Successfully overcoming organisational and operational challenges

Vincenzo Soprano is Chief Executive Officer of Trenitalia – the Italian Railway Transport company, and wholly owned subsidiary of Ferrovie dello Stato SpA since September 2006. Speaking for Global Railway Review, Mr. Soprano describes the situation of Trenitalia and general railway transport in Italy.

Closing the 2006 financial year with losses of €2 billion, Trenitalia was in a highly critical situation and required immediate structural intervention.

We have revised the organisational model and introduced objectives of quality and efficiency for the National/International Passenger, Regional and Cargo Divisions, bringing responsibility, management and operational criteria back into each single business unit.

At the same time, we have analysed our market, separating the segments where both passenger and freight service may be undertaken profitably from those where the service may be provided only with public subsidies. We have introduced the distinction between ‘market service’ and ‘social service’ and have stressed that the social service is governed by a public contract – eventually resulting from a tender – to compensate the imbalance between income and expenditure; otherwise it may not be provided.

We have contributed to correctly revising the responsibilities. Trenitalia provides the service in the terms set forth in the service contracts, the State and the Regions define the quantity and characteristics of the service and (for the global and regional services) the tariffs. In order to ensure maximum transparency, in 2008, we have provided for the first time the ‘services catalogue’, showing a separate price for the different type of trains, the possible compositions and the accessory services. This means that the relationship between the contracting bodies (Region/State) and suppliers becomes more transparent and the  price of the service is the result of the choices made.

We have rationalised the services offered, adjusting it to the real demand;  in order to guarantee an increase of quality in the service we concentrated  on maintenance, punctuality, cleaning  and information.

The results for 2007 have justified our choices. There has been a reverse in the negative trend, with a substantial fall in operating costs of €223 million and  an improvement of €595 million in income. Our Gross Operating Margin  has improved by €818 million and net losses have been reduced by approximately 70%.

All the business units have shown improvements. In the freight sector, we have extensively revised the organisation and the supply network, which had been unchanged since the early 20th century, when there were neither motorways nor road transport: over 800 freight collection points on the entire network, but with 80% of the traffic concentrated in 50% of the terminals.

With the attribution of the cost of the service to the single cycle of trains, we have created a new network based on 10 major terminals, each linked on a hub & spoke basis to about a dozen satellites, thus defining a more efficient and competitive network of services linked with other forms of transport. This new structure has resulted in the lengthening of average journeys, higher average loads and lower fixed costs.

We have improved the punctuality and regularity of the service and revised pricing, increasing some market segments prices by approximately 15% without there being any negative effects on volumes; we have changed the relationship with clients, introducing criteria of customer retention and partnership. In some cases, we have introduced co-investment, substantially tripling the order portfolio.

In particular, I would like to recall the development of international freight traffic, above all thanks to the highly positive results through the subsidiary TXLogistik, which is recording 2-figure growth rates in Europe with performance rates of absolute excellence.

In the medium and long distance passenger sector, we have revised the supply system, with a greater specialisation of the various types of train, and greater correlation between the service, rolling stock and the characteristics of the line. We have considerably increased our services available in the ES/HS sector in the areas and lines with the highest demand, with the start-up of new services that are highly competitive with respect to other means of transport.

As for pricing, we have further consolidated our revenue management system and resumed a process of gradual adjustment of tariffs to European averages, improving the quality of the service with an increase in punctuality of approximately 3% in two years, with values now exceeding 90%.

The investment plans for this  division are particularly substantial  and have the aim of expanding the supply side in relation to the activation of the new High Speed stretches due to be completed by 2009. The overall amount of the plan involves €2 billion for the purchase of new Etr 600 high-speed  trains and 50 new trains for the High Speed lines.

Positive results were also recorded in the security sector; thanks to an agreement with the Railway Police and to more targeted controls, we have achieved up to a 40% reduction of thefts on trains.

With regard to regional transport, once the resources required to guarantee the current services have been defined, we will negotiate with the regional authorities to find the best solutions for the new Service Contracts to be signed. These contracts shall have adequate conditions and duration suited for planning and investment.

As for punctuality, over 90% of the regional trains are now on time, also in this case with an improvement of about 3% in the past two years. There are still critical aspects at peak times and in the metropolitan areas, but with supply-side expansion provided for in the Business Plan, also these problems should be solved.

There remains the need to adjust the regional tariffs. On the basis of a comparison between our tariffs and those in Germany and France, in 2007, the average market revenue for regional transport in Italy was 3.6 euro cents per km, 7.4 cents in Germany and 11.6 cents in France. To this we should add the State subsidies per passenger-kilometre, amounting to 8.2 cents for FS, 10.4 cents in France and 11.8 cents in Germany. If we add these two items, the average revenue from the tariff and subsidies in Italy is half the amount of the other European countries considered.

This is not all: in France and Germany, trains for local transport  receive a considerable amount of funding from the local authorities. For example, for Ile de France alone, allocations totalled €4.7 billion.

In Italy, on the other hand, new investments must be repaid with the operating cash flow. A plan to increase the service has in any case been developed: in the period 2007-2011, we aim to achieve a 34% average increase in local traffic, with rates of up to 50% in the major cities, a gradual rise in revenue (from today’s 10.3 cents to 14.5 cents) and an investment of 6.4 billion for the purchase of new trains, of which 4.9 billion with self-financing.

With regard to cleaning, last  October we launched the operation “Objective: clean trains” involving new contract clauses with the firms undertaking this service, greater penalties and more controls.

In February, we undertook an audit, using an international certification firm; the result was a clear lack of compliance of the service provided with respect to contract conditions. We have therefore launched new European tenders to  make those positive changes demanded by our customers.

Our Business Plan defines a process of improvement and development, which are especially challenging, but I believe that the results of this first year have shown that railway personnel have the skills and resources to achieve any objective.