Infrastructure fund-owned Alpha Trains has performed well over recent years, led by expansion in its passenger train leasing arm. Growth has been fuelled by liberalisation of European rail markets, a process that is far from over.
When Arcus Infrastructure Partners, PSP Investments and AMP Capital bought into Alpha Trains as part of a consortium in the summer of 2008, some may have questioned whether the investment met the criteria of steady, secure returns usually associated with infrastructure.
Alpha was at the time mainly a lessor of locomotives for the European freight rail market, with a smaller proportion of revenue coming from the more dependable passenger market.
It was also something of an early mover, having been established in 1999 as the mainland European arm of UK rolling stock company Angel Trains to take advantage of EU plans to open up rail franchises to private companies, which are more likely than state operators to lease their trains rather than buy them.
Ten years later, the balance has shifted to passenger trains, which now account for two thirds of Alpha’s revenue, compared with a 60% to 40% split in favour of freight in 2008. It is now the largest privately-owned lessor of rolling stock in continental Europe.
Alpha, which operates in France, Belgium, the Netherlands, Denmark and Germany, has been a beneficiary of private passenger train operators taking market share from state rail companies as EU liberalisation opens up the rail market, particularly in Germany, Alpha’s core market.
Since 2008, the share of non-Deutsche Bahn operators in the German regional passenger rail franchise has risen from less than 20% to around 33% in 2016. Alpha is the main lessor to these mostly non-state-owned operators.
Although some of these operators are partly state-owned, such as Ferrovie dello Stato Italiane-backed Netinera, like private rail companies these operators tend to prefer leasing trains when operating outside their home countries due to difficulties in moving trains to different countries.
The passenger rail market in Alpha’s core market Germany has grown steadily by around 3% a year since 2005 by revenue. Today, Germany accounts for more than 90% of Alpha’s passenger lease revenue and around a third of freight lease revenue.
Alpha has a dominant share of the privately owned continental European passenger leasing fleet. In 2014 it estimated it had 65% of the market, a figure that increased substantially when it bought 89 trains from its then biggest competitor Societe Generale in 2016. Alpha’s current competitors include Macquarie Rail and Beacon Rail Leasing. In freight, Alpha believes it has around a quarter of the fleet of leased locomotives in Europe, with SNCF subsidiary Akiem, Mitsui & Co’s MRCE and Railpool among its rivals.
Alpha’s passenger rail business is also active in a specific area – regional trains. It does not operate in the market for long-distance, high-speed passenger trains, which tend to be very specialised and difficult to re-lease for use on different lines. In Alpha’s main passenger market Germany, the 16 states, known as Landers, delegate passenger rail concession tenders to 27 Public Transport Authorities, in contrast to being awarded by central government, as happens in the UK and other countries.
Alpha’s focus on the passenger market makes sense. The passenger train leasing business benefits from longer contracts of around 10 to 15 years, compared with anything from one to 10 years in freight. Leasing contracts average around 12 years in passenger trains and around four to five years in freight locomotives, a spokesperson for Alpha said.
Passenger traffic is also less vulnerable to economic downturns because, while people generally continue to travel in economic downturns, freight traffic is more tied to economic conditions. Another advantage of passenger rail over freight for rolling stock lessors is that it is supported by government subsidies, which also helps to shield it from economic fluctuations.
“Infrastucture investors like regulated assets because it makes them more predictable,” said Charles Ford, a counsel at Hogan Lovells.
Alpha’s growth in the passenger market appears to have paid dividends. Alpha’s earnings and revenue have soared since Arcus bought into Alpha in 2008, despite the investment having been made not long before the collapse of the investment bank Lehman Brothers triggered the financial crisis. Inframation understands that Arcus’s returns since investment are in the mid-teens. Arcus owns 51.1% of Alpha, Canadian pension investment manager PSP Investments 28% and Australia’s AMP Capital 20.9%.
Annual earnings before interest, depreciation and amortization have risen from around EUR 60m in 2008 to pro-forma Ebitda of EUR 198m in 2016. Although this increase has largely been due to acquisitions such as the Societe Generale purchase in 2016 and the procurement of new fleets, the rise in Ebitda margins from around 75% in 2008 to 90% today demonstrates Alpha’s ability to lift revenue at a greater pace than costs by achieving economies of scale.
Ebitda margin “could continue to increase with additional assets acquired with very little additional costs to manage them,” a spokesperson for Alpha said.
Freight has been a less steady market than passenger trains for Alpha in recent years.
Following a period of relatively steady growth, driven by the liberalization of the sector in the early 2000s, the European freight market experienced a downturn in 2009 in the wake of the global financial crisis, followed by a recovery from 2010 that stalled in 2012. Transport consultancy SCI Verkehr predicted in 2014 that the European rail freight market would grow by 1.3% a year up to 2020.
Despite the increasing tilt towards passengers, freight remains an important area for Alpha, particularly outside Germany. Unlike companies such as VTG, which are in the freight wagon business, Alpha leases the locomotives that tow the wagons. This means Alpha’s freight business is less vulnerable to economic downturns than companies that are in the wagon leasing business, which in a sense resemble the volatile shipping business more than core infrastructure.
Freight wagon leasing is more vulnerable to economic conditions than locomotives because, to use a single example, the size of a goods order might be reduced, resulting in fewer wagons being needed, but unless the order is cancelled, the locomotive to tow the wagons will still be needed.
Despite Arcus having owned Alpha for a decade, there is still potentially a lot more growth potential left in the business.
Liberalisation is still ongoing; from 2019, in a process known as the Fourth Railway Package, EU countries will be obliged to grant access to domestic passenger services in all EU member states.
State-owned Deutsche Bahn still has most of the regional rail market in Germany; but as its market share continues to fall once the Fourth Railway Package comes into effect in 2019, Alpha and competing lessors are likely to win more business as private train companies seek to lease trains rather than buying them.
Liberalisation has an even longer way to go in countries such as France. While this is a positive for lessors such as Alpha because it means there is a greater share of the market up for grabs as state operator SNCF is replaced by private companies, it also signals the slow pace of change. The fourth railway package is more of a process than a sudden change so implementation could be slow in some countries.
“Whilst they liberalise, they protect,” said one industry observer.
Nevertheless, the fourth Railway Package targets 2023 as the date by which all tenders should be subject to competition.
A spokesperson for Alpha said that press commentary in France suggests it is keen to implement changes required by the Fourth Railway Package as early as possible.