Profitability is the greatest challenge for European rail operators

• Most respondents rated Germany's market structure as the most attractive in Europe, in both rail and public transportation
• 41% of managers see the struggle for secure funding and higher profitability as being the greatest difficulty
• Although 47% of respondents consider it important to privatize their company, just 21% are planning to do so by 2020
• Just a quarter of rail operators see growth as the top priority
• Competition in their domestic markets is forcing companies to expand: Central and Eastern Europe (81%) and Western Europe (78%) are much more inviting than Asia (31%) or India (27%)

Increasing liberalization in the European rail industry and fiercer competition are forcing operators to boost their flagging profitability, extend their portfolios and expand into international markets. Germany is ranked as having the best market structure in Europe – although Deutsche Bahn has not yet been privatized. Privatization is one of the key concerns of 47% of European rail operators. But just 21% of respondents are planning to privatize their companies by 2020. Only 20% of firms are focusing on growth – especially abroad. Central, Eastern and Western Europe are much more popular expansion destinations than far-flung Asia or India. These are the results of Executive Rail Radar 2011, the new study by Roland Berger Strategy Consultants.

"The entire rail industry in Europe is getting more competitive," says Martin Streichfuss, Partner at Roland Berger. "Although most companies became more productive in recent years, profitability is still too low. Better services and lower costs are thus needed to achieve higher profitability."

Germany well positioned in European ranking

In this respect, the German market for rail and public transit is very good compared to other European countries. Government subsidies have been scaled back, although Deutsche Bahn has not yet been privatized. The proportion of private-sector operators in the German market has risen. They now provide 12% of passenger rail connections and as much as a quarter of total cargo traffic. "Integrated transport options play a key role in local public transportation," explains Andreas Schwilling, Partner at Roland Berger. "Passengers like being able to use the same ticket for modes of transport offered by different operators within their local public transport association."

The UK comes second in the European rankings. Rail travel has expanded considerably there since 2000 – despite some of the negative effects of rail privatization. France is ranked highly on local public transport by respondents to the Executive Rail Radar survey. "While the French rail market is hermetically sealed, some local transportation networks are operated by private companies. This has reinvigorated the market to some extent," says Streichfuss.

Weak profitability hampers privatization

Privatization certainly remains an important matter for 47% of rail operators. The reasons: greater independence from political decisions (55%) and the chance to attract fresh capital from private investors (32%). But just 21% of respondents are in a position to privatize their companies by 2020. "The main obstacles to privatization are government dithering and companies' weak profitability," explains Schwilling. "Only sufficiently profitable companies are of interest to potential investors."

European rail operators thus want to achieve two key goals to make themselves more attractive in the market: cut costs further (93%) and improve services (91%). But infrastructure modernization is also important to 86% of the survey's respondents.

Growth is focused on Europe

Growth is not top priority right now: just 21% of respondents want to focus on it in the next few years. And if rail operators choose to expand, they do so abroad: "Tougher competition at home is forcing companies to look at other, less competitive markets," explains Streichfuss. "But they definitely prefer other European markets. Far-flung countries, such as those in Asia, may offer considerable scope for growth, but have very different market structures and passenger habits."

European companies are therefore focusing their expansion plans first and foremost on Central and Eastern Europe (81%), closely followed by Western Europe (78%). Countries such as China (30%), India (27%) and Russia (27%) are less popular as expansion targets.