The Prague Post Online: Business: National rail freight firms reunited

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National rail freight firms reunited

Merger of Czech and Slovak operators creates EU player

July 2nd, 2008 issue

By Claire Compton

Staff Writer

Only six months after it spun off from the national railway operator České dráhy, the state-owned freight company ČD Cargo is poised to merge with neighboring Cargo Slovakia to become one of the biggest freight transporters in Europe.

ČD Cargo transported more than 90 million metric tons of goods in 2007, while Cargo Slovakia transports on average 50 million tons annually, respectively ranking fifth and 10th in volume within Europe. The merger will put the company close in size to Poland’s PKP, the second-largest rail freight company in the European Union after Germany’s Deutsche Bahn, which transports 313 million metric tons a year.

The merger process, announced June 23, is still in its infancy, and ČD Cargo was unable to give a clear timeline as to when and how the merger will take place.

Despite the scale of the plan, spokeswoman Simona Hradilová said ČD Cargo anticipates a smooth transition thanks to commonalities in language, operations, regulation, not to mention proximity. The ease of the agreement came from the logic of such a move, she said.

“From a business standpoint, a single cargo operator would undoubtedly be a stronger player on the European market than two companies acting individually,” she said.

The merger, on the heels of last year’s divorce from its parent company, is the latest step in the government’s plan to allow private investment in ČD Cargo. The deal furthers this goal by raising the price of a potential privatization, said Transportation Minister Aleš Řebíček.

It will also make the company more desirable and allow it greater negotiation power, Hradilová said.

“All this was done with the purpose to enable ČD Cargo to easily enter strategic partnerships or alliances,” she said.

The freight division was the only profitable arm of ČD, which saw the infrastructure assets of its lagging passenger division passed off to the Railway Infrastructure Administration, the state-controlled operator of national railways, in January.

ČD had a profitable year for the first time in 2007, thanks to the freight division. A privatization could earn the government up to 12 billion Kč ($586 million). The plan has been supported by most politicians as a way to lower the budget deficit.

Rail dominance

Not all parties are happy with ČD Cargo’s recent growth and future prospects. Well before the merger was announced, the Anti-Monopoly Office accused ČD Cargo of abusing its dominant position on the market from 2003 to 2007.

The office began proceedings against the company in the second half of 2006 and announced that a decision can be expected this month, said spokesman Kristián Chalupa.

That same market dominance is repeated in nearly every European country. An EU survey of the market shares of the largest rail freight operators in each country showed it to be 100 percent in 10 countries and between 70 percent and 99 percent in the remaining markets. In the past decade, the EU has pushed for these markets to be opened up, allowing freight operators to compete with national incumbents.

Whether a merger infringes on fair competition should be answered by EU organizations, since the company would be international, said Jiří Mužík, director of the Association of Railway Companies. Cooperation between the two companies is hardly new, however, and smaller companies will continue to excel in other sectors of transport.

“Both companies have always had a dominant position on the market. Czech freight-transport trains heading to Slovakia are taken care of by Cargo Slovakia, and vice versa,” he said.

The company won’t wipe out smaller train companies, which aren’t true competitors to ČD Cargo as it is, he added.

“Other transporters have a different position on the market,” he said. “They focus on direct trains or special ways of transportation, where they are and always will be better operators than a bigger company.”

Mužík echoed ČD Cargo’s assertion that the merger will ultimately raise potential privatization profits, but added that customers will continue to see the same tariffs, as the prices will remain influenced by the European market. ČD Cargo itself will see its costs go down, he said.

“We can expect that ČD Cargo’s profits will grow, because the costs should go down a bit,” he said.

The merger is in step with current trends across Europe, as freight enjoy growing profits and greater demand. Joint companies such as this one are the likely future of freight transport, Mužík said.

The freight transport sector in Europe has seen “rigorous growth” in the past decade, according to the European Commission, with traffic growing at an average of 2.5 percent each year, outpacing growth in gross domestic product by nearly 0.5 percentage points.

The generally welcoming attitude toward the merger displayed by the Czech Republic is in slight contrast to some Slovak politicians, who have expressed caution.

Řebíček said that for now, both companies will begin the planning stage for the project, which will include an in-depth study on how to best approach it.

“We are going to focus on a deep analysis of this project, to further specify the individual steps and to define all the aspects of the merger and identify the next stages of the project,” he said.

Claire Compton can be reached at ccompton@praguepost.com

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