Rail commuters in the UK know that service disruptions, delays and the wrong kind of leaves on the line can throw the timetable off track. A similar problem has befallen French rail behemoth Alstom, whose profit and cash flow warning on Monday wiped a quarter off its market value. Alstom has been hit by execution problems at its Coradia Max programme, which supplies regional trains to German states.
A team of experts parachuted in by new chief executive Martin Sion in the testing phase discovered engineering flaws in units, some of which were already being produced, forcing the company to pull the brake on the whole programme — with knock-on delays at other German contracts — and retrofit those cars that it had already produced. Alstom gets big payments when it hits project milestones, so delaying deliveries beyond this year means it will make €1.5bn less cash than it spends, counter to its previous hope of making positive free cash flow. On top of that, the company now thinks the Coradia Max programme will be less profitable than hoped, leading to a one-off hit of almost €1bn, Kepler Cheuvreux analysts reckon.
While Alstom's CEO may be relatively new, investors' disappointment is anything but. The company has missed analysts' earnings forecasts every year since 2018, LSEG data shows. More recently, its troubles have been related to the 2021 acquisition of Canada's Bombardier, which came with a whole host of poorly drawn contracts.
But they also reflect a broader problem for those seeking to sell trains to European operators. While demand for rail travel is growing, the balance of power lies firmly with customers, which tend to be large and quasi-governmental, rather than with the flock of contractors, which include Germany's Siemens Mobility, Spain's CAF and Switzerland's Stadler. Rail companies use their power to demand particular product specifications, which add cost and complexity to each project, and delivery schedules that at times appear to be tied to the electoral cycle rather than an industrial one.
It doesn't help, either, that the European rail industry is an aged, creaking hodgepodge of technologies: the track from Paris to Amsterdam, by way of example, requires operators to carry seven different signalling systems. The solution to all of this would be for the train contractors to be more disciplined and either not bid for, or not accept, contracts that have little hope of making a margin. But while crises like this may increase the pressure on the likes of Alstom to develop some backbone, they also weaken its bargaining position further.
The catch is that the group is also trying to cut €2bn of debt in order to avoid losing its investment-grade credit rating. That would be a big problem for a group that needs its customers to believe it will be around for years to come. Deliberately forgoing future revenue might seem at odds with that mission, but it's hard to see how else Alstom can get back on track.
Source: Financial Times Companies · Summarized by HeadlinesBriefing