Analysis: will DB Cargo end up like SNCF Fret?

DB Cargo UK loco side panel (DB Cargo UK)

This week, an important European rail freight company was saved from possible sanctions by the European Commission through an uncompromising reorganisation plan. SNCF Fret, the French subsidiary of SNCF was under fire because it had received financial support from its mother company, this is considered state aid. The same fate hangs over DB Cargo, the German subsidiary of Deutsche Bahn. Are we at the fortnight of a German chapter of the state-owned company debacle?

It is more than na year ago that the European Commission opened an in-depth investigation to assess whether certain German support measures in favour of DB Cargo are in line with EU State aid rules. The direct cause of the investigation was a complaint from the industry, the institute said.

It was Lineas, the Belgian rail freight operator that had taken the initiative. The company, itself struggling to make ends meet, had to witness how DB Cargo, while making losses of around 1.5 to 2 billion euros, was still investing in new locomotives. That was due to state aid and creates an unfair playing field, said Hans-Willem Vroon, director of interest group RailGood, an organisation that stands by the Belgian operator on the matter.

“The Commission received a complaint alleging that the profit and loss transfer agreement as well as certain other measures benefitting DB Cargo amount to incompatible State aid in favour of the company”, the EU institution confirms.”

Why is this a problem?

State aid is a sensitive matter in Europe. In the strive to create a private market with a fair chance to enter for every company, there are rules when it comes to providing state aid. These are called the EU State aid rules. Thus, when receiving the complaint from Lineas, the commission acknowledged that certain measures in favour of DB Cargo may not be in line with EU State aid rules, and it decided to open an in-depth investigation.

In this investigation, which has now been ongoing for more than a year, it is looking into the open-ended profit and loss transfer agreement between DB and DB Cargo, under which DB has been covering DB Cargo’s losses since 2012.

It is also looking into the pricing terms of intra-group services to DB Cargo and the group financing conditions of loans, which are allegedly favourable to DB Cargo. And, it investigates the partial coverage by the German Federal Railway Fund of the remuneration of civil servants previously employed by the former national railway company Deutsche Bundesbahn and currently allocated to DB Cargo.

A cornerstone of the EU

“Competitors in the free market have to compete with Deutsche Bahn with its infinite amount of money bags and German state aid. Market forces on the railways remain a special matter in Europe. Entrepreneurs are smart and inventive, although this form of competition is not very pleasant from a business financial perspective” Vroon said earlier.

Moreover, Ludolf Kerkeling, CEO of the Network of European Railways, also favours the in-depth investigation on DB Cargo. “Fair competition is a cornerstone of European cooperation, and it is the Commission’s duty to demand this fairness and react in the event of possible violations. We have repeatedly heard from our members about incomprehensibly priced offers from DB Cargo and are looking forward to the result of the investigation with eager anticipation,” he commented.

Money talks

“Public companies have a lot of power in the EU”, said Vroon and this may be part of the reason why state aid is allowed to exist in the first place. The competition is often limited in its ability to take over the market. Even now that the investigation is ongoing and DB Cargo may end up having to sell parts of the company to competitors, the industry fears that DB Cargo may sell these at a price that nobody can afford.

In fact, doing rail freight business in Europe is not a profitable business. “In the US, rail freight companies make it to the stock market but in the EU, this is a rare occasion. The profits are very low. Especially as a private company, it is not easy to make a profit in the industry, explained Onno de Jong, transport consultant at Ecorys. This is slightly different for state-owned companies, which have more money at hand to support its divisions when needed.

Shift of tide

There is a shift of tide, though. Last year, private companies or subsidiaries of large holdings that act like a private company accounted for a majority of the European rail freight market, with a market share of 51 per cent. This was for the first time in history, indicating that the liberalisation of the rail freight market is still taking place.

According to the European Rail Freight Association (ERFA) this is a good thing, as private companies are “efficient, growth-focused, and drive innovation in customer service and deployment of new technology. They focus on a more narrow business and geographical area, and they are lean and agile, in comparison to the complex legacy processes of the holding companies. This makes them distinctively sharper, simpler, and better”, the group says.

Red figures

Agile or not, DB Cargo has been struggling to make a profitable business as well. It has now been more than six years since DB Cargo last managed to write black figures. Since 2015, the rail freight company has made parent holding company Deutsche Bahn (DB) around 2,5 billion euros in losses, with the last low point being 2020 when a deficit of 728 million euros had to be credited to the profit and loss account.

The arrival of Sigrid Nikutta four years ago at DB Cargo did not end that series of losses, although she managed to reduce them by more than 30 per cent last year compared to 2020. This is why she was entrusted with five more years in driving DB cargo towards financial growth.

The big problem at DB Cargo, according to DB chief executive Richard Lutz, remains the single wagonload traffic. This is still a heavily loss-making segment, but Lutz expects a ‘renaissance’ and improved results, including further automation and digitalisation. “In the meantime, we still need support”, said the head of DB in February last year, just a month after the investigation was launched.

A final blow?

It is yet to be seen if this support is uncompromised. As we saw with SNCF Fret, the company pays heavily for the state aid it received. While the European Commission was still in the process of of drafting a verdict, the French government did not wait to see how the company was penalised, as this could mean the end of it. Instead, it proposed a reorganisation, which will result in the loss of 500 jobs, 20 per cent of its contracts and 30 per cent of its traffic.

The same could happen to DB Cargo, although the German government has not yet made its intentions to jump in. There are also no angry railway workers on the street asking for DB Cargo to be left alone. The matter is less urgent as in France, but this may very well change with a verdict of the European Commission.

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Author: Majorie van Leijen

Majorie van Leijen is the editor-in-chief of RailFreight.com, the online magazine for rail freight professionals.

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Analysis: will DB Cargo end up like SNCF Fret? | RailFreight.com

Analysis: will DB Cargo end up like SNCF Fret?

DB Cargo UK loco side panel (DB Cargo UK)

This week, an important European rail freight company was saved from possible sanctions by the European Commission through an uncompromising reorganisation plan. SNCF Fret, the French subsidiary of SNCF was under fire because it had received financial support from its mother company, this is considered state aid. The same fate hangs over DB Cargo, the German subsidiary of Deutsche Bahn. Are we at the fortnight of a German chapter of the state-owned company debacle?

It is more than na year ago that the European Commission opened an in-depth investigation to assess whether certain German support measures in favour of DB Cargo are in line with EU State aid rules. The direct cause of the investigation was a complaint from the industry, the institute said.

It was Lineas, the Belgian rail freight operator that had taken the initiative. The company, itself struggling to make ends meet, had to witness how DB Cargo, while making losses of around 1.5 to 2 billion euros, was still investing in new locomotives. That was due to state aid and creates an unfair playing field, said Hans-Willem Vroon, director of interest group RailGood, an organisation that stands by the Belgian operator on the matter.

“The Commission received a complaint alleging that the profit and loss transfer agreement as well as certain other measures benefitting DB Cargo amount to incompatible State aid in favour of the company”, the EU institution confirms.”

Why is this a problem?

State aid is a sensitive matter in Europe. In the strive to create a private market with a fair chance to enter for every company, there are rules when it comes to providing state aid. These are called the EU State aid rules. Thus, when receiving the complaint from Lineas, the commission acknowledged that certain measures in favour of DB Cargo may not be in line with EU State aid rules, and it decided to open an in-depth investigation.

In this investigation, which has now been ongoing for more than a year, it is looking into the open-ended profit and loss transfer agreement between DB and DB Cargo, under which DB has been covering DB Cargo’s losses since 2012.

It is also looking into the pricing terms of intra-group services to DB Cargo and the group financing conditions of loans, which are allegedly favourable to DB Cargo. And, it investigates the partial coverage by the German Federal Railway Fund of the remuneration of civil servants previously employed by the former national railway company Deutsche Bundesbahn and currently allocated to DB Cargo.

A cornerstone of the EU

“Competitors in the free market have to compete with Deutsche Bahn with its infinite amount of money bags and German state aid. Market forces on the railways remain a special matter in Europe. Entrepreneurs are smart and inventive, although this form of competition is not very pleasant from a business financial perspective” Vroon said earlier.

Moreover, Ludolf Kerkeling, CEO of the Network of European Railways, also favours the in-depth investigation on DB Cargo. “Fair competition is a cornerstone of European cooperation, and it is the Commission’s duty to demand this fairness and react in the event of possible violations. We have repeatedly heard from our members about incomprehensibly priced offers from DB Cargo and are looking forward to the result of the investigation with eager anticipation,” he commented.

Money talks

“Public companies have a lot of power in the EU”, said Vroon and this may be part of the reason why state aid is allowed to exist in the first place. The competition is often limited in its ability to take over the market. Even now that the investigation is ongoing and DB Cargo may end up having to sell parts of the company to competitors, the industry fears that DB Cargo may sell these at a price that nobody can afford.

In fact, doing rail freight business in Europe is not a profitable business. “In the US, rail freight companies make it to the stock market but in the EU, this is a rare occasion. The profits are very low. Especially as a private company, it is not easy to make a profit in the industry, explained Onno de Jong, transport consultant at Ecorys. This is slightly different for state-owned companies, which have more money at hand to support its divisions when needed.

Shift of tide

There is a shift of tide, though. Last year, private companies or subsidiaries of large holdings that act like a private company accounted for a majority of the European rail freight market, with a market share of 51 per cent. This was for the first time in history, indicating that the liberalisation of the rail freight market is still taking place.

According to the European Rail Freight Association (ERFA) this is a good thing, as private companies are “efficient, growth-focused, and drive innovation in customer service and deployment of new technology. They focus on a more narrow business and geographical area, and they are lean and agile, in comparison to the complex legacy processes of the holding companies. This makes them distinctively sharper, simpler, and better”, the group says.

Red figures

Agile or not, DB Cargo has been struggling to make a profitable business as well. It has now been more than six years since DB Cargo last managed to write black figures. Since 2015, the rail freight company has made parent holding company Deutsche Bahn (DB) around 2,5 billion euros in losses, with the last low point being 2020 when a deficit of 728 million euros had to be credited to the profit and loss account.

The arrival of Sigrid Nikutta four years ago at DB Cargo did not end that series of losses, although she managed to reduce them by more than 30 per cent last year compared to 2020. This is why she was entrusted with five more years in driving DB cargo towards financial growth.

The big problem at DB Cargo, according to DB chief executive Richard Lutz, remains the single wagonload traffic. This is still a heavily loss-making segment, but Lutz expects a ‘renaissance’ and improved results, including further automation and digitalisation. “In the meantime, we still need support”, said the head of DB in February last year, just a month after the investigation was launched.

A final blow?

It is yet to be seen if this support is uncompromised. As we saw with SNCF Fret, the company pays heavily for the state aid it received. While the European Commission was still in the process of of drafting a verdict, the French government did not wait to see how the company was penalised, as this could mean the end of it. Instead, it proposed a reorganisation, which will result in the loss of 500 jobs, 20 per cent of its contracts and 30 per cent of its traffic.

The same could happen to DB Cargo, although the German government has not yet made its intentions to jump in. There are also no angry railway workers on the street asking for DB Cargo to be left alone. The matter is less urgent as in France, but this may very well change with a verdict of the European Commission.

You just read one of our premium articles free of charge

Want full access? Take advantage of our exclusive offer

See the offer

Author: Majorie van Leijen

Majorie van Leijen is the editor-in-chief of RailFreight.com, the online magazine for rail freight professionals.

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