The Other Side of the Tracks France's SNCF Muscles in on German Rail Market
As of Jan. 1, long-distance passenger rail services are completely deregulated within the EU. The French state-owned rail company SNCF is preparing to muscle in on the territory of its neighboring competitor, Deutsche Bahn. The German national railway company is hoping for help from the government.
French president Nicolas Sarkozy made his instructions for the country's state-run railway service, SNCF, unambiguously clear. It should "take a leading role on the European level as a French public company," Sarkozy wrote SNCF president Guillaume Pepy in spring 2008.
Modesty never really having been his thing, Sarkozy then took it up another notch, adding that in the future SNCF should either be, or at least be in the process of becoming, number one in the areas of freight transport, logistics, and long-distance travel -- and not just in France or Europe, but "in the world."
In November, SNCF head Pepy began to put the French president's words into actions, announcing intentions to begin providing services on three sections of the German railroad network in 2011.
One of these routes extends from Strasbourg, France, through Frankfurt to Berlin, before continuing on to Hamburg. The second starts in the French city of Metz, passing through the German cities of Trier and Düsseldorf before reaching Hamburg. And the third would ultimately connect the major German cities Frankfurt, Düsseldorf and Hamburg. All three are among Deutsche Bahn's most heavily traveled -- and hence most lucrative -- routes.
Declaration of War
This latest declaration from Paris has brought Sarkozy's message home loud and clear to Deutsche Bahn headquarters at Berlin's Potsdamer Platz. The German national railway company's management, under new CEO Rüdiger Grube, interprets the announcement as a blatant declaration of war against its own empire -- and the cherished position Deutsche Bahn has always claimed for itself as Europe's foremost rail transport company. In any case, Deutsche Bahn still makes about 33.5 billion ($48.5 billion) in sales annually, while SNCF brings in only around 25 billion.
Deutsche Bahn and SNCF have long been competitors. Until now, however, the rivalry remained more of a long-distance duel -- as well as a battle of different systems, both technical and political, when it came to the question of who had the faster trains.
But it wasn't just a battle for prestige between the two companies' high-speed train systems, Germany's ICE and France's TGV. Much more than that, it was an ideological conflict. On the one side was Deutsche Bahn, making a painful transformation into a logistics company, growing globally and aiming to go public. On the other was France's state-financed railway service, whose market and monopoly are protected by guardians in the highest places.
Direct competition on the rails, however, remained the exception. Old regulations and the respective countries' laws, especially in the realm of long-distance transport, generally kept each company from being able to use the other's tracks at all.
Take Thalys, for example, which has operated a high-speed connection between Cologne, Brussels, and Paris seven times a day at speeds up to 300 kilometers per hour (185 miles per hour) since 1997. Thalys is a joint venture between the three countries its high-speed trains pass through -- Germany, Belgium, and France. SNCF owns 62 percent of the company, Belgium's SNCB has 28 percent, and Deutsche Bahn owns 10 percent. The upshot is that Thalys hardly creates real competition for the countries' respective rail providers.
Wave of Consolidation Expected
Now, all that is set to change. As of Jan. 1, 2010, long-distance passenger service joins local public transport and freight transport in being completely deregulated within the EU. Any railway company may now offer long-distance service on another EU countries' rail lines, at least in theory. With the deregulation, the bloc is pursuing a clear goal -- it wants to make train travel across the whole of Europe cheaper, cleaner, and more punctual, through competition among operators.
From an economic point of view, however, observers expect the new rules to have one main effect. "We are going to see a massive wave of consolidation in the European railway market in the coming years," says Deutsche Bahn CEO Rüdiger Grube. He expects especially sharp competition between the continent's two strongest rail service providers -- his company and SNCF.
Admittedly, it was Deutsche Bahn that struck the first blow in this battle of the titans, following the deregulation of rail freight in early 2007. Under then-CEO Hartmut Mehdorn, Deutsche Bahn acquired EWS, a British rail freight company. With EWS came a French subsidiary called Euro Cargo Rail -- and an opportunity for the German company to advance into French territory through the back door.
Thanks to Cargo Rail, Deutsche Bahn now controls 8 percent of France's freight transport and it wants to double that share as quickly as possible. The primary means for achieving that end lies in the fact that Deutsche Bahn can now offer lucrative transit traffic through France and on to Spain or Portugal, for example for Germany's automotive industry.
SNCF, meanwhile, has long been lagging behind in terms of freight transport. High labor costs, strict regulations on pay rates, and policies favoring investment in the high profile high-speed lines have all made life difficult for the freight sector. The French company's freight arm is believed to have made about 600 million in losses in 2009.
- Part 1: France's SNCF Muscles in on German Rail Market
- Part 2: Thinking Big