Connex's German Presence Expands with Sylt Route

A pricing system fiasco, further job cuts, compeititon from low-cost airlines, delayed trains, empty compartments and yet more red ink – these are the sorts of headlines Deutsche Bahn has been making lately. Increasing the pressure is competition from private rail concern Connex, which just won a bid to run passenger traffic from Cologne, Berlin and Hamburg to the German resort island of Sylt.

Connex, a subsidiary of the French conglomerate Veoli Environnement, has been pursuing a bold growth strategy in Germany over the past several years by bidding on operating rights for numerous local and long-distance passenger rail lines.

Although state-backed Deutsche Bahn (the state is the single largest shareholder in the private company) is legally obliged to sell off rail lines and train stations as part of a government ordained liberalization that until now has mainly affected local passenger routes, Connex has had a hard time making inroads in Germany's rail system. Represented by its Frankfurt-based Connex Verkehr subsidiary, the French company so far has only managed to offer long-distance service on a few routes in Germany.

In June it opened up a route from Cologne to Halle and Rostock, in eastern Germany, and earlier in the year it began service between Berlin and Hamburg. The company says it is now filling around 45 percent of its seats, but needs to fill 60 percent in order to make a profit. Nevertheless, Connex is Germany's second largest long-distance rail provider.

Distance routes cheaper

And it just expanded its offerings. Starting in 2005, Connex trains will shuttle passengers from Cologne and Berlin to the resort island of Sylt via Hamburg. The contract will last for 10 years.

For consumers, this means lower prices. Because the connection between Sylt and Hamburg is considered local traffic, "we can't set our own prices due to tariff regulations," says Connex spokesman Andreas Winter. However, on long distance stretches, like those from Cologne and Berlin to Hamburg, "we will be half as expensive as Deutsche Bahn."

But the group denies that it intends to try to compete with Deutsche Bahn in high-speed traffic. "We have a regional train concept, with our product Interconnex. We are not trying to compete with the ICE," the superfast trains that service larger German cities, Winter says.

In Germany, Connex took in about €260 million in the past year, the company has yet to show a profit. However, Winter said, "we hope to (be profitable) by next year. We belong to a listed company, so we can't afford to stay in the red for a long period of time."

Going through the courts

Only 10 percent of local German rail lines have been put up for bid thus far. Deciding which lines can be sold is largely left up to the states – and sometimes the courts. So far, Connex has won about a third of the German competitive bids. In contrast, Deutsche Bahn still runs some 90 percent of local train traffic.

In the case of the Sylt line, the state of Sachsen-Anhalt opened the bid up for competition. But getting a foothold in a monopolized market isn't always so easy. In Brandenburg, for example, Connex filed a suit complaining that Deutsche Bahn had been awarded a local rail contract worth billions of euros, without a competitive bid. In early September, the high court in Brandenburg rejected the suit, saying there was no legal obligation to put the contract for local passenger traffic up for bid. Yet Connex had won an earlier, similar suit in Sachsen-Anhalt. Consequently, the German government enacted an order saying that a certain amount of local traffic routes can be allocated without competitive bidding.

Yet the outlook isn't entirely bleak, notes Winter. "The various states are very different from one another. Schleswig-Holstein strongly suports competition."

A welcoming market

Indeed, Germany's market is relatively welcoming, company executives say. Stéphane Richard, chairman of the board of Connex, told the Süddeustche Zeitung newspaper that, in terms of liberalizing its markets, "France is a turtle." And Germany also compares well to England, where Connex recently lost its license due to chronic lateness – a problem the company says is because of an English failure to invest in the railway tracks there.

In addition to its latest German contract, Connex recently won the bid to run local trains around the U.S. city of Boston for five years, a deal expected to up turnover by some $1 billion (€87 million) a year.

Asked by Deutsche Welle what Connex has to offer the German market that Deutsche Bahn doesn't, spokesman Winter cited Connex's simple tariff structure, as well as a business structure and approach that puts the client first. "Our mottos are 'Keep it simple' and 'Just Get in and Ride.'