France - drink and dance the night away

[John Ashworth]

Mr High-speed Europe
Feb 21st 2008
From The Economist print edition

Guillaume Pepy, France's railway boss, is revitalising Europe's train
network

FROM April, passengers on an evening express train from Paris to
Biarritz, Nice or Marseille will be able to drink and dance the night
away rather than just slumber at 300kph (190mph). Special “iDnight”
carriages will be hooked up; there may even be onboard gambling.
Meanwhile on the double-decker versions of TGVs (trains à grande
vitesse) now on many routes, passengers will be able to choose between
“Zen” (quiet) and “Zap” (buzzing) carriages. Ideas like this bubbled
up when Guillaume Pepy, chief executive of SNCF, France's state-but-
not-staid railway, asked his executives to imagine what competitors
might do to lure customers away from Europe's sexiest trains, once the
tracks open up to competition in two years. Mr Pepy hopes such brio
will also land him the chairman's job any day now, otherwise he is
widely expected to go off and apply his talents elsewhere.

Typical French bosses are cool, sophisticated products of France's
elite universities. To be sure, Mr Pepy is a graduate of the Ecole
Nationale d'Administration, and started out as an elite civil servant
(a tax judge, no less) but he ran away to join the railway just as
TGVs were making it interesting. They were fast and prestigious; Mr
Pepy made them consistently profitable, too, and is now extending
their reach into Germany, Belgium and Britain. He is chairman of
Eurostar and founder of the Railteam alliance of eight railways that
plans to launch a seamless trans-European network at the end of the
year, with online bookings and co-ordinated timetables. Next, Mr Pepy
is preparing for 2010, when airlines and private train-operators such
as Italy's new NTV group will be allowed onto Europe's high-speed rail
network.

The French take pride in their TGVs, along with fine wines and haute
couture. But the high-speed trains made barely any profit for their
first 16 years. That changed in 1997 when Mr Pepy took charge,
introducing a dose of modern marketing and a yield-management system
from American Airlines to fill seats and take on the low-cost
airlines. It worked: sales and profits immediately started to rise.
Now 800 TGV services run each day, carrying over 200m passengers a
year, and 80% of seats are occupied. “We are the French low-cost
carrier,” Mr Pepy says. A ticket from Paris to Marseille now costs as
little as €22 ($32).

TGV accounts for only one-third of SNCF revenues, but its fat margins
lifted the railway to a profit of €695m in 2006, after fees paid to
RFF, the track owner, are taken into account. How do the TGVs make so
much money when so many railways struggle? Mr Pepy points out that a
double-decker TGV can make two round trips between Paris and the south
or west of France every day, carrying about a thousand passengers on
each leg. The combination of size and speed brings economies of scale,
boosted further by the route through Strasbourg to Germany opened last
summer, and the new high-speed Eurostar link to London.

French railways stand out in Europe not only because they manage to
turn a profit, but because they remain solidly in the public sector
while doing so. Instead of conflict between politicians and managers,
there is a clear division of responsibility. French towns and regions
now pay SNCF to run less glamorous local services or even extend TGV
services on slower lines into the depths of Brittany. Since the
regions pay, they, rather than the railway, decide where and when the
local trains run. This keeps the politicians off the backs of Mr Pepy
and Anne-Marie Idrac, his chairman. It also keeps politics out of the
railway, since no party would dream of privatising SNCF—sparing France
the agonies that Britain and Germany have faced over privatisation.
Mr Pepy is an unlikely man to be standing on the footplate. In
Germany, where Deutsche Bahn is roaring ahead with its express trains
and its global freight and logistics business, many managers came from
Lufthansa, bringing airline techniques. But Mr Pepy went straight from
the civil service to SNCF, where he was initially put in charge of
safety and labour relations. “Both were terrible at the time,” he
recalls. But a subsequent stint in the 1990s at the head of the
Sofres, a market-research and polling company, introduced him to
marketing. His new knowledge helped him transform the TGV service when
he returned to SNCF in 1997, and he was rewarded with the chief
executive's job in 2003. He then set about dismantling the fortress
mentality that had made French railways as famous for labour stoppages
as for speed. Since 1955 the government had tried to reform the train-
drivers' contracts which let them retire at 50 with a full pension. In
1995 President Jacques Chirac backed down after a three-week strike, a
critical defeat in his attempt to reform the economy. But last autumn
Mr Pepy, with the backing of the government, got the unions to do a
deal after an eight-day strike.

Circle the wagons

The TGVs are thriving, Mr Pepy is ready for an influx of new
competitors and huge sums are being spent to upgrade the dowdy old
commuter trains that serve Paris and other French cities. But not
everything at SNCF is steaming ahead. Its freight business is a
chronic lossmaker, hobbled by rigid labour practices that mean it
cannot compete with rivals such as EWS (from Britain) and Veolia (part
of a French conglomerate) which are already operating in France. EWS
has been bought by Deutsche Bahn, and Mr Pepy admits that “everybody
is talking to everybody” about further freight consolidation.

Big customers such as ArcelorMittal (steel) or Danone (food products)
want fast, pan-European freight services that do not stop at borders.
Mr Pepy dreams of new rail links that bypass city centres and allow
freight trains to roll through the night, offering a greener
alternative to long-distance lorries. But that would require
investment that the French government can ill afford—and shaking up
freight would threaten jobs, risking another conflict with the unions.

He has transformed passenger services, but it will not be easy for Mr
Pepy to pull off the same trick again.