You can’t rely on old king coal

Declining traditional markets and structural changes in the rail industry mean that rail freight operators must come to terms with a new business environment. Malory Davies looks at the challenges ahead.

There is no doubt that rail freight operators are facing challenging times with changes in the market having an impact on profits, at the same time that changes in the structure of the rail industry high on the government’s agenda.

Lindsay Durham, head of rail strategy at Freightliner, says: “The rail freight market is going through a period of change following the collapse in demand for burning coal for electricity generation. At the same time, intermodal and construction volumes moved by rail have seen steady growth. This reflects the increasing confidence users have in the reliability and competitiveness of the rail product.”

Movement of coal has traditionally been one of the largest rail freight activities, but as DB Cargo, the UK’s largest operator, pointed out in its 2015 annual report, demand has declined. Worse still, the rate of decline has been much faster than the company predicted.

“This decline was caused by a combination of low gas prices and the increase in the carbon price floor from April 2015. As a result, coal-fired power generation in 2015 fell to its lowest level since the 1950s, down 24 per cent since 2014 and 47 per cent since 2012,” it said. For DB Cargo, this resulted in a £61 million fall in turnover from £448m in 2014, and left it with a loss for 2015 of £113 million.

In October, the company put forward proposals to cut 893 jobs across its UK business, the reduction of its locomotive and wagon fleet, and the revision of “the number and location” of its operational facilities. Hans-Georg Werner, who became CEO in October, said: “Responsible and successful businesses must evolve and reshape as their markets change and sometimes this means making tough decisions. While this is a difficult time for all of us at DB Cargo UK, reshaping the company will enable us to build a business for the future and protect the majority of jobs.”

While coal transport is a problem area for rail freight operators, there are more profitable markets available.

Freightliner, the container specialist that was taken over by Genesee & Wyoming in March 2015, produced a profit for the year to 28 March 2015 of £4.1m, up marginally on the year before on sales that rose from £184m to £197m.

Freightliner’s Lindsay Durham points out that service levels have been rising. “Reliability against the timetable has reached 87 per cent (within 15 minutes), compared to 78 per cent in 2010. This compares well to punctuality through Switzerland, which was recently reported by SBB Cargo as below 80 per cent, measured against a one hour arrival target. One reason for the improvement is the increased joint working between the operators and Network Rail following the formation of the Rail Delivery Group. Additionally, since 2003/04, tonnes moved per train have increased by 69 per cent, helping to make the rail product more competitive and environmentally friendly versus road.”

GB Railfreight, the third largest operator in the market, increased sales by 11 per cent to £132m in 2015 although profit for the year was down 42 per cent at £7.8m. Bulk transport represents some 45 per cent of its business – and coal and biomass makes up half this volume. In November, Swedish private equity group EQT completed its purchase of GB Railfreight from Eurotunnel. EQT said the deal was an integral part of its strategy to create a leading independent pan-European rail freight operator. EQT submitted its bid, through its existing Hector Rail business, a Swedish rail freight company chaired by Bo Lerenius, who was chief executive at Associated British Ports from 1999 to 2007.

GB Railfreight CEO John Smith said: “EQT’s business model is very much aligned with GB Railfreight’s, and I look forward to working closely with our new owners to support our continued growth ambitions.”

Durham believes there is plenty of scope and opportunity for growth in markets such as deep-sea containers, movement of domestic swap-bodies, aggregates and cement as well as transporting car parts and finished products. “We are determined to convert that interest and deliver train services that are price-competitive, as well as timely and reliable. At Freightliner, we know that delivering excellent and innovative customer service is vital to attract new companies to using rail.”

She also points to the steady increase in the number of rail connected warehouse sites being planned. “The iPort near Doncaster with its huge Amazon warehouses is being built right now. Of course, it takes some years for the change in planning policy to come to fruition and there are now many sites in the pipeline. A network of connected sites will support the future movement of domestic intermodal movements by rail, and help to reduce the requirement for final legs by road.”

The rail industry as a whole is looking to two initiatives to boost capacity over the coming years: the development of the High Speed 2 line which should free up capacity on the West Coast Main Line: and the move to digital signalling, which allows trains to travel closer together in safety.

This has been successfully introduced on parts of London Underground, but introducing it to the national rail network with its complex web of tracks is a much more challenging task.

The critical need for digital signalling was underlined by Sir Peter Hendy, chairman of Network Rail, which manages the railway infrastructure in the UK, when he delivered the CILT’s annual rail lecture in October. “We have the most congested railway in Western Europe, but this is not a bad thing – we just need to fix it,” he said. “I think digital railway signalling is inevitable on the larger rail network, we did it on the Underground simply to fit more trains.”

Durham sees digital signalling as a step-change that will increase capacity across the rail network over the decades to come. “This will be even safer (the UK railway is already the safest in Europe) and enable trains to move closer together. In the recent autumn statement, Philip Hammond announced £450 million additional funding to accelerate the development of this exciting project.”

She also highlights the importance of HS2. “Rail freight will play a vital role in supporting the building of HS2 and Freightliner is preparing to support the project in providing services to bring in large quantities of materials and remove spoil created by tunnelling. Once open, the HS2 corridor will create a once in a generation opportunity to enable a step-change increase in capacity on the parallel West Coast Main Line as some passenger services are transferred to the new line. The West Coast Main Line connects London and all the major deep-sea ports to the West Midlands, North-West and Scotland, and as such is the busiest rail freight corridor in the UK.”

While the operators have been redefining their role as a result of the decline in some core markets, the government has been rethinking its strategy for rail freight.

The strategy has four main elements: promoting innovation and skills; ensuring there is adequate network capacity; ensuring track access charges are “appropriate” for the rail freight industry; and ‘Telling the story of rail freight” – effectively helping the industry promote itself.

The government’s strategy document has broadly been welcomed by the freight industry. Russell Mears, Freightliner European CEO and chair of the Rail Delivery Group’s Freight Group, said: “The strategy emphasises the importance of having a clear policy framework to support rail freight to achieve its potential.

“It sets out a clear vision for how rail freight can continue to grow and identifies opportunities for industry partners to collaborate and innovate to help deliver increased environmental and air quality benefits, relieve the pressure on our road network and increase the productivity of British businesses.”

But the government is also rethinking the role of Network Rail. In a statement in December, transport secretary Chris Grayling made it clear that he wanted the train operating companies to be much more closely involved in infrastructure development. This follows a recommendation made five years ago by Sir Roy McNulty, when he reported to Philip Hammond on how to make the railways run better and more cost-effectively.

The proposal was welcomed by Mark Carne, chief executive of Network Rail: “We strongly welcome these plans to bring more joined up working within the industry. We have already devolved Network Rail into route-based businesses closer to customers, and the proposals announced today will build on the alliances we have created between these route businesses and train operators. We also strongly believe there should be better alignment of incentives between train companies and Network Rail. That is why we now align the performance incentives for all of Network Rail’s 35,000 staff, around targets agreed jointly with train operators. But more needs to be done across the industry.”

However, there are concerns that rail freight could be marginalised in this process. The Rail Freight Group highlighted the point saying: “While recognising the need to improve performance and cost, rail freight customers have expressed concerns that their interests could be marginalised by giving more operational control to passenger franchises.”

Ultimately, says Durham, rail can optimise the logistics chain by moving large volumes between hubs more reliably than on the trunk road network and help to reduce congestion for other road users. “With increasing concern over global warming, caused by carbon and poor air quality in the UK, affecting health, rail can help to deliver policy objectives to reduce both carbon and emissions as each tonne of freight can be moved by rail using 76 per cent less fuel. With the planned increase in future electrification of the rail network, the environmental advantages of using rail will only increase further going forward.”