Pepy sets himself a tough challenge at SNCF

Guillaume Pepy, who took over earlier this year as president and CEO of French National Railways (SNCF), has launched an ambitious five-year plan called Destination 2012 to increase turnover by 50% and double SNCF’s operating profit, as David Briginshaw reports from France.

PEPY is a man on a mission: he wants to take SNCF to a new level of performance so that the railway can grasp the opportunities for real growth made possible by soaring fuel prices and the urgent need to reduce CO2 emissions. Pepy wants SNCF to be bigger, more resistant to external shocks, and more autonomous by being much faster at improving its offer to customers, reducing its costs and innovating.

“We are facing two crises at the same time: energy and the environment,” says Pepy. “If we can accelerate our internal transformation we have a great future. But we face two major difficulties: the capacity of the network and the mentality of people within SNCF.

“The renaissance of rail transport is already underway, and we have a boom on SNCF, which is not always easy to manage,” says Pepy. “We have ‘traffic jams’ on the railway - we need more paths which means more investment from French Railway Network (RFF). It is not a question of safety or speed, but of capacity.”

Regarding the second difficulty, Pepy says SNCF employees have faced years of what he describes as “internal recession” where staff constantly faced questions regarding their future with the threat of redundancy often hanging over them, which is hardly the best motivator.

Entrenched working practices coupled with very strong unions make Pepy’s task of trying to change the mentality of the workforce a major challenge. However, there is one thing in his favour, as he points out. “SNCF has 220,000 staff, but 35% of them were hired less than six or seven years ago. So we have a very young workforce, and our growth project is very motivating for them.”

SNCF’s rapidly-improving performance is also working in Pepy’s favour. Last year, turnover grew by 8% to Euros 23.7 billion, and earnings before interest and tax (EBIT) jumped 15% to Euros 994 million. SNCF’s net result passed the symbolic figure of Euros 1 billion for the first time. This is the fourth successive year that SNCF has made a profit, and SNCF’s debt was at an historic low of Euros 4.5 billion.

Nevertheless, Pepy’s objective of increasing turnover by 50% to Euros 36 billion by 2012 and doubling the profit to Euros 2 billion is still a major challenge. “Our income must increase twice as fast as our costs for financing our development,” says Pepy.

“My personal challenge is: are we going to be able to meet these challenges? We face several risks, such as having technical problems like poor punctuality causing trains to miss their paths, and taking too long to buy new trains and improve the tracks. Are we able to have more flexibility in the system to get the best out of the resources available? But if there is a clear view of the future, then it will be easier to get people to change, which is why I want them to focus on growth.”

Pepy wants to see new methods of working coupled with investment to improve productivity. He wants everyone in SNCF to be focused on quality and cost. The decision-making process must be much shorter. “The key word will be adaptability to our competitors and our customers,” he says. Pepy points to the poor utilisation of rolling stock as an example of how SNCF could improve its performance. “We have 400 trains today that are only in service for an average of 7h 16min per day.” This represents a huge waste of resources. If the trains were in service for longer each day, they could be deployed more effectively to increase capacity where demand is growing. SNCF’s network of locally-funded Regional Express Trains (TER) has seen a 60% growth in traffic in the last 10 years to reach 270 million passengers in 2007. The TER network faces a quadrupling of demand by 2030, so will clearly need more trains.

SNCF’s improving financial performance is allowing it to use its own resources to invest for the future. “This is without precedent,” says Pepy. SNCF will invest a record Euros 2.5 billion this year, supplemented by a further Euros 1.5 billion from the regional governments. “In 2008-09, we will order 200 TGVs, 1800 TER trains, and close to 200 locomotives for infrastructure operations or European freight traffic.”

SNCF Fret, the railfreight division, has been the railway’s Achilles heel for far too long. A succession of managers battled in vain to stem the huge losses being racked up. However, there are now signs that the worst may be over, as SNCF cut the operating loss from Euros 228 million in 2006 to Euros 186 million last year.

A lot is riding on the recent acquisition of Géodis, the French international freight forwarder and logistics group. The purchase makes SNCF one of the top five international freight transport and logistics operators. Géodis has an annual turnover of Euros 4.8 billion which boosts the combined SNCF Fret-Géodis turnover to Euros 7.7 billion.

“The acquisition of Géodis makes freight our number one activity,” says Pepy. “Straight away, it gives us a critical mass, especially for the industrial groups and distribution companies in France. It also gives us a new face to our clients - we can accompany them around the world.”

Turning to high-speed rail, Pepy wants SNCF to be “the uncontested champion in popular and innovative very high-speed rail transport in competition with other operators.” He says this can be achieved by differentiating SNCF’s services from those of its competitors to ensure that people choose to travel by TGV. Air France-KLM, Europe’s largest airline, is in discussion with Veolia about entering the high-speed rail business with a view to replacing short-haul flights with high- speed trains, and Pepy says SNCF must fight back by inventing new services. “Nothing must be taboo,” he says. “We must cut the grass under the feet of our competitors.” SNCF will launch a project next month to enable passengers and the public to have their say in inventing the TGV service of tomorrow.

As far as regional and commuter services are concerned, Pepy describes the situation as very brutal. “The local authorities are pressing very strongly for growth. We have to create a new generation of public transport for daily travel, accessible to all, reliable, continuous, modern like TGV, and with an excellent quality to price ratio.”

Turning to stations, Pepy wants to convert them into multimodal centres par excellence. They should be open to all modes of transport and offer a good range of services.

Pepy also wants SNCF to become even more international than it is today. And it is easy to see why: international business already accounts for 25% of SNCF’s activity but 50% of its growth.

Pepy believes innovation is vital to SNCF’s future success. One simple, but effective innovation will be introduced in the autumn. Instead of only announcing when trains are delayed, SNCF will also announce on-time arrivals. “It is up to us to value our performance,” says Pepy. Several freight initiatives will also be launched soon:
• a high-speed courier service in cooperation with the French Post Office in 2009
• long-distance freight trains to eastern Europe and Asia
• a high-speed express freight service with Géodis and Federal Express, and
• intermodal freight trains serving the ports with Maersk CMA-CGM in 2009.

Pepy asks rhetorically why such initiatives and changes have not been implemented until now. He responds with three reasons: “because we weren’t ready, we didn’t have the means, and also perhaps because the need for public transport and rail was not as vital as it is today with oil at $US 140 a barrel, and ecological imperatives facing the whole population.” The government is also backing rail more strongly than in the past with its new Grenelle environment bill that will see a huge expansion of the rail network especially for high-speed and in urban areas.

But now that we are faced with this revolution, Pepy says he will not wait only to see his competitors take his customers. “I will not accept this,” he affirms.