As president and chief operating officer of France’s state-owned rail service, Société Nationale des Chemins de Fer Francais universally known as SNCF, he’s trying to keep it on the tracks through a wave of deregulation, a new official ‘green’ policy, militant rail unions, plus firm instructions from President Sarkozy to massively lift capital expenditure in the midst of collapsing revenue.
From January SNCF faced competition in passenger and freight services that will pose a whole new set of challenges for the president. Rolling strikes on inter-city and suburban routes, triggered by SNCF’s determination to cut costs to meet the competition, are on the horizon for much of the year. And the boss is in a public dispute with French rail network Reseau Ferre de France over rising charges for maintenance.
Taking everything together, 52 year-old Guillaume Pepy probably has the most difficult job of any SNCF chief executive in its 72-year history.
According to analysts, his biggest immediate problem is the slump in revenue in freight and in the TGVs, the flagship service of the SNCF. “For the first time in our history, TGV is seeing stagnating traffic and [so are] the daily commuter services,” Pepy pointed out in the latest annual report. Just one of the results of flat or declining patronage is a €1.1bn [$1.53bn] jump in debt to €7.1bn [$9.8bn] over last year.
In these straitened circumstances a chief executive would normally be expected to cut capital expenditure but, au contraire, the president expects him to help France spend its way out of the recession while at the same time turning SNCF into the most-admired rail company on the planet. In his formal letter of appointment to Pepy some two years ago, Sarkozy ordered him “to enter, body and soul, into the era of development and competition.”
Thus capital spending will jump by €2.2bn as SNCF strives to meet the president’s goal of reviving the nation as well as turning the SNCF into “a European and world leader in eco-mobility”.
“This commitment, especially at a time when SNCF has been hard hit by the crisis, puts our financial structure under pressure,” regrets the chief executive. Normally self-financing, SNCF’s spending will be under water by €500m this year because of these commitments.
Like the heads of most of France’s state-owned companies, Pepy is a high-ranking civil servant who built his career as a ministerial assistant in the Elysee Palace, official seat of government. However he has converted himself into a railway specialist through a series of increasingly responsible jobs. He ran the mainline services before moving up to take charge of all passenger services when he daringly introduced a lower-fare policy based on the airlines’ technique of yield management but which ran counter to the SNCF’s civil-service mentality. He won the top job in February 2008, not long before the current mayhem began.
Right now, one of his biggest worries is the decline in the fortunes of the high-speed trains, the blue-riband TGV service. A slump in the sale of higher-margin tickets has hit group profits to a disproportionate extent. Analysts say it’s inevitable that SNCF will this year have to slash the frequencies of loss-making or marginally profitable services. According to French business paper Les Echos, a whole new strategy for the TGV routes is in the mix for 2010: “The TGV has been the milk cow of SNCF and has underpinned its results. But this golden age is over.”
The statistics tell the TGV story. An eight percent jump in revenues in 2008 was rudely followed by a 1.4 percent fall in 2009 and this year SNCF forecasts an even deeper decline. The overall result will likely be a 50 percent collapse in TGV revenue within two years, not exactly what a rail boss wants from the flagship service.
And that was before the competition arrived. Officially, European rail networks opened to all-comers from January 1 and potential competitors aren’t taking too long to leave the station. An Italian-French consortium of Trenitalia, which already runs services in Netherlands and Germany, and Veolia Environnement, a water to transport conglomerate, are reportedly planning three TGV services by 2012.
Pas de probleme, insists Pepy. “We expected it,” he said. “We are prepared.” He adds that any competitor undercutting SNCF would “have to be very, very good.”
He appears to have help in the Elysee. Arguing that foreign train services must not profit at the expense of taxpayer-subsidised French rail, the government has ruled that international operators will be permitted to use the rail network only provided they don’t achieve more than half their turnover or volume from picking up and setting down passengers at French stations. Complaints have been made to the European Commission about this restriction.
The SNCF boss pins his hopes on Destination 2012, the long-term grand plan, and believes the crisis will knock the flab off the group. “It imposes on us the duty to deal with fundamental problems that were deferred because of the good years and the absence of competition,” he says.
In a virtual call-to-arms to SNCF staff, Pepy has told employees to brace themselves for a revolution. SNCF would “adjust capacity and service much faster to meet passenger demand”, it would “brutally attack running costs” while “chasing earnings instead of waiting for them”.
Even the freight division, long the Cinderella of SNCF, is in for a massive overhaul. Sarkozy wants to win the distribution industry over to a high-speed iron road and the government has already stockpiled €7bn in capital expenditure for a modernised freight system. Never mind that the freight arm has languished more or less permanently in the red and has defied six attempts in the last twelve years to sort it out.
Nothing if not an optimist, Guillaume Pepy sees the crisis as an opportunity. “We will emerge with a healthier and more robust business model, ready to seize the opportunities of high-speed projects around the world, of tomorrow’s green economy, of Grand Paris [the capital’s rail reforms],” he enthuses.
Clearly, there’s nothing like competition to shake things up.