Two ways to diversify activities of railway companies
Analysis of Mediarail.be - Signalling technician and railways observer
(version en français)
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(version en français)
See also the Trainworld on facebook of Mediarail.be, also Twitter and LinkedIn
24/08/2015
«In Japan, from the
early 60s, and the emergence of the car-oriented society, it was understood
that, in order to enhance the competitiveness of railways, there were only two
ways: high speed trains, and the diversification activities.» These are
words of Mr.Yamanouchi, former president of the JR EAST company. One of reasons
that encourage railways to diversify their activities is that the core business
- rail transport - is not the activity that brings the most income, at least in
its current configuration. The railway business is indeed most of the time
focused on public service and provides each year a trade deficit which must be
covered only by subsidies from government. For two decades, the role of the
State is to decrease public funds in all sectors. The railways companies must
now to try to find other sources of revenues, by increase of efficiency and by
diversification of activities.
Diversify to increase income
Of course, Japan is a very special case: its different
kinds of passenger railway companies (JR, Major or Minor;
regardless of their size) operate all kind of diversification activities, from
real estate to amusement parks, which account for a large part their total
operating results. From 1991 to 2004, global results show a convergence of the diversification
strategies of the different passenger railway companies. The segments of
activity that are generally distinguished are “Transport” (railway, bus,
ferry), “Retail” (shops, restaurants, shopping center, department stores in or
near stations, directly operated by child companies), “Real Estate” (office,
residential and commercial lease in or near stations), and “Others” (hotel,
advertisement, credit cards, tourism, other leisure activities). For some
companies, Transport activities account for 49%, activities of capitalization
of land and commercial rent account for 41% and others for 10%. This shows the
importance of outside activities for the railway passengers companies.
In Europe, there is nothing. However, some
companies are recently equipped by an estate subsidiary, in order to fructify
an exceptional heritage in terms of location. It is difficult to imagine the
amount of lands which are the property of the railways companies. Some are the
first or the second landowner of the country. In France, SNCF Immobilier is the
newest of its five business units, tasked with managing properties owned by
SNCF Réseau for optimum value and tailoring them to the Group’s needs, as
described on his website. In Switzerland, CFF Immobilier employs 65 developers’
architects on a total of 850 employees.
The other importance of diversification is the revalorization
of the stations. Activities of capitalization of land and commercial rent in
this sector are mostly shopping activities in stations. European passenger railway
companies do not directly operate these shops, but they earn a rental lease
which is function of the operating results of the shop. The importance of this
activity is the amount of clients who frequent the stations.
Recently, Zurich's main station which welcomes every day 437,000 people
(passengers and non-passengers, expects an increase in commuter traffic by 70
percent, a flow of 743,000 people per day. According Il Sole 24 Ore, Grandi Stazioni, the railways station management
company 60%-owned by Italian state railways Ferrovie dello Stato and 40%-owned
by Eurostazioni (Pirelli, Caltagirone, the Benetton family…) manages Italy’s 14
largest rail stations, represents a unique case in Europe for its expertise in
revamping railway stations to transform them in meeting and retail points. The
figures at stake are high: more than 500 stores opened so far, which will
become 900 at the end of the renovation works; 700 million visitors every year
(300 million only between Roma Termini and Milano Centrale, the two largest
stations), 1.5 million of square meters of real estate. And, especially, more
than €900 million of investment combined to redesign the stations in Italy and
two others in the Czech Republic (Prague Central and Marianske Lazne). The
diversification of stations has allowed the company to book over €200 million
of revenues in 2014. But in despite of these examples, a survey of Emmanuel
Doumas in 2007 shows that in Europe, the Transport accounts around 92% of
revenues.
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| (photo SBB-CFF) |
Diversify to attack the market
The best form of defense is attack. This strategy, which
consist to attack the same market that your concurrent, is very different and
is not targeted necessarily to increase income, but is designed to contain the
competition from outside. This follows some major changes in the mobility.
Today, prosperity and future of long-distance services and high speed trains
are questioned. Most companies does not seem have taken full measure of
societal changes, while the low-cost aviation has become widely imposed on the
market and more recently, the long distances buses were liberalized, robbing
for example the German company DBAG nearly € 200 million. In France, the
profitability of the TGV has dramatically decreased, but remains the first
source of revenue of the French company. As described in another post, the
first action to undertake is the price, to meet the low-cost aviation. This is
what the French did with the TGV Ouigo, which starts from the outskirts of
Paris (and not from main stations), where the bar was removed and where the
space between seats was reduced. Some people told about the come-back of the
third class...But the low-cost railway is not enough to counter the
concurrence.
As the liberalization of transport is inevitable,
including railways, the best is to enter the market. In two sectors: car and
bus. For that reason, SNCF bought in September 2013 the 123envoiture.com site,
in which it had already invested since 2009. In 2014, the French company
launched Idvroom, a website focused on the commuters traffic and also compete
on a national stage with Blablacar. And the german railway company DBAG also
has launched Flinkster, the biggest company of car-sharing in Germany.
Approximately 3,600 cars - including more than 600 electric vehicles - can be
reserved in 200 German cities to nearly 1000 stations, including all major
stations. 2,500 vehicles are available in Austria, Switzerland, the Netherlands
and Italy. With the start of cooperation between the German railways (Flinkster
CarSharing) and Daimler (car2go) in early June 2015, customers of both
CarSharing companies have the option to use with a single registration the two
fleets for a total of 7,000 vehicles.
The entry in the bus sector is some years old. French
railways SNCF operates coach services in Europe since 2012, under the brand
name Idbus. The german railway DBAG has also his bus division, under the name
of Fernbus. This presence can be surprising because the two companies
specifically complained of the fall of their revenues for long-distance trains,
including high-speed trains. But in reality they seek to position themselves in
niche markets in goal to corner more market share in this sector. Indeed, the
best form of defense is attack.
Conclusion
The core business - rail transport - seems not the
activity that brings the most income. This evidence has long been known. To
cover a maximum of operating costs, it becomes necessary for railway companies
to seek other sources of income. This requires to develop real estate and to
enter the market of competitors. This policy does help relieve the company's
finances? The future will tell...
