By NZPA
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Friday 26th July 2002 |
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The market has been calling for Tranz Rail to provide information about its balance sheet and intentions for some time, and its shrinking share price -- falling to record lows last week -- demonstrated the dissatisfaction with its piecemeal response.
On Tuesday the rail operator briefed the market about writedowns amounting to about $170 million, its expectations of a $26 million net profit this year and an operating profit of $55.8 million next year, and details about ongoing restructuring to turn Tranz Rail into a distribution and freight-focused operation.
Tranz Rail chief executive Michael Beard said at Tuesday's presentation the restructuring would be a "solid three-year job".
"We've been under this change process for the last two years, and I have to be honest and say it has sometimes been more difficult and challenging than we'd anticipated."
He promised similar levels of disclosure into the future.
Analysts may have been impressed with the unprecedented transparency, and Tranz Rail's shares rebounded somewhat this week, but international credit rating agencies Standard & Poor's and Moody's reacted with a swift warning to the company.
Although it has a monopoly in New Zealand's rail freight market, S&P warned Tranz Rail's ratings could go down by one notch as confidence dwindled in the company's financial performance, particularly from the last 12 to 18 months.
Net profit plunged last year to $5.6 million from $46.9 million in 2000, while revenue per tonne kilometre fell 3.3 percent. Operating costs rose by 15 percent, largely related to restructuring.
Intense road competition could hinder the company's expectations of recouping market share and revenue next year.
Tranz Rail has been struggling to meet competition head on since the 1980s when the government deregulated all transport while it was Railways Corporation.
And Tranz Rail's largest freight customers believe the viability of freighting goods by rail around the country is nearing the end of the line.
Members of the newly formed Rail Freight User's Group, including Fletcher Forests and coal company Solid Energy, feel they have been faced with a deteriorating level of service and ever-increasing prices in the last few years.
Its statements this week coincide with some members' robust ongoing contract negotiations with Tranz Rail.
The group, which speaks for more than half the rail freight users in the country, says it is not "anti Tranz Rail".
However, it has warned that if a significant number of freight customers decide it's too hard to persevere with rail, Tranz Rail will be stuck with maintaining the track with less revenue. Freight provides about three-quarters of the rail operator's income.
"For the users and for Tranz Rail, it looks as though rail freight is just going to deteriorate, and when it happens it will probably happen with a rush," spokesman Cedric Allen says.
"Some of us have been presented with price increases of more than 50 percent on the renewal of contracts, and our members feel that rail freight in this country is right on the edge of simply becoming uneconomic, for them and for the country."
The market capitalisation of the company is only about $270 million, yet it carries the national rail network on its books at $340 million.
Members feel they would get much keener pricing if Tranz Rail allowed other rail operators access to the network.
Michael Beard agrees Tranz Rail had priced itself, deliberately, out of the forestry freight market because it would require considerably more capital into rolling stock.
However, a new operating format would allow the company to win back significant amounts of freight, he says.
Some suggestions from the freight group include persuading Tranz Rail to open up access to other operators at a cost; a government buy-back of the rail network; and ensuring road and rail are treated the same.
There are questions about whether road users are paying their full operating costs. However, if the Government decides to fall in line with the Kyoto protocol, costs for trucking will rise.
Tranz Rail has put in four applications for access to a $30 million government fund for alternatives to roading.
The company pays only $1 a year rental for the 19,000ha of land it leased for 80 years from the Government, but was allowed to buy the rail network. In other countries the state has held onto the network and leased it to rail operators, thus retaining some control over the rail industry.
Director of the Institute for the study of Competition and Regulation, Lew Evans, warned it was "distinctly possible" Tranz Rail would become unviable if it does not continue adapting.
Indications were that Tranz Rail could not meet the cost of replacing, over time, its equipment and tracks, estimated at $4.6 billion.
"If it can't meet those, that's a real indication it's struggling in economic terms ... so restructuring and adaptation is going to be essential," Prof Evans said.
Tranz Rail is restructuring to strip it to the core businesses of freight forwarding and ferry operations, turning away from passenger services.
Prof Evans' 1999 study for Treasury on the privatisation of New Zealand Rail concluded the Government and taxpayers benefited from rail ownership moving into private hands.
However, rail itself was not meeting its costs, despite huge gains in productivity.
"New Zealand has a very costly network, and railways are only profitable anywhere in the world as a rule where you have very long hauls and you have products like coal to be shipped very long distances."
In New Zealand, freight is currently moved more efficiently on road or by shipping, which cuts into the length of rail runs.
"The only caveat to this is are we pricing roads properly, whether road user charges are covering the cost of the roading. If that's the case, it's a proper level playing field and rail's performing in that environment."
Prof Evans said rail competition was not the answer, given that Tranz Rail has every incentive to wring a profit out of the tracks.
Simon Botherway of Brook Asset Management said the level of disclosure this week was unusual, "and particularly so for someone like Tranz Rail".
Mr Botherway also warned that the company did not appear to be covering the cost of replacement of its largest asset.
"Saying the replacement cost of the track is $4.6 billion, and it's got a 50-year economic life, you would assume we're looking at somewhere around $90 million capital expenditure (capex) for the track alone every year.
"They've said their capex will be $50 million to 60 million, for the entire business. There are a few aspects that are difficult to reconcile."
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