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Monday, 15 January, 2001, 16:33 GMT
Railtrack under pressure
Graphic description of Railtrack's revenue stream
Railtrack's income and expenses
The challenges faced by Railtrack, the company that owns and operates the rail infrastructure in the UK, seem insurmountable after more than a year of accelerating costs of repair and waning support from both the politicians and the people of the country.

Railtrack's share price
Railtrack's share price tumbled from its high in late 1998 amidst concerns about rising costs
The company was brought to its knees by a disastrous train derailment in Hatfield north of London, and the subsequent costs and customer disgruntlement.

Then, throughout the autumn, it was pounded by the bad weather, with floods and landslides doing even more damage to its battered rail network.

Threats of fines of up to 10m for failing to meet punctuality targets set by the train regulator Tom Winsor were matched by threats of legal action by rail operating companies.

They blamed Railtrack for the mass desertion of disgruntled train travellers who were deeply concerned about the reliability and the safety of rail transport.

By the end of 2000, the company's share price had plummeted back to below 9, not much above its original share price when the company was floated in 1997, three years after it was privatised in 1994.

And the challenges were mounting for the new company chairman, Steven Marshall, who had been appointed after Gerald Corbett had resigned following the Hatfield derailment and two fatal crashes near Paddington Station in London.

Optimistic future

It was a dramatic change from the past.

When Railtrack was privatised in April 1994, buying the share appeared to be a waterproof investment.

At the time, state owned British Rail was split into 28 train operating companies.

Each of them would pay money to Railtrack to use its tracks, signals, and train stations, as well as its tunnels, bridges, viaducts and level crossings.

Railtrack's income seemed secure because it was a monopoly whose customers depended on its products.

Rising profits

Indeed, the company's share price rose steadily until November 1998 when it threatened to go above 18, a near trebling since its formation five years earlier.

The share price had risen for good reasons.

Railtrack's profits more than doubled between March 1996 and March 1999 to 428m.

And on 4 November 1999 the company announced that it had made profits of more than 1m a day during the previous six months.

Cracks appearing

The optimism felt by many investors about the company's future was not shared by everyone, and towards the end of 1999 the stock took a serious hammering.

Train at a station in remote Scotland
Profits seem remote for Railtrack
Some observers were raising concerns about the company's rising costs as it became apparent that the rail network required a massive investment commitment to maintain and improve it.

The company's liabilities had risen sharply, from 2.7bn to 3.9bn between March 1998 and 1999, and by March 2000 they were to reach 4.4bn.

The company's assets rose from 5.9bn to 8.4bn during the same period - an impressive growth but still too slow to keep up with its rising debts.

As a consequence, Railtrack's debt to equity ratio - that is its debts as a percentage of its equity value - more than doubled from 31% to 66% during the same two years.

Revenue short-fall

Throughout this period, the company's revenues remained virtually static at 2.5bn per year, while its borrowing requirements rose sharply.

Most of Railtrack's income is derived from an access charge that is paid by all train companies that use the railway tracks and stations.

These companies receive subsidies from the government.

It is this income that has to pay for both investment in the infrastructure and to pay out dividends to shareholders.

If this income grows slower than Railtrack's expenses, it has to be supplemented by loans raised in the financial markets to ensure investment in the rail network.

Investment shortfall

Railtrack found itself under fire from the day it was privatised as several people and organisations insisted it did not invest enough to maintain and improve the railway network.

In March 1998, the company revealed an ambitious upgrade plan that included recommendations for investments totalling 52bn over the next 12 years to cope with growing customer numbers and an accelerating decline in the quality of the network.

A year earlier, its 12-year spending plan had been much less ambitious at 27bn.

But the company also confirmed its critics' concerns by pledging only 3bn to the plan, insisting that it cannot afford everything.

In December 1999, Railtrack turned to the government for help, pleading for subsidies to rise from 1bn to 2.3bn to enable it to meet government targets for modernising the rail network and improving signalling and safety.

This was followed by plans to spend a record 2.5bn on the rail network in 2000, announced in March, about two thirds of which would go towards upgrades of its network.

Even more ambitious spending plans may be required in the near future, and this is unlikely to do much to lift the company's share price back towards its highs.

When Railtrack was privatised, the government was accused of selling the stock at a discount compared to its estimated real worth.

But with the current fall in its share value, that may not prove to be true.

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See also:

17 Nov 00 | Business
The new Railtrack boss
15 Jan 01 | Business
Hatfield costs Railtrack 580m
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