May 01, 2018

Passenger growth and international success boosts DB profits

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German Rail’s (DB) CEO Dr Richard Lutz set out his vision for DB in the wake of the formation of a new federal government, at the national railway’s annual results conference in Berlin on March 22.
David Briginshaw analyses DB’s performance and future ambitions.

GERMAN Rail (DB) achieved a 5.2% increase in revenue in 2017 to €42.7bn which translated into a 37.1% jump in pre-tax profit to €968m, a 2.8% rise in adjusted Ebitda to €4.93bn, and a 10.6% increase in adjusted Ebit to €2.15bn.

DB’s CEO Dr Richard Lutz, who presented the financial results for 2017 in Berlin on March 22, attributes DB’s “favourable performance in 2017” to passenger growth and better performance outside Germany at passenger operator DB Arriva and freight and logistics subsidiary DB Schenker.

Lutz2Both long-distance and regional passenger services in Germany recorded a 2.6% increase in passenger-km to 40.5 billion and 42 billion respectively. “More than 142 million people used our ICE, IC and EC trains in 2017,” Lutz says. “That was more passengers than ever before - and 2017 was the third year in a row to see a growth in passenger numbers. Our new high-speed line between Berlin and Munich is doing particularly well: since the line opened in December, more than twice as many passengers have used our service between the two cities as in the same period a year before. Over a million passengers used the line in the first 100 days.

“The 3h 55min ICE Sprinter connection between Berlin and Munich is giving us a major boost in competition with other modes of transport. The new line shows how much potential the rail system offers. And our ICE Sprinter trains are in very high demand, with load factors one-fifth higher than on our other long-distance trains.”

However, DB only operates three ICE Sprinter round trips per day between Berlin and Munich, compared with an hourly-interval ICE service taking between 4h 34min and 4h 55min to complete the trip.

“Our ICE Sprinter service between Berlin and Munich has an average on-time rate of some 90%, due in large part to the use of ETCS, the European Train Control System,” Lutz observes. This marks a shift in attitude by DB’s top management to ETCS, which until recently was decidedly luke warm. Indeed, Lutz now sees ETCS as a key component of DB’s plans for digitalisation as he says DB plans “across-the-board implementation of ETCS and digital signalling technology” to achieve shorter headways between trains and thus use infrastructure capacity more effectively.

Turning to regional rail services, Lutz says DB Regio achieved the highest contract award rate it has seen in the past five years, winning 74% of the total train-km that were put out to tender in 2017.

Overall, train-path-km rose by 0.5%, with more trains using Germany’s rail infrastructure than ever before. DB says the proportion of non-DB operators running trains on the national network increased slightly from 30.1% in 2016 to 30.9% last year.

However, rail freight suffered a 2.2% drop in tonne-km from 94.7 billion in 2016 to 92.7 billion in 2017. Lutz took the opportunity to present DB’s new board member for freight transport and logistics, Mr Alexander Doll.

DB Arriva achieved a 4.9% increase in revenue in 2017 to €5.3bn and a 7.5% rise in Ebit to €301m, while DB Schenker performed even better with an 8.6% increase in revenue to €16.4bn and a 16.3% jump in Ebit to €477m. “These two international subsidiaries now account for roughly half of our revenues,” Lutz observes.

Following an investment of €7.5bn in 2017 to modernise the network and build new lines, Lutz says DB is investing more than ever before. “This year we are looking at a record investment of over €9bn,” Lutz says. “And despite extensive construction work in 2017, we still managed to lower construction-related delays by 10% year on year.” Gross capital expenditure increased by 10% to €10.46bn.

Net financial debt of €18.6bn at the end of 2017 was around €1bn more than at the end of 2016 due to an increase in investment in new trains, including the ICE4 fleet, which is entering service.

However, DB is failing to meet some of the targets laid down in its Future Rail strategy.

Overall punctuality was 93.9% in 2017, lower than the 94.4% achieved in 2012 and below the 2020 target of 95%. Long-distance passenger punctuality also dropped from 78.9% in 2016 to 78.5% last year. Unsurprisingly, passenger satisfaction, which has a target of 79% by 2020, fell from 76% in 2016 to 75.8% in 2017.

“Not happy”

Referring to the long-distance sector, Lutz says he is not happy with recent performance. “Our objective was an increase that would benefit our customers,” he says. “Our target for 2018 - average long-distance punctuality of 82% - remains unchanged. Looking at the first few months of 2018, there is no question that we will need to do a lot better, and that we will need to work harder to make Future Rail more energetic and effective.

Lutz says DB is harmonising its data to create “a single source of truth” for its customer information systems. “We have also set ourselves the target of ensuring that we restore traffic within 24 hours when major disruptions occur at key rail hubs.”

Regarding 2018, Lutz says he expects DB to generate revenues of some €44bn and adjusted Ebit of at least €2.2bn. “We will also continue to invest in our quality, punctuality and reliability - and in our digital future,” he says.

Lutz adds that the new German government coalition agreement is positive for rail with the governing parties expressing their support for DB’s integrated structure and a high-performing rail sector, as well as the digital railway and continuous increases in investment.

“The new government plans to form a “rail pact” with business representatives,” Lutz reveals. “The goal between now and 2030 is to foster a significant increase in the number of passengers and goods travelling by rail. There are also plans for a bill to ensure that the transport sector meets climate protection targets set for 2030.

“The German government’s Rail Freight Master Plan, and the reductions to track access charges the government has announced, will help make rail freight much more competitive. We lost no time in responding to the government’s plans and have launched our own freight transport campaign. We intend to go above and beyond earlier plans for capital expenditure, and purchase up to 100 new multi-system locomotives and 4000 modern freight wagons in the coming four years.”

Lutz says that as DB is by far the largest pan-European rail freight operator, it is focused on improving interoperability and promoting cross-border traffic. With this in mind, GPS and other sensors will be included as standard features in DB’s new freight wagons. DB also intends to work with the government to upgrade freight corridors to eliminate bottlenecks and run longer trains.

“The government’s master plan is expected to generate 8 billion additional tonne-km of rail freight transport in Germany, and it is DB Cargo’s goal to run roughly 5 billion of them,” Lutz says. “Digital technology will help us in our efforts here: for example, we are moving forward with the construction of a digitalisation and automation test site near Munich.”

Lutz is a passionate believer in digitalisation as he thinks it will produce real benefits, by making the railway more efficient and more attractive to younger people as a profession. “Our Digital Rail for Germany programme will have a far-reaching impact,” Lutz says. “It involves digitalising the rail network, and it will be a giant leap forward for technology throughout the rail sector. The goal is to generate up to 20% more capacity in the existing rail network.

“Digital Rail for Germany will make our network extremely efficient, without necessitating the construction of new rail lines. It has the potential to make us a pioneer, to strengthen Germany as a place to innovate and do business, and to foster the development of expertise we can export around the globe.”

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