Market opening – remaining

Challenges

Irina Michalowitz

Florence School of Regulation, 12 December 2014

European Rail freight remains below Pre-Crisis level

19

2011

435

415 403

2010

406

2009

20

396

2013

416

+1.5% -1.8%

422 420

403

17 22

434 444

21

375

18 20

2008

456

357 386

2007

465

2000

20

2012

2000-2007: moderate growth in rail

freight, driven predominantly by positive

economic development

2008-2011: dramatic reductions, then

impressive rebound 2010/11

Since 2009: weak economic development

in the Euro-Zone and strongly increasing

factor costs -> modal share of railways

decreasing

Neither rail nor road or shipping industry

back to pre crisis level; rail is recovering

best

Development of European Rail Freight In Billion tkm

Austria

EU27+CH,NO

Source: EUROSTAT

1

Road freight remains with cost advantage compared to

rail freight

2

Cost development of rail freight in Austria

2008 = 100

98

100

102

104

106

108

110

112

114

116

118

2008 2009 2010 2011 2012 2013

Lorry transport cost index Costs/train km

+ 3% p.a.

+ 2% p.a.

Cost development for

road transport slightly

more advantageous than

for rail transport

Increase of rail-related

energy levies in AT

significantly higher than

for road

Track usage fees for rail

freight declined more

strongly than road toll for

lorries in Austria

Costs for staff in Eastern

Europe significantly lower

– Advantage for road sector

using lorries under Eastern

European flag

Quelle: RCG (track usage fees, energy, traction costs incl. staff), transport cost index plus road charge

BEISPIEL ÖSTERREICH

Lacking interoperability hinders cross-country traffic in terms

of quality and efficiency

3

12 national variants of the same

message: „go ahead“

Waiting times at borders

often for purely

technical reasons due to

lacking interoperability –

lorries are faster

Many different national

safety regulations (tail

lamps, safety systems

etc) in cross-border

traffic, electrification

systems, train

lengths/weights,

speeds

0,9

1,4

1,5

2,5

2,9

3,7

3,8

4,5

7,4

7,7

8,5

8,6

16,0

D-AT

AT-SI

NL-D

SI-HR

BG-GR

HU-RO

HR-SR

AT-HU

RO-BG

SR-MK

MK-GR

HU-SR

BG-TR

Typical time spent by freight trains at

border crossings (hours)

Loss of time due to bureaucracy and

lacking technical coordination

Source: CREAM Final Report 2011

Privatisation rarely successful – state-owned railways in

deficit, competition reduces profitability

4

Poland (PKP-Cargo)

49,9% via IPO successfully sold in 2013

Despite strong competition still market leader

Czech Republic & Slovakia (CD Cargo & ZSSK Cargo)

Media report 2013 on potential merger due to financial situation of

both companies.

Romania (CFR MARFA)

2013 sale of 51% planned

Negotiations with highest bidder GFR failed

New attempt announced for 2015

Bulgaria (BDZ Cargo)

Repeated attempt failed in 2013

Shares pledged and non-transferable

According to transport ministry earliest dates for

sale 5 years after successful recapitalisation

Hungary (RCH)

Acquisition and successful turnaround by ÖBB/RCA

Croatia (HZ Cargo)

2013 three offers of 75%

Negotiations with highest bidder GFR failed

New attempt not certain

Greece

Sale of network, freight and passenger division

planned (OSE Group)

per Sep. 2013 three interested parties

Due Diligence and further steps uncertain

Montenegro (Montecargo)

Several privatisation attempts since 2011 failed

New attempt started in 2014 – next steps

uncertain

Belgium (SNCB-Cargo)

Search for strategic investor for further

development; negotiations with CVC without

result

~

~ ~

~

Slovenia (SZ)

Since 2008 several failed attempts to sell

operative rail services (passenger and freight)

2014 non-binding discussion of fresh start

~

gescheitert ~ unklar erfolgreich

Additionally, newly emerging business models pose

challenges to long-distance rail passenger services

5

Focus on target group "Time-rich, cash-

poor"

Focus auf price competition

Low operating costs

Use of digital platforms

Creation of a new market and

cannibalisation of existing mobility offers

Start-Up business models – no costs

created by old structures

High flexibility in operations (rolling stock

and related equipment)

Key success criteria Business models in competition to long-distance rail

transport

1 Bus

2 Car

Close gaps in the long-

distance offer

Strong players are becoming

established

e.g. IDBus (2012), ADAC

Postbus (2013), IC Bus (2009)

„Share Economy“ continues

to be successful

200%p.a. Increase of usage

(e.g. BlaBlaCar 2014 with

>9 Millionen users)

Cost level of rail means competitive disadvantage

compared to bus and low cost carriers

6

11

20

9

25

Low cost carriers and bus

companies operate with business

models without legacy costs

High speed trains face a cost

disadvantage compared to

conventional trains due to higher

material costs and more expensive

infrastructure

Factor costs strongly dependent of

the respective country, business

model, load factor etc

7 6

12

20 4

3

8

5

Billig Fluglinie Bus Zug High speed Zug

Factor costs EUR-Cent/Passenger Km

Maximum

Minimum

Few investments in rail infrastructure especially in SEE

7 Quelle: Internationales Verkehrsforum / OECD 2014; eigene Berechnungen

http://stats.oecd.org/Index.aspx?DataSetCode=ITF_INV-MTN_DATA

0

5

10

15

20

25

30

35

40

45

50

55

2001

2000

2003

1997

1999

1998

2005

2004

1996

1995

2002

2006

2007

2008

2011

2010

2009

Südost-EU + HR

Süd-EU

EU28 + HR

Nordwest-EU

Investment in infrastructure

Share of rail in investments in rail and road

In %

SEE: 7x as many

investments in road

than in rail during the

past 10 years

4th Railway Package to increase competition

8

Internal Market and the 4

Freedoms of the EU

Goal of the European

Commission: Creation of a

Single European Rail Area

1st Railway

Packaget 2nd

Railway

Package

3rd

Railway

Package

4th Railway

Package 2001

2014 §

Commission Proposal Amendments 1st Reading EP

Separation of Infrastructure and operations

Alternative: strict „Chinese Walls“ between

infrastructure and operations within Holding

structure

Prohibition of double hats in supervisory

boards

Opening of domestic passenger market

End of direct award, mandatory tendering as

of 2019

Maximum contract volumes of 1/3 of the

overall PSO volume

Rolling stock to be made available to

tendering winners

Staff transfer not clear (responsibility of

Member States)

Harmonisation of interoperability and safety

certificates

Strengths of Holding Structure

acknowledged

Independence of infrastructure manager

(IRM) to be safeguarded

Double hats Holding CEO/IRM

supervisory board possible

Regulator powers remain strong

weitreichend

Direct award until 2022 (max. 10 years),

afterwards under strict conditions1)

Ab 2022 for AT min. 2 contracts, 1 of

which with max. 75% of the overall PSO

volume

Agencies in charge can eliminate

bidders from tenders under certain

reciprocity conditions

Technical part mostly accepted – cross-

border rail traffic will be eased

4th railway package to increase competition:

„Better value“: higher efficiency of public means

Unified market conditions

Abolishing discrimination suspicions

1) Steigerung Personenverkehrszahlen, Pünktlichkeit, Kosteneffizienz, Frequenz Zugbetrieb, Kundenzufriedenheit, Qualität Rollmaterials

Competition is leading to labour cost arbitrage

+4,6

2020

49,5

2019

48,9

2018

48,2

2017

47,5

2016

46,6

2015

45,7

2014

44,9

75% of ÖBB employees older than 40

Average age of ÖBB employees by 2020: 49,5 years

Cohort 50 to 54 years with largest share

In 2020 rise of the above-40-year olds to >80%

Average age today: 44,9 years

Increase by 2020 by +4,6 years

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

60

plus

50 to

59

50 to

54

45to-

50

40 to

44

35 to

39

30 to

34

25 to

30

< 25

Age in

years

Number of employees 2020

Number of employees 8/2014

Retirement wave due to age within the next 15 years – focus on health management and strategic

human resources planning in order to maintain competences

9 Anmerkung: Werte repräsentieren ÖBB-Inland ohne Lehrlinge

ÖBB Holding

Infrastructure Freight division

Passenger division

In Mio. EUR

154,8

102,574,5

-27,9

+432,3

FC 2014 2013 2012 2011 2010

-329,8

78,2

58,644,1

15,9

-13,0

+71,5

FC 2014 2013 2012 2011 2010

31,6

25,8

12,08,4

10,9

2012 2013

+14,8

FC 2014 2011 2010

53,258,431,0

-48,6

+411,6

FC 2014 2011 2013 2012 2010

-353,2

Annual results 2010-2013: Big leaps in EBT – all operating

divisions with a significantly positive balance of accounts

Anmerkung: Angepasste Vergleichswerte 2012 10

Conclusions regarding the European Commission‘s proposal on rail

domestic passenger market opening

• As long as it leads to an increase of the overall rail system efficiency, overall customer satisfaction and service quality

• Measures are welcome that effectively lead to better customer service, higher efficiency and increasing modal shares for rail

ÖBB welcomes fair and open competition in European railway

markets

• Legacy costs: historical debt and staff contracts

• Structural costs and needs: intermodal competition disadvantages and integrated timetable

Two conditions dominate differences

between countries and railway undertakings

• Integrated solutions are needed that take the greater context of foreseeable future competition development into account

• Without a prudent solution, one state monopoly will be replaced by another one: tendering of transportation services is not always and not in every Member State the adequate solution – and needs, at minimum, sidelining measures to guarantee a level playing field

Who benefits and who pays for legacy costs?

11