith, is anyone’s guess. n

The author is Editor of Modern Railways magazine and Technical Editor of European Railway Review