1. Europe’s big aspiration to reverse the decline of its rail freight industry will require significant effort, with substantial investment and smart thinking. Governments and industry players can help to achieve this goal, as there are examples of success to draw on and some key levers to pull.
2. The European freight rail industry has seen a steady decline over the past 70 years. Freight rail’s modal share has decreased from around 60 percent in the 1950s, and 30 percent in the 1980s, to roughly 15 percent today, driven mainly by large industry shifts.
3. This prompted a vicious circle of increasing fixed costs, leading to loss of competitiveness and loss of volume, and consequently increasing fixed costs again—with little hope for a thriving future. The rise of new small and agile entrants worsened the situation for freight rail incumbents that were left with unhealthy structures and often faced political pressure to maintain unprofitable businesses.
4. The European Union has set a bold ambition to reverse this trend. It plans to double freight rail’s modal share by 2030, both to reduce the transport sector’s CO2 emissions and to ease the congestion of major road connections.2 Achieving this ambition would see freight rail volumes grow by around six percent a year in ton-kilometers (tkm).
5. A massive shift in trajectory would be required to achieve this ambition. A European strategy to transfer a large proportion of transport from road to rail could focus on several key elements, including major long-distance freight flows, key connection points such as ports, and new industries that can replace volumes lost in declining sectors. Regulators and operators could also play a role in rethinking the regulatory model and reorienting the industry to become more customer focused, and more profitable.
MAJOR TRANSFORMATION REQUIRED
1. As far back as 2011, the European Commission set a target of shifting as much as 30 percent of road freight that is transported further than 300km to other modes of transport, such as rail or waterborne transport by 2030—and to increase this to more than 50 percent by 2050.
2. Such targets have been confirmed recently on the European level and also by member states, such as France and Spain.5
3. These objectives are in line with the motivation to build a greener and more digital transportation system that will be more resilient to future crises, particularly in the context of the Paris Agreement on climate and the stimulus plan launched to deal with the economic crisis associated with the COVID-19 pandemic.
4. However, the effort required to double freight rail’s modal share throughout the EU will be substantial. Goods transported by rail would increase from 420 billion tkm today to approximately 1,000 billion tkm in 2030—a yearly growth of 6.1 percent.
5. What this means in practice is that France and Germany, for example, would need to shift 90 percent of goods that are transported more than 500km—and 50 percent of goods transported more than 300km—to rail to boost today’s modal share from 19 percent and 10 percent respectively to the target of 30 percent. Similarly, for Spain to boost modal share from 5 percent today to 30 percent, it would need to shift 55 percent of transports beyond 500km, or 40 percent of transports beyond 300km to rail.
6. In an alternative perspective, reaching 30 percent modal share would mean shifting 70 percent of food and agricultural products from road to rail in Spain. Meanwhile in Germany, the 30 percent goal could be reached by shifting 60 percent of all metal and ore volumes to rail.
7. Given today’s preference for truck transport, the freight rail industry will need to undergo a major performance shift if it is to provide a competitive alternative. Today, truck transport is better positioned than rail in terms of cost, flexibility, and reach. Furthermore, truck transport is expected to gain a cost advantage of between 20 and 30 percent by 2050, given advances in driverless operations, flow optimization by advanced analytics, and fuel efficiency. The rail industry would need to at least match these cost savings, if not exceed them significantly, to gain market share.
8. The situation is intensified by the fact that traditional customer industries for freight rail—such as coal, iron ore, and petrol—are declining. In fact, they are expected to decrease by 1 percent a year until 2030. To make up for lost volumes, rail will need to grow seven times faster than road transport to reach the expected modal share of 30 percent.
STEADY DECLINE OF FREIGHT RAIL IN WESTERN EUROPE
1. Freight rail’s modal share has been in decline across Europe, both in terms of market share and the profitability of major operators. In France for instance, modal share declined by 50 percent, from around 30 percent in the 1980s to 15 percent today. By contrast, road transport has been steadily increasing. In 1980, less than 50 percent of goods were transported by road. This rose to more than 75 percent by 2018.
2. The decline in freight rail can be attributed to three factors: a loss or decline of key customer industries, the withdrawal of railways from providing various unprofitable services, and road transport improving its relative cost position compared to rail services.
3. First, traditional heavy-industry clients disappeared, particularly coal and steel. For instance, European coal production decreased by 60 percent between 1990 and 2019.
4. In the United Kingdom, the phasing out of coal in the power industry caused a drop of 85 percent of the tkm performance of coal transport by rail.
5. And in Germany, the volume of coal, iron, and metal transported dropped by around 85 million tons between 1970 and 2017—representing a 60 percent drop in the volume of freight rail from all sectors in the country.
6. Second, railways discontinued or reduced certain services—such as single wagonload, break bulk transport, and expedited overnight services—as these showed low or negative margins and faced heavy competition from road transport. Countries like Spain, the United Kingdom, and Denmark, for instance, no longer see any single wagonload traffic, which used to comprise 20 to 40 percent of all rail transport.
7. In parallel, associated infrastructure was heavily reduced. For example, in Germany over the last 25 years the number of private rail sidings dropped from around 11,500 to around 2,300. Similarly, in France the number of private access points dropped from roughly 11,200 in 1970 to 1,150 in 2019.
8. Third, road transport saw a significant improvement in productivity with the arrival of more fuel-efficient trucks. Companies were also able to engage workers at lower wage levels, for instance by hiring drivers from Eastern Europe. Additionally, new transport demands such as the need for greater flexibility to accommodate just-in-time production, smaller lot sizes, and decentralized flows gave road freight a natural advantage.
9. The loss of rail volumes and a decline in competitiveness, in combination with a market opening up to private road players, initiated a vicious cycle: declining volume—at high fixed cost—led to the cutting of non-profitable services resulting in a high fixed-cost structure not sufficiently covered by revenue growth. In a low margin industry, this situation involves structural losses that are hard to recover, especially in an economic crisis.
Source:
https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/bold-moves-to-boost-european-rail-freight
