Rising Freight Volumes Encouraging Start to Rail Turn-Around

Media release

1 March, 2011

Rising Freight Volumes An Encouraging Start to Rail Turn-Around

Rising freight revenue in the first six months of the 2010-11 financial year has enabled KiwiRail to make an encouraging start in its quest to create a business capable of paying its way, said Chairman John Spencer.

He was commenting on the business’s financial results for the six months ended 31 December, 2010.

“Despite a comparatively flat economy and severe challenges posed by earthquakes, the business increased its operating revenue and most significantly, its operating profit before depreciation and grant income,” he said.

“This performance has been achieved on the back of strong growth in freight volumes and revenues, reflected in the overall growth in freight revenue of more than thirteen percent.”

KiwiRail has reported an increase in operating revenue of five percent on the corresponding six months, up from $310.4 million in 2009 to $326.1 million. In spite of the challenges encountered during the six months, operating expenses were held to an increase of only 0.3 percent over the 2009 figure.

Operating profit before depreciation and grant income (effectively EBITDA) of $43.3 million increased 66 percent over the comparable period in 2009-10.

“In the Board’s view, EBITDA is the most significant measure for the business’s core operations because it reflects the cash being generated by the business as a whole,” said Mr Spencer.

“The result represents a timely endorsement of the work being done as part of the Turnaround Plan to increase freight revenue by strengthening the rail ‘spine’ stretching the length of the country and improving service .”

Mr Spencer said depreciation of $137.7 million has a significant effect on creating a net deficit after tax of $117.6 million.

“The depreciation figure reflects the underlying valuations of our assets,” he said. “We are currently seeking to determine if a more realistic carrying value would be appropriate. “

Business unit results

Bulk, domestic and import-export freight, carried on the rail network and across Cook Strait on Interislander ferries, is the cornerstone of the KiwiRail business. Including the Interislander business, it generates more than sixty percent of revenue

Mr Spencer says that for a number of years, the volume of freight carried by rail has been static or declining. But in the first six months of the 2010 financial year bulk freight net tonne kilometres carried increased by almost 20 percent, import-export goods by more than 12 percent and domestic freight goods nine percent.

“An encouraging sign is the growth of domestic freight that has come from outside KiwiRail’s already established customer base. Growth of more than 200 percent in this traffic points to rail representing a more relevant and customer focused service than in the past.

“Growing the base of domestic customers is fundamental to achieving the objectives of the 10-year Turnaround Plan,” he said.

Bulk freight revenue was up almost 13 percent, Import-export, 12 percent and Domestic, the freight source critical to the Turnaround Plan, up almost 16 percent.

While other parts of the business did not manage growth on the same scale, they still improved on their performance in the previous year. The exception was long distance passenger services, which suffered from adverse trading conditions and service disruptions.

Interislander increased its overall revenue for the six months by four percent on last year. Commercial vehicle traffic increased by 16 percent, reflecting the increased freight volumes moving south after the initial Canterbury earthquake.

However, passenger traffic reduced by six percent, a likely consequence of tight economic conditions, fewer people travelling, increased competition on Cook Strait and resulting competition for passengers. These challenges are likely to apply for the remainder of the financial year.

Mr Spencer said the Wellington metro business appears to be stabilising passenger volumes. Passenger volumes for the six months were only down one percent, a significant improvement on the previous six months.

Outlook

Mr Spencer said the results achieved during the first half of the financial year are consistent with a slowly improving economy and the benefits efficient rail operations can provide to freight forwarders.

“Overall economic growth in New Zealand appears to be slowing, This is reflected in trading results for the early months of the second half year.

“In the second half of the financial year, we face a number of challenges. A dry spring and early summer has reduced milk volumes we have been carrying and depressed retail trade is affecting domestic volumes.

“We will have the ferry Aratere out of service for four months while an extension is fitted and we are still working on finding a substitute.”

He said that given the inter-relationship between economic conditions and freight volumes, business activity may not be as strong in the remaining months of the year as it was during first six months. This will be exacerbated by the reduction in coal and freight volumes as a result of the tragic earthquake in Christchurch.

ENDS

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