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  1. Analysis
December 14, 2014

Changing Track: Can SNCF offset its dilemma at home by investing abroad?

France’s national railway company SNCF reported a 74% drop in net profit for the first half of 2014, which it attributes to a round of chaotic strikes in June. Ross Davies looks at whether the current political climate in France could force the company to make its investments further afield.

By Grant Turnbull

SNCF

Even by the French penchant for a good old-fashioned strike, the widespread industrial action taken by rail workers in June was out of the ordinary.

From Paris – where the striking unduly disrupted the beginning of the national baccalauréat exams – to Lyon and the southern port city of Marseille, trade unionists at France’s state-owned railway company SNCF coalesced impressively to voice their anger over rail reforms proposed by the government.

The reforms, as unveiled by President Francois Hollande’s cabinet, advocate the merger of SNCF and RFF – the body which owns and maintains the nation’s railway network – in a bid to head off the French rail sector’s parlous levels of debt, which currently stand at €40bn.

The deadlock between the Hollande and the rail workers’ unions

In response, French rail union CGT Cheminot issued a flat-out "non". Speaking at the height of the strikes, CGT chief Thierry Lepaon attacked the accord as a direct threat to jobs and the "preparation of the privatisation of rail transport in our country."

Yet, despite the heated nature of the workers’ actions – strikes became militant at times – it didn’t tap into national sympathy; rather the opposite. According to a poll published in newspaper Le Parisien, 76% of the country opposed the downing of tools.



The California High Speed Rail project has begun to veer off the tracks.


Even SNCF, which attempted to display a semblance of optimism during June – promising the resumption of normal services several times as a result of waning picket lines – had to admit that it had been the most costly strike in 13 years.

In August, this claim was further substantiated when the group announced a 74% slump in net profit to €224m for the first half of 2014; in contrast, net gains for the first half of last year stood at €865m.

Explaining the staggering decline in turnover, SNCF president Guillaume Pepy was forced to admit that the June strikes – exacerbated by France’s listless economic performance – had been the root cause.

"Faced with the persistently sluggish economy in France, SNCF has demonstrated its ability to meet the challenge, preserving our margins through an unrelenting drive to cut costs," said Pepy. "However the strike in June has forced us to launch an additional cost-cutting programme aimed at erasing two-thirds of that strike’s impact on our accounts."

However, the first six months of 2014 weren’t entirely disastrous. The same report also highlighted that SNCF’s performance outside of France – divested of industrial discord – had been surprisingly positive with revenue growth coming in at 5.6%.

Keolis’ infiltration of the UK rail market – and beyond

SNCF’s charge has been led by subsidiary Keolis, France’s largest private sector transport group, which recorded an increase of 6.8% in revenue for the same period, 14% of which was derived from abroad.

Has Keolis – the employer of some 54,600 people across Europe, China and North America – pulled SNCF’s proverbial chestnuts out of the fiscal fire? Well, that might be straying into the realm of hyperbole, but its impressive performance over the last year is hard to counter – particularly across the Channel.

"SNCF’s performance outside of France – divested of industrial discord – had been surprisingly positive."

In July, not a month after the strikers’ clamour had ground to a halt, the group was awarded the enviable franchise to operate London’s Docklands Light Railway (DLR) in partnership with UK services group Amey. The contract, which commences in December and will run through to April 2021 – with the option of extension to 2023 – will earn Keolis £700m, as disbursed by Transport for London (TfL).

In May, Keolis – along with UK-based Go-Ahead Group – was also given charge of Thameslink, Southern and Great Northern, purportedly Europe’s biggest rail franchise. The service currently amounts to 414 million journeys a year and is set to increase in the future. But the potentially biggest coup for Keolis – and SNCF – awaits in the shape of London’s Crossrail, which will commence its initial services next year. Bidding against National Express, Arriva and MTR, the group has been shortlisted for the project, estimated to be worth £14.8bn.

Keolis’ activities extend beyond the UK, too. In January, it was announced by the Massachusetts Bay Transportation Authority (MBTA) that the group had been awarded a $2.68bn contract to operate 664 miles of commuter passenger service in Boston, starting in July.

France’s ailing economy and the benefits of investing abroad

Let’s return to the parent company, SNCF. Aside from issuing a statement in October, declaring that it has no intention to buy out the UK’s stake in the Eurostar – SNCF is a majority stakeholder – the group has evaded the headlines over the last couple of months. Given the events of June, this is no bad thing.

However, on home soil, SNCF’s fate still remains precarious. France’s national economy is showing no sign of a kickstart under Hollande’s stuttering premiership, which continues to be denoted by high levels of unemployment. If the government continues down the path of privatising the national rail sector, SNCF is sure to be hit by further industrial opposition.

The immediate answer for Guillaume Pepy, SNCF’s beleaguered chief – in France, at any rate – may be to plough further investment into its overseas projects, where the political and financial landscapes are significantly less incendiary.

 

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