Whitepaper: Pricing for profit in rail freight
19 August 2016 • Author(s): Quintiq
The outlook for the rail freight industry is, at best, mixed. Operators are struggling to cope in a post-crisis world that has seen rail freight shift from being the price-competitive modal transport of choice to one that is, today, up against trucking and air freight ― and struggling just to keep up.
Liberalisation of rail transport in the European Union, the sluggish economy, falling volumes, and supply-demand imbalance have led to drops in rail freight prices. It is becoming increasingly difficult under current circumstances for rail freight operators to earn sustainable margins and create returns for shareholders. McKinsey reports that none of the larger European carriers have achieved average margins of 3% in earnings in recent decades, and at least 7% is needed to cover their costs of capital.
To fight against this chronic situation of low profits, operators are aggressively slashing operational costs, cutting personnel, and expanding to other modes of transport. These measures, however, are unsustainable. Financial benefits are shrinking with each round of cuts they make and expansion exercises require massive investments. Furthermore, personnel cuts are a highly unpopular move among state-owned operators.
These crises involve forces that are simply beyond any rail freight operator’s control. However, there is one that isn’t ― pricing.