Train Stations

Deutsche Bahn’s Most Profitable Track

Deutsche Bahn Leipzig Train Station Source Agentur Bilderberg 48116134
Shopping, not rail transport, is bringing in handsome profit at railway operator Deutsche Bahn.
  • Why it matters

    Why it matters

    Highly profitable train station operations at Deutsche Bahn are helping to partially offset stagnating profitability in its rail transport businesses.

  • Facts

    Facts

    • State-owned Deutsche Bahn is experiencing growing competition from long-distance bus and regional train services.
    • The company’s operating profit this year is at risk of shrinking to €2 billion instead of the expected €2.2 billion, Handelsblatt learned in June.
    • The railway was once Europe’s most profitable, as it prepared for a now-shelved initial public offering.
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    Audio

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Rüdiger Grube, chief executive of national railway operator Deutsche Bahn, is concerned about his business. Turnover and yields are dropping, the profit margin in long-distance passenger transport is only 5.5 percent and in cargo transport it is almost zero.

There are also problems in regional transport, with competitors such as Abellio stealing contracts away from Deutsche Bahn. Even the once extremely profitable rail network is yielding fewer profits.

Mr. Grube is reacting and is currently planning the restructuring of the company, which is 100 percent owned by the German state and has €40 billion, or $45 billion, in annual sales.

But the train stations division is one bright light among Deutsche Bahn’s problem-ridden subsidiaries.

Managing train stations yields an operating margin of 20 percent, making it four times more profitable than the entire group.

The business unit is officially called DB Station & Service, which is earning a lot of money in comparison with others in the group.

For years, the company has provided stable revenue between €1 and 1.2 billion, and that with impressive margins. The business unit had €240 million in earnings before taxes and interest (EBIT) for the financial year 2014, corresponding to a 20 percent operating margin. Train stations are four times more profitable than the entire group.

Pay-outs to the Deutsche Bahn holding are growing each year, most recently standing at €188 million. That does not make up for the decline in profits in the other business areas, but does stabilize the group’s weakened earnings performance a little.

The secret to the yields earned by the DB subsidiary Station & Service lies more in the leasing of store space and less on the fees for the trains stopping in the station, which have to be paid by railway companies to Station & Service.

 

Train Station Revenues

 

André Zeug, chairman of the board of management at Station & Service AG appreciates the earning power of his division, and through it the outstanding position it has in the corporation.

He declined to give exact figures, but told Handelsblatt in an interview that about two-thirds of the profits come from property leasing.

Currently, that would be about €160 million in operating profit of the €240 million made last year. Total rental income was €325 million.

In other words, the retail properties bring in a gross margin of 50 percent.

Mr. Zeug also knows that greed can rear its head in the headquarters, which is why he played down the desire for higher profits. “There will not be any larger increases from the existing business.”

The 59-year-old executive is an old hand at Deutsche Bahn. He has been in the company for more than two decades, and has been in charge of the stations for seven years.

Mr. Zeug knows heated debates are waged over the stations in particular and conceded that it is a “highly emotional” issue. It is sometimes a feat to reconcile the expectations of returns with the political expectations and public opinion.

In the past, train stations were the gateway to the world, and today they are often only a transit point for a mobile society. The facilities have accordingly fallen into disrepair. Mr. Zeug said that two-thirds of the stations have been renovated, but it is a never-ending task.

 

The planned new train main train station in Munich Source Deutsche Bahn 48086084
The planned new Munich main train station could be another profit maker for the railway company. Source: Deutsche Bahn

 

Many of these small stations have fewer than 100 travelers per day, so arrival halls are no longer needed. Deutsche Bahn removed its station personnel years ago, so the corporation is trying to get rid of the often over 100-year-old buildings as quickly as possible.

The buyers are sometimes private investors, but usually cities and municipalities. Of the 3,000 station buildings that Deutsche Bahn once owned, there are now only 950 left. By comparison, Germany has a total of 5,400 railway stations.

Deutsche Bahn’s plan is to sell off more rural train stations, reducing the number of properties to 600 in a few years’ time. It is a difficult undertaking, because train stations, like churches, city halls and schools are “emotionally charged buildings,” said Mr. Zeug.

In the big metropolitan areas, however, Deutsche Bahn has three large projects in the pipeline. Construction is planned in Frankfurt, Stuttgart and Munich for the next few years and each project will require hundreds of millions in investments. Mr. Zeug’s average investment budget of €800 million per year will hardly suffice.

Munich is slated to get a new train station as part of the expansion of the metro and suburban train network. The total cost of the project is projected to be €700 million.

In Frankfurt, the historically protected arrivals hall has already been renovated for hundreds of millions of euros. But the shopping level and the S-Bahn entrances are decades old and have fallen badly into disrepair. The cost of repairing those is €127 million.

The major construction that is part of the controversial billion-euro project Stuttgart 21 is just now really getting underway. The renovation of the arrivals building will on its own already cost millions.

The city of Münster in North Rhine-Westphalia is an example of why Deutsche Bahn is also replacing buildings that were first built after World War Two. The train station, which serves 60,000 travelers per day, is one of the most frequented in the state. Münster has exactly as many passengers as Dresden in Saxony, but only about half as many residents.

Münster is therefore interesting for Deutsche Bahn because of the high number of travelers. The new construction will cost €37 million, but will provide room for 21 instead of 14 stores.

Such projects also draw criticism that the DB subsidiary is only running “shopping malls with a connected train platform,” similar to many airports, which appear to earn their money primarily from luxury brands and designer clothes. But Mr. Zeug does not accept that argument.

“The retail stores in train stations are designed for efficiency,” he said. Train travelers are in a hurry, but passengers in airports, often have to wait for hours for their connections.

Deutsche Bahn is therefore working on plans to expand the offering of convenience products. It is currently testing out a store that offers the measured ingredients for complete meals, which then only have to be prepared at home.

That shows that Mr. Zeug and Deutsche Bahn are taking more and more into their own hands. The days are over in which Deutsche Bahn left the business to others.

For a long time, the state-owned company did not see itself as being capable of managing its real estate itself. Leipzig is the last major train station that is leased out to another operator, the Hamburg-based ECE.

Looking at the high profit margins, it is no wonder Deutsche Bahn itself wants to manage the property. Shopping simply gives higher returns than moving people and cargo.

 

Dieter Fockenbrock is Handelsblatt’s chief correspondent for the companies and markets desk, focusing on corporate governance, opinion and rail transport. To contact the author: fockenbrock@handelsblatt.com

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