Challenges for European rail bound freight traffic

Whilst American companies are showing continuously that freight on rails can be operated quite successfully, many European train operating companies (TOC) still struggle to create a positive bottom line from that business.

In the early 2000s many European TOCs where quite successful on course to reach solid EBIT, this has changed after the financial crisis and is up to now still on the way back to previous levels.

Obvious reasons for different profitability are certainly the fact that long haul rail freight has to cross multiple borders and many countries still require certain specifics to operate a train on their rail network. These can be technical, i.e. different track gauge, loading gauge, electrification system or other regulations how to ensure fire safety, or these can be process wise, i.e. different customs papers, regulations on how to operate the train, trade union requirements etc…
An article in Eisenbahn-Revue written by DB Schenker’s strategy people pointed out a few other quite important aspects on the demand, infrastructure, factor cost basis and capital cost sides.
They elaborate that approximately 65% of European rail freight traffic stems from the steel, coal, wood and paper industries bound for the chemical and automotive industry. These where the industries that were hit hard in the financial crisis and, at least for coal, the substitution effect from renewable resources is further driving demand down.
Another issue is in their opinion, that there is a lack of investment in the rail infrastructure and higher utilization of known bottlenecks such as the Gotthard tunnel. Especially in the Central and Eastern European countries where the competitiveness of the road has increased strongly due to new paths, rail transport is on the decline.

When looking at the cost structure of the TOCs, it becomes immanent that costs for rolling stock are continuously increasing due to regulatory and increased factor costs for labor and material. The same is happening in energy costs and infrastructure access charges, where infrastructure operators try to charge more to the user of the tracks in a total cost model whereas the automobilist still pays a fraction of the actual costs.
Limited profitability of TOCs has resulted in a low attractiveness for investment of private capital, thus not favoring a transformation in the industry and large investments resulting in increased competitiveness.

With the comeback of the economy across Europe and the simple fact that capacity on roads is reaching its limits, I expect that rail freight can again play a bigger role in the freight transport modal split in Europe. However, the clearance of bottlenecks with i.e. the Gotthard tunnel and in Eastern Europe as well as a continuing technical homologation across the countries driven by the European Railway Agency ERA are a prerequisite to make this form of transport more attractive. Automation and efficiency gains at each stage of the transport chain enable to further drive down costs and increase reliability overall. This however also requires a collaboration of the stakeholders across countries including labor unions, rolling stock suppliers and national safety authorities.

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