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European Rail Operators Are On A Slow Train To Recovery

The COVID-19 pandemic is placing a huge strain on European rail travel as passengers continue to avoid usually crowded trains due to health concerns, public health advice, or ongoing travel restrictions. Over the lockdown months between March and May 2020, passenger traffic declined by more than 90% in many European countries, including Italy, France, and the U.K., and has only recovered partly since the travel restrictions were eased. Even after the pandemic, S&P Global Ratings expects work-from-home practices, virtual meetings for business and socializing, and the rise of online shopping to have a lasting impact on all types of rail travel.

International rail travel has been hit hardest and volumes remain low, while domestic rail travel volumes remain subdued and volatile. We have therefore updated our recovery scenario to a 45%-60% decline in passenger traffic in 2020, down from our previous forecast of up to a 35% decline (see table 1). We see only a slow recovery to 2019 levels, in many countries taking until 2023 at the earliest. We expect the recovery to differ from country to country because travel patterns vary by region and type of service, including regional, high-speed, freight, and cross-border services.

Although we assume that the recovery will be gradual, it might not occur in a linear fashion, but could ebb and flow. In the near term, we forecast that passenger numbers will remain as subdued in the upcoming winter months as in August and September. Passenger numbers could then remain below pre-pandemic levels in 2021 and 2022 considering capacity shortages due to social distancing; potential changes in commuter behavior; a slow return of customer confidence in public transport; and the uncertain macroeconomic backdrop and rising unemployment rates.

Downside risk to our forecast could result from further lockdowns affecting general mobility, and more stringent requirements to self-isolate after crossing borders to countries with high infection rates. At the same time, travel could rebound more quickly if a vaccine or effective treatment becomes widely available, which we assume will happen around mid-2021.

Table 1

Decline In The Average Number Of European Rail Passengers Per Year Compared To 2019 Levels
Year Revised Previous
2020 45%-60% Up to 35%
2021 20%-30% 10%-15%
2022 10%-20% 0%-5%
2023 0%-5% N/A
We use these average forecasts for European rail operators as the basis for our rail passenger traffic assumptions while analyzing individual companies, but we also incorporate variations around the central estimate, such as regional differences or an individual rail operator's business mix and passenger profile. N/A--Not applicable.

Chart 1


Rail's Environmentally Friendly Credentials Are A Benefit

While we see a potential risk of structural change in the demand for rail travel, we also factor in the importance of rail as an environmentally friendly mode of public transport. Rail travel is widely recognized as a solution to support the EU's target of net-zero emissions by 2050. It appeals to 16-29 year olds in particular as a means of lowering their carbon footprint when traveling, and therefore could recover faster in countries with populations who are conscious of climate change.

For example, the German government has pledged €11 billion in rail funding under the Climate Action Program, and covers 85% of Deutsche Bahn's capital expenditure (capex) through investment grants. Germany's fiscal stimulus to mitigate the effects of the pandemic on its society and economy includes VAT reductions on long-distance rail tickets, which will make rail travel even more affordable.

The strong rail passenger growth in Germany and the Nordic countries in the past five years highlights the long-term importance of rail travel to these markets. In France, the environmental conditions attached to Air France's state-aid rescue package require the French flagship carrier to cut carbon dioxide emissions on long- and medium-haul routes by 50% by 2030. This could stimulate demand for SNCF's long-distance rail services.

The Recovery Will Be Uneven Across Countries And Services

The wide variety in travel patterns across countries, regions, and types of service will continue to influence the recovery. For instance, countries that were more successful in controlling the virus, such as Denmark, or less draconian in terms of restrictions, such as Sweden, are witnessing a strong rail traffic rebound. Similarly, the early lifting of restrictions in Germany has led to rail passengers on both regional and high-speed services returning in line with our earlier expectations.

In emerging markets, such as Russia and the Commonwealth of Independent States, the appeal of rail travel remains strong, largely because train tickets are more affordable than airline tickets. On the other hand, commuter traffic is more difficult to forecast and is still relatively low in the Netherlands and the U.K., where passenger numbers are down to about 35%-40% of pre-pandemic levels.

Cross-border travel

This could be affected just as much as aviation, and we use similar assumptions, including, a 60%-70% drop in rail passenger traffic in 2020 compared with 2019 (see: "From Bad To Worse: Global Air Traffic To Drop 60%-70% In 2020," published Aug. 12, 2020). The uncertainty around when quarantines will be lifted and cross-border traffic will rebound explains why Eurostar, which operates across the Channel between the U.K. and France, decided not to reserve any train paths in advance on the U.K. high-speed network from mid-December 2020.

Domestic and leisure travel

This is returning at a faster pace, evident from the widespread use of rail for summer holidays in Germany, France, and Russia. However, revenues, rather than passenger numbers, are more important to rail operators, so products subsidized by the government, such as season tickets and student rail cards, could help alleviate the financial impact of the pandemic. Furthermore, many regional services have contracts under which the regions or municipalities cover the revenue risk. For example, about 60% of the revenue from regional rail services in Italy and France stems from ongoing payments by regions that are unaffected by the reductions in passenger traffic.

A rebound in travel by certain groups, such as university students and office workers, is difficult to forecast. For instance, universities in the Netherlands can use only 25% of their classroom capacity and U.K. universities are using a blended (partially online) method of teaching, raising questions about how many students will need their rail cards to travel to the classroom. For office workers, remote-working practices could last much longer than the restrictions on travel. According to the Voice of the Enterprise, Digital Pulse Coronavirus Flash Survey October 2020, by 451 Research (S&P Global Market Intelligence's emerging technology research unit), 64% of respondents expect a significant increase in remote working to be a permanent change to their working habits, and about 44% of respondents expect to be operating under altered work conditions until sometime in 2021.

Rail freight

This held up better than passenger rail during the lockdown months, but its recovery remains contingent on economic conditions, industrial production, and the energy transition. We forecast up to 10% lower rail freight volumes in 2020. To date, the performance in key markets such as Russia is relatively positive, with a 4.4% drop year on year to August 2020.

The Pattern Of Recovery Is Highly Uncertain

It is impossible to predict the pace, extent, and timing of the recovery in rail travel with any certainty, with a number of different factors having an influence (see chart 2). We will likely continue to revisit our assumptions as the pandemic continues to evolve.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Chart 2


Government Support Is Critical In Limiting The Rating Impact

Weaker passenger numbers put pressure on European rail operators' underlying (stand-alone) credit metrics and could result in negative rating actions without extraordinary government support. Even moderate revenue shortfalls can lead to a significant worsening in financial credit ratios. This is because European rail operators have relatively high operating leverage compared to other transport infrastructure issuers, and are either not able or not allowed to easily scale down services to respond to falling demand.

Also impinging on European rail operators' credit quality is their higher cash burn than other badly affected transport infrastructure groups, such as airports. This is because rail operators have limited leeway to reduce capital investments, particularly track managers. Governments continue to mandate rail companies to invest in the resilience and sustainability of rail travel in order to progress toward their environmental goals, even during the pandemic.

Partly alleviating the impact on European rail operators' credit ratios in 2020 is capex deferral. A portion of contracted train deliveries will be delayed due to factory closures and disruptions in global procurement, and a portion might be cancelled altogether due to lower passenger traffic.

To date, government support has taken the following forms:

Temporary measures

These remain crucial in alleviating rail operators' high fixed costs and take the form of employee furlough schemes, and in certain countries, like Italy, reductions in track access charges.

Investment grants and subsidies

Historically, these have been high in the European rail sector to plug gaps in cash flows when losses have occurred. Germany has already pledged to cover part of Deutsche Bahn's losses and invest €2.6 billion in regional rail services and infrastructure. Availability payments--which compensate train operators for providing a certain number of services regardless of how many people use them--will cover 93% of rail operators' costs in 2020 in the Netherlands. The French government has announced a €4.7 billion support package to the rail sector, while the Italian government has approved a set of extraordinary subsidies in favor of rail transportation companies (€1.19 billion in 2020-2034) and infrastructure manager Rete Ferroviaria Italiana (€270 million in 2020).

Equity injections from parent companies

Most rail incumbents are directly or indirectly state-owned. For example, Russian Railways has raised perpetual bonds and will likely downstream some to its subsidiary Federal Passenger Company as equity.

Subsidized funding

Such funding comes from government-owned banks in the form of subsidized loans, or state guarantees on loans from export agencies.

The Pandemic Has Fast-Tracked Rail Reform In The U.K.

We think that the pandemic will delay the nascent liberalization of the rail sector in most of Europe, and increase governments' role. The U.K. rail industry, which was based on franchises for passenger rail services, has been a model for liberalization in other European markets. However, the U.K. government's Department for Transport (DfT) recently extended its emergency funding agreements for the U.K. rail industry to address continuing weak demand for rail travel as a result of the pandemic. The government further announced that these temporary agreements, under which the DfT has taken over passenger volume risk, will pave the way to a new system. Indeed, the U.K.'s rail franchising system will be permanently abolished, 24 years after it was introduced and replaced government-owned British Rail. A replacement system will be announced in due course, possibly with a renewed partnership between the public and private sectors, but the reform is not yet detailed.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Tania Tsoneva, CFA, Dublin +353 1 568 0611;
Secondary Contacts:Stefania Belisario, Madrid +34 91 423 3193;
Anna Brusinets, Moscow +7 (495) 7834060;
Juliana C Gallo, London (44) 20-7176-3612;
Rachel J Gerrish, CA, London (44) 20-7176-6680;
Pablo F Lutereau, Madrid 34 (914) 233204;
Additional Contact:Industrial Ratings Europe;

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