Operail remains financially strong and seeks new opportunities despite losing most of its cargo volume

Added on 18.08.2023

Due to the direct and indirect effects of the war in Ukraine, Operail, a group of railway companies, has experienced an 83% reduction in cargo volume, incurring a projected loss for the first six months of the current year. However, the company’s financial position remains robust thanks to income earned from the sale of non-strategic assets. The management is now proactively seeking new profitable opportunities for Operail.

In the pre-war year of 2021, Operail’s cargo volume in Estonia was 6.6 million tons for the first six months. In contrast, in the same period in 2022 the figure stood at 3.6 million tons, and this year it was just 1.1 million tons. Of the 2.2 million tons forecasted for 2023, exactly half was therefore transported in the first six months.

“We anticipated a loss in the first half of the year because railway transport is a volume-driven business that thrives on the ability to transport large quantities simultaneously. It’s challenging to operate profitably with a reduced volume and to cut costs at the same rate. Moreover, in the first half of the year, there were also extraordinary expenses, such as layoffs,” remarked the CEO of Operail, Raul Toomsalu. The company’s EBITDA (earnings before interest, taxes, depreciation and amortisation) for the first six months was 0.2 million euros, with a net loss of 3.1 million euros.

The drastic decline in cargo volume is attributed to the sanctions imposed on Russia and Belarus in 2022 and the owner’s decision to halt all transportation of goods from Russia and Belarus starting from 2023, regardless of whether they are under sanctions or not. “While such a decision sends a powerful message that Operail does not support the aggressor in any way, it inevitably grants a significant business advantage to competitors who persist in transporting Russian and Belarusian goods. Regrettably, we don’t anticipate any positive change in revenue generated from transport within Estonia this year,” Toomsalu added.

To adapt to the new situation, the company has reduced its workforce by half. However, staff reductions are not directly proportional to the decline in transportation volume. “Carrying out layoffs on such a large scale has been a daunting task because we are dealing with specialists with expertise in railway operations. It is crucial to retain the expertise to potentially restore volumes in the future,” Toomsalu emphasised, highlighting an additional challenge.

Considering that railway transport thrives on volume, the decline in transit volumes has also adversely affected small Estonian enterprises whose freight volumes are not large enough to fill an entire train on their own. To address this, Operail recently introduced a new service tailored for small clients: weekly scheduled trains where even a single wagon can be reserved.

Earlier this year, Operail exited the cargo transport business in Finland and the wagon rental business. The revenue from these sales is enabling the company to navigate the current challenges and focus on finding new solutions. “Despite the nearly negligible cash flow due to lost volumes, the group remains financially strong. The sale of assets has provided a significant financial cushion,” said Toomsalu.

A comprehensive strategy to restore the group’s profitability through new avenues is currently in development and is expected to be finalised by autumn. Once the company’s economic position improves, there is potential for privatising Operail at the owner’s discretion.

Operail is an Estonian state-owned railway company that specialises in freight transport, as well as the maintenance, repair and construction of rolling stock in Estonia. The company employs around 250 people. Until the beginning of 2023, Operail also provided international wagon rental and freight transport services in Finland. Following the owner’s directive, Operail exited these business directions, as they were not deemed strategically essential activities for the state.