Deutsche Bahn on profit track

But some analysts warn that the railroad's good news is based on one-time gains

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F.A.Z. Weekly. Deutsche Bahn normally sells about 1 million train tickets in five days. Last week, it sold that number of tickets within about five hours.
In a unique marketing campaign, the German railroad operator allowed the discount supermarket chain Lidl to sell tickets for Germany-wide travel at €49.90 ($62.64) for a packet of two. This was a real bargain: A regular one-way trip from, say, Rosenheim in the south to Flensburg in the north costs €111. Germans jammed the Lidl stores and stood in line for hours. But many left empty-handed and frustrated. Overwhelmed by the success of its coup, the railroad is now pondering the possibility of regularly selling tickets via supermarkets.
This week, Deutsche Bahn had to turn its focus from marketing gimmicks to analysts. The company wanted to show them that its ambitious medium-range forecasts were realistic when it published its results for the past business year. On Wednesday, the company posted its first profit in four years, although operative earnings before interest were somewhat lower than hoped at €253 million ($319 million), up from a loss of €172 million in 2003. The first quarter brought further improvements, but Deutsche Bahn still posted a net operating loss of €38 million.
Chairman Hartmut Mehdorn emphasized the significance of last year's turnaround in operating earnings before interest for the company's ambitious plans. Mehdorn wants to turn Deutsche Bahn into a globally leading mobility provider - from rail through road to waterways. Profits are supposed to grow almost tenfold in the next five years, and the railroad operator aims to be listed on the stock exchange no later than 2008.
But some analysts warn that the forecasts are built on a shaky foundation because the turnaround, too, is based mostly on one-time positive effects. Some of Deutsche Bahn's divisions are still deep in the red, particularly its freight and long-distance passenger businesses as well as the rail network operation. The future of the strong local transportation segment also is far from secure, experts say.
The long-distance railway business suffered a loss of about €260 million in 2004. Although this could drop to below €100 million this year, Deutsche Bahn has a long way to go to reach the targeted capital return of 10 percent in this segment. The key problem here is insufficient capacity usage, which currently stands at 43 percent, a marginal 2 percentage points more than two years ago. A minimum capacity usage of 50 percent is the goal for all IC and ICE high-speed connections.
The freight business posted a loss of €15 million for 2004, although a profit of €120 million had been budgeted. And sales fell dramatically in the first quarter of this year. Competing rail freight operators have snatched a combined 12 percent market share from Deutsche Bahn. The languishing economy and the EU's market opening in road transportation are adding to this competitive pressure. Indeed, freight hauler Schenker, which posted a profit of €193 million in 2004, has high hopes for other means of transportation.
Deutsche Bahn's key cash producer last year was local transportation, which added nearly €500 million in profits and is expected to raise this contribution to €800 million by 2009. However, market opening is foreseeable and private competitors operate considerably more efficiently. In new tenders for local transportation contracts, private operators outbid Deutsche Bahn in more than half of all cases. In addition, a decision by the European Union that might speed up the liberalization of this segment is pending. Until these questions have been answered and Deutsche Bahn's forecasts become more reliable than in the past, it will be difficult to convince politicians that the state operator is fit to be listed on the stock exchange.

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