Can KiwiRail Turnaround?

in Featured General Top Debate Trains by Jon C — February 7, 2011 at 12:00 am | 6 comments

So how is KiwiRail’s so-called Turnaround Plan progressing, seven months on from when it was announced and as another Government Budget looms?

It’s crucial to the future of rail in New Zealand for it to be successful.

After years of neglect by both National and Labour governments to the rail network and the possibilites of growth in freight, the present Government has given what feels like a last gasp to push oxygen into the network, make it run on more commercial lines and allow for promotion of rail freight traffic to supplement that carried by the dominate roading business.

If the Plan fails, it’s hard to see how governments in future will try again and probably only when an oil crisis forces a re-thinking. By then, it’s going to cost millions to re-juvenate what will have been lost including in closed lines.

In a recent newsletter to staff, KiwiRail CEO Jim Quinn says the Government has given rail a future - but “while it’s a ten year plan, we have to make real progress over the next two to three years. If we can’t do that, we’ll struggle to catch up and, more importantly, lose the confidence of our shareholder.”

That is the danger. There are no doubt a few in National who are waiting to see it fail as they do not have their hearts in the belief rail can pull freight customers across and are close to the roading lobby. And if the economic difficulties continue, it won’t be hard to see the government pulling the plug early. It’s a 10 year plan - not a 10- year commitment as it’s dependent on signs things are moving upwards for it to continue.

“The good news is that in the year to date, our revenue  is up almost six percent (5.8%) on the same period  last year. This has been led by 13 percent growth in  freight revenue.  October was a particularly good month for freight – revenue was up 16 percent on the October 2009. The  other business units have played their own part. We can all be pleased with the performance and it says  a great deal for the way everybody has embraced the need to improve our service levels.

“But we still have some way to go.

“Year to date, we are 2 percent behind our budget. More  good news here, we were 2 percent ahead of budget  in October, but we need to keep the momentum going  and we can only do this by meeting our customers’  needs day after day, week after week and month after  month. While it’s great to see our revenue rising, the important  measure for us is EBITDA. This translates into earnings  before interest, depreciation and amortisation but in simple terms it’s a measure of the cash we generate. It’s a critical measure as we look to maintain the  investment needed to deliver the Turnaround Plan.

“There’s good and not so good news again. We are 41 percent ahead of our EBITDA performance at the same time last year and 17 percent ahead of last year for the October month.  As with the revenue figure, EBITDA reflects the lift in  freight revenue that’s come from all three sections of the business and the work being done in the other business units.Just as with the revenue figure, we must not get carried away. Our EBITDA figure is13 percent behind budget for the year to date – so we still have a challenge ahead of us.”

But a fortnight ago, things weren’t so rosy:

“We’ve just passed the half way mark in the current  financial year. The good news is that revenues are close to budget – and so is our EBITDA figure. You will recall that in simple terms it’s a measure of the cash we generate. It’s a critical measure as we look to maintain the investment needed to deliver the Turnaround Plan.

“The not-so-good news is that revenues for December didn’t hit the heights we’d hoped for. Looking ahead, the New Zealand economy generally looks flat.

“That means we can’t rely on rising economic activity handing us revenue growth on a plate. It’s something we’re going to have to earn by improving the quality of service we offer our customers and being aggressive about identifying opportunities. At business peaks, we’ve been stretched for wagons, locomotives and the availability of locomotive engineers. We can look forward to greater capacity as the year unfolds.”

Train arrives at Wiri Port |POA

In this business, as Queenslanders have found to their horror, good news can change to bad quickly.

A few days he quoted the old saying, “the best laid plans of mice and men”.

Referring to the recent Queensland floods which has disrupted that state’s rail links and to our own North Island weather problems which has seen rail damage, he says:

“When it comes to our Turnaround Plan, the weather and nature in general is the “wild card” in the pack. It has the potential to interfere with our two major goals for the year – delivering growth in revenue and delivering the Turnaround Plan projects, ideally exceeding expectations of what was to be delivered.”

Recent cyclone damage on the tracks

Significantly, Mr Quinn has also warned staff not to get “distracted” by debate about privatisation in election year.

“It is election year and the level of noise and debate will rise. This week we’ve seen the Government signalling its intention to seek private sector investment in some SOEs. The Prime Minister has spelled out clearly that these are energy companies – the state-owned power companies and Solid Energy.Our job is to ignore the noise, stay focused on the Turnaround Plan and deliver to our customers the dazzling service that will keep them coming back.”

KiwiRail ‘s $4.6b Turnaround Plan is designed to see the rail freight business become sustainable within a decade by getting it to a point where it funds its costs solely from customer revenue,” according to Minister Joyce in announcing it in May of last year. The Government committed in principle to a total package of $750 million over  three years, with final decisions on funding subject to individual business cases.The Minister said then:

“In fact, the lion’s share of the $4.6 billion will come from the business itself. The government investment reflects the fact the amount of freight being moved on New Zealand’s transport network will double by 2040 and all transport modes need to become more efficient to meet this demand. The government is committed to retaining and improving the rail freight network and is providing KiwiRail the capital investment to demonstrate it can become commercially viable and make a valuable contribution to the New Zealand economy.
“To do this, it will need to focus on the areas where it can increase revenue, become more efficient and carry more – primarily bulk and long distance freight.” Mr Joyce says stringent conditions for government funding will be set to make KiwiRail accountable to taxpayers.

“Funding, while committed in principle, will depend on meeting the government’s performance measures. Achieving this turnaround will be a challenging process and requires the support of every KiwiRail customer and employees.”

KiwiRail’s CEO said at the time that one of the central elements of the plan was the need to maintain a connected network rather than reverting to a series of ‘short lines’.

“We will review the minor lines and ultimately, unless they have an anchor customer or there is a compelling public good reason for them to stay open, they will be closed or moth-balled. The key to achieving the goals set out in the ‘turn-around plan’ we provided to Government before Christmas is growing traffic volumes and revenue. Rail already carries a third of all export goods and excels in moving heavy traffic.  We are confident that with improved infrastructure and rolling stock we can also carry more of the domestic goods that largely travel from Auckland, down the North Island to Christchurch and destinations in between.”

In this economic climate, businesses are putting off plans to expand and many are taking a conservative route of not changing tack, not be bold and not change existing supply chains.

It’s going to be hard to generate new freight revenue.

But the messages coming out of KiwiRail are one of determination to succeed and prove the stakeholder (the Government) was right to let KiwiRail throw everything at it.

Let’s hope it pays off.

Tags: KiwiRail Turnaround Plan