Czech rail cargo takeover puts Polish company in vanguard

Central European rail cargo companies have traditionally grabbed a much bigger share of the market for shipping goods than their Western European peers. But competition across the region is stepping up and a long expected consolidation has just occurred with Polish rail freight company PKP Cargo just buying out the second biggest Czech rail cargo company, AWT.

Illustrative photo: Robert Linder / freeimages

Central European rail cargo companies traditionally had solid results. But competition with road hauliers has stepped up across the region and the rail companies themselves are trying to buy new trains and wagons and at the same time trim their debts and workforce. Rumours of pending mergers and acquisitions across the region have been legion with many of the state owned rail cargo companies, such as Czech company ČD Cargo and its Slovak counterpart, looking vulnerable on their own.

But the pacemaker in the expected wave of consolidation has come out of Poland in the form of PKP Cargo, created out of the former state railway company and launched on the Warsaw Stock Exchange at the end of 2013 with the state rail company conserving around a third of the shares. Most of its rivals in the region are still fully state owned. PKP is the second biggest rail cargo company in the whole of Europe with more than 3,500 locomotives and 60,000 freight wagons.

It snapped up the Czech cargo company AWT, which specialises in the transport of coal, steel, and materials for the car industry out of Ostrava with a fleet of more than 160 locomotives and 5100 wagons. Adam Purwin is chairman of the board of PKP Cargo and was in Prague last week to explain the Czech purchase and outline his company’s strategy for the whole of Central Europe. I asked him first of all whether the 80 percent stake in AWT has been bought mainly for the company itself or its strategic position on the Czech market.

“We were definitely looking for a small private company to grow faster in the north-south corridor connecting the Baltic Sea and Adriatic, so I thinks it is both. First of all, it is the first international M&A of PKP Cargo which is the second largest operator in the European Union. And AWT is the number two player on the Czech market and it gives us a unique opportunity to grow on the foreign market first. And due to the scale of the operation of AWT, which is very lean and operating well, we will not have to be heavily involved in the restructuring of the company and we can go ahead pretty fast with growing this market.”

We want to leverage the Central European location on the crossroads of the main transportation corridors.

Aren’t you afraid of the fact that there is a state cargo company, ČD Cargo, which has about three-quarters of the market, and obviously the Czech state would not like it to diminish too much?

“We would rather focus on the quality of service of our company and try and come up with an attractive offer to our customers. We would rather focus on our customers rather than build up an alternative programme of competing with ČD and the Czech government. We would rather focus on the day to day market and that is the main goal of the team of PKP Cargo and AWT.”

Crossroads

But ČD Cargo is one of your main competitors, both on other European or Central European markets and on the Czech market with AWT having around eight percent [of the Czech cargo market]. It is your acquisition’s main competitor?

“Of course, but again long-term it is the customers who will decide which offer is the best to accept. We focus on building the best offer in the region. We are very well positioned to do that because we own our fleet. We own part of the infrastructure, which are the terminals. We want to leverage the Central European location on the crossroads of the main transportation corridors. Plus there is the very good thing that is the position of the company as the only which is publicly listed with access to equity and the company is not leveraged so we have the capacity to invest in a new fleet. So again, the goal is to deliver good service to the customers rather than fighting against others.”

Adam Purwin, photo: archive of PKP Cargo

You mentioned your plans to use the Paskov terminal outside Ostrava. Why there? In a sense it’s not so far from Poland and presumably you have terminals on the other side of the border, so why should this terminal at Paskov be so useful to you?

“The tricky thing is that there is a different traction system in Poland and the Czech Republic so we always need a number of locomotives to operate things properly. And the level of containerisation in Poland and Central Europe is six times lower than average in the European Union and that shows the capacity of the market which should experience double digit growth in the coming years. So I believe that I believe we will be able to use the full capacity of all these terminals. And obviously Paskov is closer to the Czech market so I believe this is a great opportunity to grow in the region as well.”

You mentioned the north-south corridor as strategic for you, but are there so many more goods being transported in this direction now between, say, the North Sea and Baltic and the Adriatic?

“We see that corridor as a growing opportunity, firstly because of the modernisation of infrastructure in this part of Europe which means that we are right now just building the product based on the improved infrastructure and you can see that through the increased volumes on Polish ports through the Baltic Sea, where there is double digit growth. And there is also, for example a lot of investment in Croatian ports and we hear, obviously, that the Chinese are buying Piraeus and other Greek ports. Also, the corridor connecting Asia and the East with Europe is also, let me say, under pressure because of the very difficult situation in Ukraine. So we see the north-south corridor to other corridors which are now heavily in difficulties. This is also the new deal as regards the logistics map of Europe because we would then be in the position to build the triangle between the North Sea, Baltic Sea, and Adriatic. So we believe it is all coming to the market.”

Truckers

But in one way your real competitor in Poland and Central Europe is road haulage. Can you realistically eat into their market share as well?

“Absolutely, this is definitely the name of the game we are going to play in the coming years as the infrastructure improves in Poland. In Poland, roughly 80 percent of goods are transported by trucks. That is basically due to the improvement of road infrastructure in Poland and the fact that there are no entry barriers to truckers compared with the rail business. Infrastructure will certainly support the growth of the rail business in Central and Eastern Europe.”

Are there similar acquisition opportunities in other countries?

The level of containerisation in Poland and Central Europe is six times lower than average in the European Union

“We are looking at different targets in different countries. We are in a position to consolidate the market. We have the financial strength to do that and we have a lot of synergies that can be offered due to the number of locos and wagons that we possess today. The assets are not heavily leveraged so I believe there is a lot of capacity for the consolidation of the market and we are looking at different targets.”

Actually, Purwin admits that other acquisition talks are ongoing but is reluctant to say anything more on that. Meanwhile the Czech train drivers union warned this week that company ČD Cargo is preparing to cut around 560 jobs from the current workforce of around 7,300. It warns in an open letter to the transport minister that cargo volume is down in the first quarter of the year and that the financial figures are once again in the red. ČD Cargo says no final decision has been taken.