Road Rage Stopped in its Tracks?

Deutsche Bahn, the government-owned rail service, is mulling a range of options to fight off competition from less expensive bus firms and reverse a profit decline.
Driving home for Christmas? Deutsche Bahn faces growing competition on the roads, plus strikes.

There are big changes down the line for Germany’s rail service Deutsche Bahn – and for train travelers across the country.

The government-owned rail group is under pressure to win back customers who switched to more affordable long-distance bus travel and increase profitability. A document, obtained by Handelsblatt on Thursday, reveals some of the solutions Deutsche Bahn’s managers are considering.

The ideas range from no longer covering some of the long distance routes, to replacing a popular and established discount loyalty program, known as the "Bahncard."

Chief executive Rüdiger Grube is in a difficult position as Deutsche Bahn’s financial situation changed unexpectedly and comes at a time when the rail firm also faces strikes and growing delays.

Only recently, operating profit at its long-distance operations had tripled within three years, to €364 million, or $451 million, in 2012. But then profit declined to €323 million last year, and Deutsche Bahn had to cancel its ambitious targets.

This is partly due to changes in the way people in Germany are choosing to travel. Growing delays, train cancellations due to technical problems and ailing rail networks deterred former customers from taking the train.

The market for long-distance bus travel was liberalized in 2012.

Deutsche Bahn has seriously underestimated the competition from long-distance buses, which have been serving long-distance routes since early 2013 – but at much lower prices. The market for long-distance bus travel was liberalized in 2012. The rail group expects to lose €120 million in revenues to its new competitors in 2014.

In July, chief executive Mr. Grube prepared the public for the news that business wasn't going as well as expected. The new competition from long-distance bus operators cost the railroad €50 million in missed revenue in the first half of 2014. Polls show that half of the new bus passengers would have taken the train in the past. Mr. Grube has already cautiously adjusted the full year forecast downward by €500 million, to about €40 billion in total sales.

 

DB Results under Pressure-01

 

When he released his forecast in July, Mr. Grube couldn't have known that train drivers would go on strike in November, costing the company even more business.

Deutsche Bahn’s supervisory board, which hires and fires chief executives and confirms management board decisions, will discuss the situation next week. Decisions are expected in March next year.

A 33-page report by Deutsche Bahn’s management addresses many issues, including a fundamental restructuring of long-distance routes. This could mean the elimination of unprofitable routes, such as in rural northwestern Germany, linking the Rhine area to Emden.

The board has already made preliminary decisions on car freight trains and night trains. The night train network will be thinned out, and car freight trains will be cancelled altogether starting in 2017.

 

DB has Passenger Travel Peaked at DB-01

 

Sharp declines in passenger volume on long-distance routes have also prompted the company to consider reforming its entire pricing system.

In a supervisory board meeting of the long-distance subsidiary DB Fernverkehr last week, there was apparently a proposal to convert the popular Bahncard discount into a customer account, the deputy chairman of the supervisory board, Reiner Bieck, told German newspaper Die Welt. This account would only guarantee "discounts based on how full a train is and individual discounts based on customer revenues."

On Thursday, German media reported that the 20 year-old Bahncard – offering discounts of 25, 50 and 100 percent – could be eliminated. But that same afternoon Ulrich Homburg, the member of the Deutsche Bahn executive board in charge of passenger transport, reassured travelers there were no plans to phase out the Bahncard.

Mr. Homburg said there are plans to "further develop the Bahncard family." In addition to the current discount cards, Deutsche Bahn might also offer a card based on the Miles-and-More principle in the future. The newer system would depend on how often customers traveled by train and whether the routes they selected were busy or not.

All long-distance rail lines are under review.

Mr. Grube, the chief executive, has neglected to mention that Deutsche Bahn's forecasts have been seriously inaccurate in past years. There are many reasons for this, including greatly exaggerated expectations for long-distance travel on high-speed ICE trains and Intercity (IC) trains.

Until 2012, Deutsche Bahn had as many new customers as it could handle. More than 131 million people, the highest numbers ever, were choosing the train for long-distance travel.

But storm damage, technical problems with trains and the many construction sites in the rail network led to growing delays and deterred large numbers of customers from taking the train – especially when long-distance buses came into the market in early 2013, with rock-bottom fares that even Deutsche Bahn's most attractive specials couldn’t compete with. The lowest price of a train ticket, at €29, was near the highest prices for a bus ticket.

This year, the railroad has also struggled with delays. Although at the start of the year, most trains were on time, by the third quarter, one-third of long-distance trains were arriving more than five minutes late, and the delays are not only due to repeated strikes.

 

All of this affects profits in long-distance travel. 2012 was a record year for Deutsche Bahn, with earnings before interest and taxes (EBIT) of €364 million. Mr. Homburg, the executive in charge of passenger transport, had originally predicted that profits in his passenger transport division would double, to almost €718 million, by 2017.

But profits in the long-distance segment had already begun to decline in the last fiscal year. The new, internal earnings forecast, presented in June, was significantly more modest. Insiders no longer believe that Deutsche Bahn will reach €362 million in earnings this year. Long-distance travel is a performance test for Mr. Homburg. His job is to develop a new concept to revive this division.

 

DB Tougher Competition for Buses-01

 

Some changes will take place straight away. This month, Deutsche Bahn will already cancel night trains to Paris and Copenhagen, and cut off the night train that used to link Warsaw with Amsterdam in Cologne.

All other long-distance lines are under review. Initially, the rail service considered withdrawing entirely from this business, but this is politically unfeasible.

The discount card system will be similarly tough to change. Mr. Homburg called it a "sacred cow," and his colleagues believe eliminating it would be suicidal, recalling that a past attempt to phase out the Bahncard met with public outrage.

While the changes in the transport market seem dramatic in Germany, the country is gradually catching up with its neighbors. Bus travel has long been an alternative to rail transport in most European countries.

Germany's travelers will just have to get used to greater choice.

 

Dieter Fockenbrock covers companies and markets for Handelsbaltt. To reach the author: [email protected]