train travel

Upstarts Rail Against Deutsche Bahn

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All aboard the competition.
  • Why it matters

    Why it matters

    If Locomore and Der Schnellzug succeed, they could offer passengers viable alternatives to Germany’s government-owned railway for intercity, long-distance travel.

  • Facts

    Facts

    • Previous attempts to compete against state-run Deutsche Bahn haven’t been successful.
    • The new Locomore service aims to raise capital via crowdfunding on the Internet.
    • Another newcomer, Der Schnellzug, will raise money though private investors.
  • Audio

    Audio

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Deutsche Bahn, Germany’s government-owned railway operator, has only ever faced one real competitor: the bus.

The cost of bus travel has fallen dramatically ever since Germany’s bus market was liberalized in 2012, leading to a rush to the bottom as private long-distance bus companies fight for customers.

But rail travel remains popular in Germany and the government has moved gradually to liberalize the country’s railway services. Long-distance trains are expensive to run though, and funding a rail service to compete with Deutsche Bahn is usually no business for private investors.

Nonetheless, two new train companies are now attempting to take on Deutsche Bahn.

Locomore aims to raise the necessary capital via crowdfunding, and the other company, Der Schnellzug, has sought out private investors. Each wants to make do with a maximum of €1.2 million ($1.27 million) in seed capital.

“In such financing dimensions, it is difficult to develop competitive long-distance railway transportation services.”

Maria Leenen, Consultant, SCI Verkehr

Experts are divided on whether the two companies’ ventures are likely to succeed. Some say the new operators are likely only to attract fans of train travel as paying customers and say the projects have little chance of making money.

Derek Ladewig, the mastermind behind Locomore, is undaunted by these pessimistic forecasts. A public administration and management specialist, Mr. Ladewig is collecting start-up capital over the Internet. Locomore plans to start operating in September 2016 and its initial train schedule is already set. The train would depart Stuttgart at 6:56 a.m. and arrive at Berlin’s main train station at 1:04 p.m. The return trip would start one and one half hours later.

The rail routes have already been booked; now the only things missing are money and trains.

But Mr. Ladewig is confident. “It’s looking good,” he said.

Mr. Ladewig hopes to raise from €500,000 to €1 million and believes Locomore will be able to take on Deutsche Bahn, the dominant provider in the sector, with the investment money.

The second provider, Der Schnellzug, plans its first “All aboard” on March 18. The company plans initial train connections that traverse the country, linking Stuttgart, Hamburg and Aachen.

The initiator and a partner in the firm, Johannes Zimmer, told Handelsblatt that he estimates the company’s initial financial needs to be €1.2 million. The plan is to collect this exclusively from private investors. Mr. Zimmer calculates that his trains will be making money in the first year of operation – at least as far as the operating costs are concerned.

For Locomore, its low seed-capital goal is surprising given that Mr. Ladewig, the company’s founder and chief executive, is no newcomer to the railway business and is well aware of the financing hurdles. He was co-founder of Hamburg-Köln-Express (HKX), one of the few previous attempts to take on Deutsche Bahn.

The rail routes have already been booked; now the only things missing are money and trains.

HKX is still posting losses three years after the start of operations. Hans Leister, a general director at U.S.-based RDC, which is HKX’s majority shareholder, is hoping that HKX will finally land in the black in 2016.

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Source: imago/Lars Berg

 

Locomore’s Mr. Ladewig doesn’t let himself be discouraged. “Our train has to pay for itself in the first three months,” he said.

Experts doubt the plan will succeed.

“In such financing dimensions, it is difficult to develop competitive long-distance railway transportation services,” said Maria Leenen, chief executive of the consulting firm SCI Verkehr. Services like that of Locomore appeal more to railway enthusiasts who don’t want to travel on state-owned trains, she said.

“However, the customer segment is likely to be somewhat too narrow for an economically successful business model,” Ms. Leenen said. In addition, the trains often used are far more reminiscent of museum pieces than a modern means of transportation.

So far, Mr. Ladewig has collected part of his investment money. About €181,000 is in the form of unsecured, profit-participating loans from private investors. That is typical in the crowdfunding world. Should the project fail, those investors’ stakes are likely lost forever because other creditors will be given preference.

In addition, Locomore is raising money by selling ticket vouchers through the platform Startnext. The buyers will be able to redeem their investments later – if the train service is up and running – by taking trips between Stuttgart and Berlin. By midday Thursday, €15,744 had been raised via Startnext. All told, the seed money raised so far is way short of €1 million.

Locomore’s later rounds of financing will have to be backed by a sales prospectus, according to the new Retail Investor Protection Act. For now, Locomore’s optimistic business plan is posted on the company’s Internet homepage along with a warning: There are “significant risks” in subscribing to a loan that “can result in the complete loss of the invested capital.” Thus, it says, “you should not invest your entire piggy bank.”

The company says it needs the first €500,000 in seed money primarily to cover all the expenses incurred preceding the start of operations. If €1 million is collected, Mr. Ladewig also wants to buy express train cars for Locomore instead of just leasing them.

Der Schnellzug also hasn’t decided whether to lease or buy trains.

Both fledgling train services might face tough going, based on two previous attempts to compete with Deutsche Bahn.

After 15 years of operation, Interconnex, a competing rail service that runs trains between Leipzig and Rostock, gave up in 2014 despite backing from Transdeve, a powerful French private-public transport operator. Interconnex faced aggressive price competition from long-distance bus operators.

The other competitor to challenge Deutsche Bahn, HKX, has had to radically change its business concept. The service’s decision-makers, led by RDC, initially planned a top-quality express train service between Hamburg and Cologne. But the train cars ended up being far less than top quality. The express trains bought for millions and now partially converted are languishing on a railway siding. HKX investors probably burned through €19 million in capital over the course of the year.

Locomore and Der Schnellzug, on the other hand, hope to manage with a fraction of that – suggesting optimism is part of their business plans.

Although Mr. Ladewig is still running around with his collection box, he is already planning additional Locomore routes: an extension heading north to Rügen, Germany’s largest island off the coast in the Baltic Sea; another going south to Munich; and a express route between Berlin and Cologne starting in early 2017.

Der Schnellzug is already advertising its third route, between Swabia and Saxony.

 

Handelsblatt’s Dieter Fockenbrock covers corporate governance, opinion and rail transport. To contact the author: fockenbrock@handelsblatt.com

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