Clemens Först: “Striking Disadvantage”

The interview by Michael Cordes originally appeared in DVZ on October 4, 2023.

DVZ: ÖBB is celebrating its 100th birthday this year. Given the economic situation, do you feel like celebrating at all?

Clemens Först: Whenever the occasion arises, it should be celebrated even in difficult times. And yet, we find ourselves in a crisis indeed. In my view, this is the most difficult phase in rail freight transport since the great financial crisis of 2008.

How is the crisis affecting the Rail Cargo Group (RCG)?

The crisis has been building slowly: First came corona and then, with the Ukraine war, the tremendous rise in energy prices. Then, at the beginning of this year, the demand imploded and led to noticeable declines in volume.

Can you elaborate on that?

In the “Handelsblatt”, Sigrid Nikutta, head of DB Cargo, spoken of a decline of 10 to 15 per cent in the first half of 2023 compared with the same period last year. That is what happened to us. In the first few months, the losses were somewhat less, but they grew over the summer to around minus 15 per cent.

Are all segments equally affected?

We were especially affected in the beginning when we were in direct competition with trucks and had to experience a competitive disadvantage due to the high price of electricity: in single wagonload and continental intermodal transport.

How much has revenue dropped at RCG recently?

We are not experiencing a decline in revenue because we had to adjust prices greater than usual due to the increase in energy costs. The price increases were between 15 and 30 per cent, depending on the product.

How pronounced were or are the different developments in electricity and diesel costs?

In the Austrian market, the electricity price before the crisis was around 60 euros. We still had a relatively good price of just under 100 euros in 2022 because of our hedges. In 2023, we are at around 210 euros. This is more than three times the pre-crisis level and more than double even compared to last year. Diesel prices in Austria were 1.40 euros at the beginning of 2022. Now we are at 1.70 euros – a little more than 20 per cent higher. That is a huge difference.

Was RCG able to absorb the electricity price increases internally?

Profits in rail freight transport involve extremely low margins. At RCG, we are proud that we have been operating in the black since 2012. In a good year, rail freight transport does not write much more than zero in the black. If we make a even small mistake, we are quickly in the red. Rail freight therefore does not have the potential to cushion factor cost increases like these in terms of margin. In contrast, road transport is trying to maintain its capacity utilisation with more favourable freight rates. The road price level in 2023 is definitely lower than it was in 2022.

What portion of total costs at RCG do energy costs have?

That is extremely difficult to answer because they fluctuate a lot. In single wagonload transport, they amount to about 10 per cent or slightly less. For a heavy raw material block train, they are greater than 20 percent.

Last year, RCG just managed to achieve positive earnings. Will you also manage this in 2023?

The accounts are settled at the end of the year and communicated at the annual press conference. But it will be very challenging. In terms of volume and productivity, however, 2023 is turning into a bloodbath. In addition to the declining capacity utilisation, there is a high level of construction site activity in many countries, leading to greater expenses and causing productivity to suffer.

Other than by increasing prices: How have you tried to cope with this difficult situation?

The first thing to do when there are declining volumes is to adjust the production network. We have reduced frequencies and tried to bundle volumes more in single wagonload transport. And, especially in network business, i.e., in intermodal and single wagonload transport, we are on the lookout for additional volumes. In single wagonload transport, for example, we have only been offering attractive prices for new volumes – with an expiry date of half a year. But this is just a temporary action: After all, I don’t believe you can viably provide sustained single wagonload transport in the long term via low prices.

Have you saved on investments or personnel?

We are now in the process of medium-term planning: We will certainly be stretching our investment programme. The current economic forecasts are significantly worse, and we have adjusted our plans accordingly. With regard to personnel, our hiring of new workers is limited at the moment. However, we do not have any plans to lay off personnel.

Is that on the table if the negative trend continues?

In sales, you have to try to acquire volumes in a recession. We need personnel to do that. In production, we currently have a high level of disruptions in the European network, which is why the workload remains high despite declining volumes. But if we permanently lose 15 per cent in volumes and the disruptive events subside, we will also have to think about adjusting our personnel levels.

Do you see light at the end of the tunnel in 2023/2024?

If things go well, there could be a recovery again in the second half of 2024. With regard to planning, we assume that the current situation will not improve in 2024.

Does this applies to all customer sectors?

Yes, although we continue to see a risk in the automotive industry. This segment is currently still holding up quite well. Conversely, we believe that we have hit the bottom in industries such as wood, paper and intermodal.

Are you receiving support from the state?

Austria is exemplary in Europe when it comes to sustainable transport policy. There is already a subsidy system, which is currently being discussed in Germany as well. The Austrian Ministry of Transport also reduced the rail user fee for all railway companies in the manipulated segment starting on 1 April. This segment essentially includes single wagonload and intermodal transport. This meant that we were able to partially compensate for higher energy prices, although not for other factor cost increases, particularly in the area of personnel. There is therefore a delta compared to truck transport.

Are you satisfied with state support?

The situation here in Austria is the best you can find in Europe. However, we mainly operate internationally. We provide 80 per cent of our transport services outside our country. And for this larger share of international transport, we receive no support whatsoever.

How much are you affected by the shabby rail infrastructure in Germany?

Enormously. After Austria and Hungary – our two home markets – Germany is our most important market. We offer our entire range there: rail forwarding services, intermodal operator activities and our own locomotives. So we are highly affected.

Is the network in Germany the worst one for RCG in Europe?

If we are talking about Central Europe, I would answer this question affirmatively. If in the direction of Turkey, however, then no. For decades, Germany has been investing too little in its network. That was a mistake, but there is no going back to change it. What is positive is the learning effect and what is happening now: Politicians have recognised that investments have to be made now. And while this will lead to an increased construction volumes, it will have a positive impact in the medium to long term. What I would criticise, however, is the way rail freight transport is being handled.

What is it that bothers you?

It’s the new cancellation fees. Starting in 2024, DB Netz is planning a rigid system with, in my view, prohibitively high cancellation fees. They are to be 15 per cent of the network fee, even if we cancel 30 days in advance. In times of economic volatility and fluctuating transport chains, this does not mesh with market requirements. For passenger transport, although much easier to plan, the figure is only 3 per cent. I see a striking disadvantage for rail freight transport in this. Overall, the fees are way too high, confusing and therefore unacceptable. And there is nothing like this affecting road transport either.

Are you satisfied with what is happening in Germany with the northbound Brenner tunnel?

No, of course we are not satisfied. South-bound, the situation is similar and shows the toothlessness of European transport policy. When one country meekly submits and the two neighbouring countries just shrug their shoulders, that is unsatisfactory.

Do you have to fear that the full capacity of the Brenner Base Tunnel will not be utilised for years?

We still have a few years left, so things may still change. But one consideration for a transitional period would be to expand the “Rollende Landstraße” (truck transport via rail). Transport would then go through the tunnel. At each end, the trucks would leave the rails and return to the road.

What do you expect from Digital Automatic Coupling (DAC)?

DAC has the potential to revolutionise rail freight transport in Europe. We will reap benefits in productivity and need fewer personnel. There will also be greater safety. With the coupling, we can advance digitalisation of the entire train production. DAC will also give us increased capacity in the network because we will achieve a higher traffic density – ETCS level 3 – on the existing infrastructure.

What costs will RCG be facing?

I don’t have any data for RCG yet. For the European market, the costs are expected to be around 15 billion euros. The sector cannot raise this amount itself. There will need to be a good mix of European funds, national grants, and funds from the infrastructure. This is because rail networks are a major beneficiary of DAC. Still, part of the burden will need to be borne by the railways as well.

How high will the railways’ portion be?

I don’t want to throw out a figure now. But if you look at the losses in single wagonload transport now, there’s not a lot left. I think that, first and foremost, the benefit would be that the railways’s losses would drop significantly, resulting in less need for support.

The railways are one of the main beneficiaries and yet are expected to contribute almost nothing?

In my view, the main beneficiary is all of European society thanks to lower CO2 emissions, reduced congestion and accident costs, etc. If it did not make economic sense, the entire project would have to be called into question. Yields for single wagonload transport are negative for all the key players in Europe. The industry can only handle a small portion of the costs.

What are yields for single wagonload transport at RCG?

We do not publish any figures on this. However, we would not operate single wagonload transport if it were not possible for us to break even with the subsidies provided in Austria.

In terms of profits, RCG has been in a better position than DB Cargo in recent years. What do you do differently?

According to media reports, DB Cargo’s losses are mainly due to single wagonload transport. It is important to understand the following here: Distributing one or two handfuls of wagons in the area is less productive than driving a truck from point to point. This results in a natural discrepancy between road and single wagonload transport. This difference has to be balanced, or else these transports cannot be operated economically anywhere in Europe. In Austria, as we have had for two years in Hungary, we have a transport policy environment in this segment that supports single wagonload transport with a subsidy system. That puts us in a better position. However, there is currently a debate in Germany regarding greater support for single wagonload transport. I think that is very important for the entire market in Europe.

Even without single wagonload transport, DB Cargo’s losses are still significantly higher than those of RCG.

We are fiddling with all the adjustment screws to keep our head above water. We achieve 2 billion euros in sales each year. And yet the profits we generate in good years only add up to the tens of millions.

What are you doing to achieve such narrowly positive results?

We are strongly oriented towards the market. That’s why the topic of internationalisation is of such great importance. This is where rail freight transport plays to its strengths. We rely on product innovation. Our TransFER connections – intermodal and conventional shuttle services – are important for us. The area of multimodal logistics is playing an increasingly significant role: Here, we are trying to find new customers in companies without their own siding. That is also why we are working together with Transporeon, the market leader among contracting platforms for trucks. Internally, we are constantly working to make our production network resilient. For example, we offer an alternative route to Turkey by going through Serbia instead of Romania. In light of the increasing disruptions in the network, we have set up other route options with suitable locomotives and drivers who know the territory. Such resilience, which is normal for truck is something that we in the rail sector have to work hard at.