Deutsche Bahn

Missing the Connection

deutsche bahn dpa foto
Not making the trains run on time. Handelsblatt has learned that Deutsche Bahn plans to report a 2015 loss of €1 billion, amid labor strikes, increasing competition from low-cost bus line rivals and customer dissatisfaction over deteriorating punctuality and service.
  • Why it matters

    Why it matters

    The German economy could take a big hit if the country’s biggest government-owned employer, Deutsche Bahn, cannot turn around what appears to be a long-term decline in its freight and passenger businesses.

  • Facts

    Facts

    • Deutsche Bahn will post a net loss of more than €1 billion for 2015, Handelsblatt has learned.
    • Writedowns for the company’s freight transport business will be €1.3 billion, €700 million in provisions will be set aside.
    • CEO Rüdiger Grube wants to cut costs and boost efficiency, but rail unions are resisting plans they say could lead to 5,000 job cuts.
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The perception that the trains always run on time in Germany is an outdated myth, as regular customers of Deutsche Bahn, the national railroad, will readily confirm.

Compensation for train delays, exacerbated by striking locomotive drivers earlier this year, and storm damage to the track network have erased profits at the government-owned railway. Writedowns and the costs of a major reorganization will push the operator, which once harbored hopes of going public, to post a net loss of more than €1 billion, or $1.06 billion, this year, Handelsblatt has learned.

Writedowns for the company’s freight business will amount to €1.3 billion, and some €700 million will be set aside as provisions.

Chief Executive Rüdiger Grube is seizing on the bad news to drive forward his strategic revamp. He has been working on his “Future Railway” plan since the summer and will present it to the supervisory board of the state-owned company on December 16.

His own professional future hinges on the outcome of the plan, said a supervisory board member, who declined to be named.

Mr. Grube’s contract will run out in 2017 and he would like to stay on as head of Germany’s biggest state-owned company for a few more years. If he delivers on his turnaround, government sources said, he may get his contract extended next year.

Mr. Grube, a former senior executive at automaker Daimler, started restructuring the railway in July, reshuffling the management board  in response to collapsing earnings and persistent operational glitches.

Several management board members left and the board was reduced from eight to six members. He has also replaced almost a dozen managers below the board level. The latest addition was Clemens Först, who came over from the Austrian Federal Railways.

But personnel moves were only the first step in Mr. Grube’s reorganization. The second involves a modernization aimed at boosting productivity, where the main barrier is the German railroad’s above average compensation to its employees. Locomotive drivers in Deutsche Bahn’s freight division are only half as productive as their counterparts at private competitors.

 

090 WTB Deutsche Bahn 2014

 

That’s part of the reason why private railway operators have snatched away a third of Deutsche Bahn’s transport volume. Drivers often spend hours fetching the keys for their engines at operating centers. It’s a problem the railway has been aware of for a long time — but nothing has been done about it.

Mr. Grube, a former senior executive at automaker Daimler, started restructuring the railway in July, reshuffling the management board in response to collapsing earnings and persistent operational glitches.

Another problem is that Deutsche Bahn’s repair shops apparently don’t mind that only half of the railway’s high-speed Intercity-Express trains and regional Intercity trains roll out without technical defects.

These can range from faulty software to unusable toilets and broken doors, which has generated increasing customer complaints.

This can result in massive delays and irate customers.

 

rüdiger grube angela merkel july 23 flooding damage survey saxony anhalt source dpa
Deutsche Bahn CEO Rüdiger Grube and German Chancellor Angela Merkel survey flooding damage in July near Schönhausen in central Germany. The railroad plans to report a 2015 loss of about €1 billion, Handelsblatt has learned. Mr. Grube’s future at the railroad hinges on the success of a turnaround plan. Source: DPA

 

In response, a board member in charge of transport, Bertold Huber, is being made responsible for maintenance.

Mr. Huber, deputy Chief Executive Volker Kefer and head of personnel, Ulrich Weber, have spent months working on the railroad’s grand reorganization project. One of the biggest challenges is Deutsche Bahn’s freight division, which has been barely profitable for years despite consistent German economic growth.

The restructuring will cost some €700 million, but Deutsche Bahn expects to generate operating profit from its freight business of €250 million by 2020, Handelsblatt has learned.

According to the railroad’s previous forecasts, Schenker Rail, the freight division, was supposed to post an operating profit of €500 million soon. But instead, the division is sliding deep into the red. Many of the railroad’s 1,500 freight loading sites will be closed in the restructuring.

Railway trade union EVG fears up to 5,000 jobs will be axed. Deutsche Bahn has denied that so far; Mr. Grube needs the support of unions and employees for his revamp, so he’ll probably stop short of mass layoffs. But that could undermine the restructuring given that the railroad’s biggest costs are its bloated staff, which is by far larger than other national railroads in Europe and around the world.

The railroad had 295,746 employees as of the end of 2014.

Without addressing personnel costs, the railroad has few options to significantly cut costs. The planned restructuring will dissolve DB Mobility Logistics, a holding company created to prepare for Deutsche Bahn’s now-aborted stock market flotation.

Mr. Grube needs the support of unions and employees for his revamp, so he’ll probably stop short of mass layoffs. But that could undermine the restructuring given that the railroad's biggest costs are its bloated staff, which is by far larger than other national railroads in Europe and around the world.

Deutsche Bahn’s administrative headquarters in Berlin costs €1 billion a year to run, which according to Mr. Grube is far too much. He plans to save €720 million in costs by transferring a host of responsiblities to other divisions. A subsidiary, DB Services, which accounts for annual revenues of some €3.2 billion and among other tasks presents workshops, will be dissolved.

Deutsche Bahn used to be the most profitable railroad in Europe, generating earnings before interest and tax of more than €2 billion on revenues of around €30 billion for several years.

The company is readjusting to a more sober reality now.

The company expects earnings before interest and taxes of €1.75 billion in 2015, some €300 million below its own projection at the start of the year. Worse, Deutsche Bahn’s debt is rising again — to a projected €22 billion in four years, almost €5 billion more than today. One reason are the dividend payments to the German government, its sole owner, which this year will amount to €850 million.

The railroad is boosting its borrowing to deliver its promised dividend to the government, and it isn’t generating enough profit on its own. That’s why the management wants to open a foreign transport services unit, Arriva, and its Schenker Logistics non-rail freight business to private investors.

Mr. Grube told Welt am Sonntag newspaper in October that the railway was looking for investors for the units, but would only sell minority stakes. It’s a sensitive issue and will be discussed at a special meeting of the supervisory board in February.

The German railroad, once a symbol of the country’s efficiency and attention to detail, desperately needs fresh capital.

So it will continue what is essentially a back-and-forth form of subsidy from the German government.

Deutsche Bahn has pledged to pay the government dividends of €4.3 billion through 2019, and Mr. Grube appears committed to fulfilling that promise. The lion’s share of that money will return as an investment subsidy from the government to upgrade the national track network.

But Deutsche Bahn first needs to earn the money to pay it forward. And if it can’t show promise of doing just that, Mr. Grube’s professional journey as the head of Europe’s largest national railroad could reach its end station in less than two years.

 

Dieter Fockenbrock is a Handelsblatt editor who covers transport, freight and Deutsche Bahn. To reach the author: fockenbrock@handelsblatt.com

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