Deutsche Bahn’s Domestic Rail Challenges

21 April 2008 (Last Updated April 21st, 2008 18:30)

Germany's rail operations are currently experiencing a number of difficulties, from privatisation to employee unrest. Neil Pulling examines how this is affecting the country's overall economic growth.

Deutsche Bahn’s Domestic Rail Challenges

Germany is a leading light of the international railway industry. It is headquarters of several of the world's leading equipment suppliers and is viewed enviously by passengers using less well-endowed and less well-run systems around the world.

But that does not mean all is well oiled at present on the German rail track. Following what it reported as its most successful year ever in 2006, principal passenger operator and international freight giant Deutsche Bahn has been facing some deep-seated challenges in its own backyard.

Deutsche Bahn AG (DB) was started in January 1994 following the amalgamation of the former national rail bodies of East and West Germany after the nation's reunification in 1990.

By early 2008 DB remained wholly owned by the Federal Republic and with a count of about 229,000 employees it is also one of the country's largest employers.

One fifth of Deutsche Bahn's (DB) workforce is counted outside of Germany, where DB also has a strong corporate identity – its name can be seen on trains and properties from the Baltic to the Alps and from the Rhine to the Oder.

"The German government believes private sector capital is the only way its rail industry can sustain improvements."

A series of international acquisitions have also helped DB extend its global reach. Stinnes Logistics/Schenker and BAX Global are among some of these.

Furthermore, DB's European expansion is exemplified by buying EWS – the UK's biggest rail freight operator – and Laing Rail, which includes Chiltern Railways and a contract for joint operation of Transport for London Overground. Spain's Transfesa and an interest in BLS Cargo of Switzerland are also included in the DB portfolio.

SUPPORTING PRIVATE SECTOR GROWTH

Today, the German government believes private sector capital is the only way its rail industry can sustain improvements and DB's management has not shied away from this idea, having pressed for whatever privatisation is allowed them. German law prohibits full privatisation of the country's rail assets, but not enough to stop the nature and size of the portion going into the private sector leading to much dispute.

After previous deferrals of moving DB towards private ownership, a privatisation bill was adopted by the Federal Cabinet in July 2007. Triggering opposition within and beyond parliament, the process remains awkward. The intention is to float 49.9% of the present DB, aiming for 25% going to the market before the end of 2008. The infrastructure would remain in the public sector with DB as the manager and beneficiary of a guaranteed €2.5bn for maintenance.

But reshaping the business for the future private investor era has brought to the fore the concerns of parties with disparate interests, not least the state representatives constituting the Bundesrat – the German Parliament's upper chamber.

"The intention is to float 49.9% of the present DB, aiming for 25% going to the market before the end of 2008."

BREAKING UP DB

In 1999, DB was restructured into a host of subsidiaries, a move prompted by access rights under European Community law. DB's long-distance train operation – ICE and InterCity – was eventually to emerge under the DB Fernverkehr name. DB Regio became responsible for local and regional trains (where funding is via the Lände – the powerful states making up the German federation – and their constituent communities).

Both the above services are put out to competitive tender, and although other operators have made inroads, DB maintains a majority presence in the sector. The companies running Berlin and Hamburg S-Bahn systems are now part of the latest passenger grouping – DB Stadtverkehr GmbH.

Rail freight subsidiary Railion is part of DB's wider logistics grouping that also embraces international airfreight and shipping. In common with many other European countries, a separate infrastructure body called DB Netz was created. This has 34,000km of track (21,126 miles) which is increasingly used by the proliferation of private operators as well as DB for both passenger and freight.

Lastly, DB Station & Service AG covers DB's 5,400 stations and commercial development.

FLAGSHIP PROJECTS

DB's Fernverkehr long-distance operation is now a very profitable business and its flagship high-speed ICE services are well placed to benefit further from perceived environmental ascendancy of rail over air. But a counter-view to the benefits of privatisation asserts that an independent DB would starve and/or cut regional and local services, including line closures, in favour of funding Fernverkehr.

"In 1999, DB was restructured into a host of subsidiaries."

Such fears, it is believed, have been fuelled by the announcement in spring 2008 of procurement processes starting for ICE-quality EMUs that would end long-distance loco-hauled services, similarly with the prospect of first-generation ICEs becoming due for replacement.

It should be noted, however, that the quality of DB Regio's stock and motive power has been greatly improved in recent years.

STAFF IN DISPUTE

The very rarity of transport strikes in Germany before 2007 made the months of conflict caused when 34,000 members aligned to the Gewerkschaft Deutscher Lokomotivführer (GDL) drivers' union and DB all the more newsworthy. Citing a pay shortfall in comparison with other train drivers around Europe and with confidence in a successful outcome buoyed by revival in the national economy, GDL submitted a claim for a 31% increase in 2007, also seeking a separate settlement from that of 195,000 rail workers in other unions.

Their claim was rejected and GDL members implemented their main strike across freight and passenger sectors between 14 and 17 November. Even with management drafted in to provide cover, the overall effect of the 62-hour walkout was substantial, with the German Institute for Economic Research identifying a cost to the national economy at €75m.

"The new fragmentation foreshadows the possibility of 'leap-frogging' pay deals in the future."

The effect was varied between different routes and cities, being greatly marked for freight via the northern ports and factories dependent upon regular, unbroken supply of just-in-time components for lean supply chains.

All in all, the conflict ran for 11 months and was settled finally in 2008. But a separate dispute had arisen; one that has been every bit as disruptive as the earlier one.

Although settlement removed one threat to passenger journeys around Berlin, a dispute between the Ver.di union and operating body BVG remained unresolved.

Within days of the drivers' dispute ending, DB were indicating, without giving detail, of the possibility of job cuts and fare increases in the future to meet increased costs inherent in the pay settlement. DB projected that the settlements could overall add over €1.2bn to the cost base of its operations over the following five years.

On a broader front, however, the settlement had other facets that may have future implications – notably that the coalition government headed by Angela Merkel had been sufficiently concerned to intervene in the dispute rather than letting DB resolve the issues with their staff, which would normally have been the case. The settlement, specifically with GDL, also marked a departure from the norm, which historically had related to the whole workforce.

FRAGMENTATION

The new fragmentation foreshadows the possibility of 'leap-frogging' pay deals in the future. Germany's many non-DB train operators may also face a situation where drivers will be more tempted to change employment frequently according to the likely pay differentials that may emerge, especially as driver shortages have become apparent in Europe.

"In 2007, even with some strikes having taken place, DB recorded an increase in profits for the third successive year."

The political wrangles and damaging strikes were soon followed by adverse public relations surrounding the handling of the Holocaust Train of Commemoration travelling exhibition that included its barring from Berlin Hbf in April 2008 and arguments over the access charges being levied.

With the added embarrassment of having to relay track on the relatively new Köln-Frankfurt Neubaustrecke and Hamburg-Berlin Ausbaustrecke, these tribulations do not form the type of backdrop that DB would have wished in their continuing push for privatisation.

Nevertheless, the company and Germany's wider railway operations remain in relative terms something to which many would aspire. In 2007, even with some strikes having taken place, DB recorded an increase in profits for the third successive year, reporting a net income of €1.72bn while cutting €3bn off its debt.

The future shape of DB and the implications for non-DB operators and all rail users in Germany is as yet unclear. It remains to be seen whether the recent difficulties will prove to be grit in the formation of an oyster or sand grinding away at the machinery.