Deutsche Bahn Hell of a way to run a railroad

Deutsche Bahn is celebrating solid financial results and the opening of a prestigious new high-speed line. But the good news masks a deep malaise that threatens to derail the state monopoly.
Quelle: Bloomberg
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It's not so long ago that the train journey from Berlin to Munich, beloved of many Germans, was an overnight affair. Locomotives would ease out of Anhalter Bahnhof in the German capital at around teatime, trundling through the Brandenburg countryside and the great forests of Thuringia and Franconia before arriving in Bavaria the next morning. Adolf Hitler was a regular voyager, travelling in his own special train – limited to 40 kilometers per hour to ensure it could maintain radio communications – between his HQ and adopted home city.

How times have changed. From December, thanks to the building of a new high-speed line, the journey time will be cut by a third to just 4 hours. Deutsche Bahn, the state-owned railway company, says 3.6 million passengers will use the new 550-km-intercity link (roughly the same as the distance between LA and San Francisco), doubling current traffic.

The service is something of a crowning glory for DB, a direct descendant of Hitler’s Deutsche Reichsbahn. At first glance, the monopoly’s network is booming. Long-distance trains are working at near capacity, with usage up an impressive 17 percent on last year, a figure partly explained by airline bankruptcies, which have cut domestic flight capacities. Profits on the network’s famed ICE high-speed, long-distance trains are set to hit record levels, expected at over €400 million ($472 million), according to internal DB documents seen by Handelsblatt.

Right now, Germany can afford hidden rail subsidies, but the good times will not last forever.

Overall, the company is the most successful – and profitable – rail service in Europe, raking in adjusted operating profits of €1.95 billion last year on revenues of €40.6 billion. The finances of logistics subsidiary Schenker and British bus company Arriva are also in rude health. Even DB Cargo, the company’s perennially loss-making freight division, is enjoying a boom in orders. And as one of the biggest mobility players in Germany, car- and bike-sharing subsidiaries such as Flinkster and Call a Bike are also boosting revenues. Deutsche Bahn’s “finances will look good this year,” CEO Richard Lutz told senior executives.

Yet, like in a high-tension action movie, the DB locomotive may be hurtling towards a precipice. The firm is dogged by deep-seated problems. Decades of cost-cutting mean that as profits have risen, there has been a steady fall in punctuality, quality and customer satisfaction. Complaining about the railways’ poor performance unites Germans more than almost any other topic.

Mr. Lutz knows he faces a titanic task to restore the reputation and performance of Europe’s largest railway network. As well as crumbling infrastructure, dissatisfied customers and competition from Germany’s newly deregulated bus market, the CEO must deal with a large and highly politicized supervisory board, which includes no less than three government ministers, a host of political appointees and a number of labor representatives.

The biggest source of customer complaints is punctuality. October saw DB’s worst-ever punctuality performance, with more than a quarter of long-distance trains arriving more than six minutes late. This falls well short of DB’s rather lax internal goal: 80 percent of trains arriving not-quite-on-time.

The situation with freight traffic is even worse. Since the beginning of 2017, logistical snarl-ups have led to hundreds of freight trains sitting idle every day, left without locomotives or drivers. On one day in June, no less than 350 sat immobilized across the country – far above the target of 58.

Major line repair work, needed to patch up Germany’s creaking rail infrastructure, has not helped. DB receives €6 billion in state subsidies each year to help maintain its tracks, but there never seems to be enough cash to go round. In late summer, for example, subsidence closed one of Europe’s busiest stretches of freight line completely for six weeks. Operators in neighboring countries complain that DB’s mismanagement has disrupted services across the continent.

DB staff say that years of staffing and maintenance cuts, designed to streamline the company in preparation for possible privatization, are the root cause. But that aim seems a long way off. While DB has been forced to sell off small, localized parts of its network to private operators, these pose very little threat to its core business as their expansion options are limited. Indeed, most rely on DB to feed their services. Meanwhile, privatization of the whole company remains a political no-no, especially in light of the largely failed rail denationalization in countries such as Britain.

17 p57 Deutsche Bahn's Many Areas for Improvement 3-01

The cost cutting has not been painless, and has irked customers. Catering services on high-speed trains, for example, are now provided by two staff rather than five, delays due to maintenance problems are mounting and faulty on-board wifi and shabby interiors are common.

Worse still for Mr. Lutz, DB’s outward financial position may be deceptive. Although executives of the French state railway SNCF – carrying €50 billion of debt – look enviously across the Rhine at DB’s financial independence, a closer look at DB’s figures reveals a company kept on track by handouts. As well as the maintenance subsidy, the government also pours €4 billion into medium-range trains, and state and municipal authorities help fund local services. The federal government also waived its €1.75 billion dividend this year to ease DB’s financial situation.

All this has jacked up the company’s debt, which is now approaching the €20 billion mark. If it exceeds that level, rating agencies could downgrade its credit, making it more expensive to borrow. Right now, Germany can afford hidden rail subsidies, but the good times will not last forever.

The company’s supervisory board has often managed to make things worse. It so aggravated Mr. Lutz’s predecessor that he resigned in January. Since then, the board has had considerable trouble filling several vacant senior positions. Another may soon arise: The current government kept faith with chairman Utz-Helmuth Felcht, but the new coalition government may not have the same patience.

When Mr. Lutz, a career DB man, took the reins in March, he promised there would be “no revolutions.” He is banking on the firm’s expansion of its high-speed network, gradually increasing the number of ICE trains from 220 to 350. This may be a good bet. At its best, the ICE is a dreamy way to travel: smooth, fast and luxurious. It leaves its passengers directly in city centers and largely runs on clean, green electricity. For example, it’ll soon be quicker to take a train between downtown Berlin and Munich than undertake the same journey by air.

The Deutsche Bahn boss will be hoping the strategy goes some way towards helping Germans fall in love with their railway again.

Dieter Fockenbrock is Handelsblatt's chief correspondent for the companies and markets desk, focusing on corporate governance, opinion and rail transport. Christian Wermke is an editor for Handelsblatt Live, covering politics, corporate executives and lifestyle. To contact the authors: [email protected], [email protected]