On the right track

Arlanda Express (A-Train AB)

Sponsor: Macquarie Infrastructure and Real Assets
Geography: Stockholm, Sweden
Sector: Transportation
Deal size: Lower mid-market ($50 million – $150 million)
Initial investment date: January 2004
Realisation date: July 2014
Top-line revenue growth: 10-yr revenue CAGR of 7%
EBITDA growth: 10-yr EBITDA CAGR of 12%
Average time per month spent with portfolio company (days): 5

A stronger bottom line, award-winning service, product diversification, market segmentation – there were many reasons Arlanda Express emerged as the winner in this year’s Operational Excellence Awards.

Acquired by Macquarie Infrastructure and Real Assets (MIRA) through its €1.5 billion Macquarie European Infrastructure Fund (MEIF I) in 2004, Arlanda Express was an underperforming asset. Macquarie did not disclose the purchase price at the time, but reports placed it at €62 million at a time when Sweden-A, operator and manager of the Arlanda Express and Arlanda Rail Link (on which the Arlanda Express runs), was in financial distress.

In addition to significantly improving efficiency and productivity – between 2003 and 2013 EBITDA margin improved from 33 percent to 54 percent – one of the elements that impressed judges most was MIRA’s ability to take a constrained asset and create new revenue streams.

“To me, Arlanda is a typical infrastructure asset in that it is constrained – it only does one thing,” Michael Matheou, a partner at law firm Hogan Lovells, said. “And so the levers that you can pull to improve performance are pretty limited; to find those levers and pull them successfully is an achievement,” he added.

Arlanda Express is a single railway that connects Arlanda Airport – Sweden’s busiest – to central Stockholm, an asset that according to one judge, “you wouldn’t expect to have much revenue growth”.

“What I thought was really interesting was that they’d taken an asset which you would think would have a pretty stable traffic stream and they’ve really worked to create new revenue streams and really target the business to consumers effectively,” Michelle Karavias, global head of infrastructure at Business Monitor International (BMI), pointed out.

MIRA negotiated track access arrangements to introduce third-party traffic, enabling Arlanda Express to earn revenues from passengers who would not have used the service otherwise. Macquarie introduced a ‘slow-stopping’ service, for passengers not looking to travel to or from Stockholm Central.

It also agreed a “fair and revenue enhancing arrangement”, which gave a broader choice of travel options to consumers and allowed airport workers and other commuters to travel to and from the airport at a heavily discounted fare.

The asset manager also succeeded in increasing revenues by putting up fares for business passengers who prioritise reliability, punctuality and speed over price, while at the same time creating new price categories for more price-sensitive passengers.

“The ability to raise ticket prices without a drop-off in ridership and the way in which they have targeted different areas of the market are innovative ways of managing an asset which was previously not doing particularly well,” BMI’s Karavias said.

Increasing the full fare over the course of 10 years was made possible through a SEK120 million (€13.0 million; $14.6 million) refurbishment programme, which earned Arlanda numerous design awards, and a full rolling stock refurbishment, realised between 2009 and 2011.

Improving the customer experience was another area MIRA focused on, which resulted in multiple awards for the railway and the distinction of Sweden’s most popular transport company with best-in-class customer satisfaction scores.

In addition to upgrading infrastructure, one of MIRA’s priorities was quality of service, reliability and punctuality. To this end, the fund manager placed emphasis on dedicated training for staff in customer-facing roles, as well as enhancing processes for monitoring performance and responding to customer feedback.

According to its submission, MIRA developed strong relationships with the incumbent management team, working with Arlanda’s chief executive and chief financial officer throughout the 10-year holding period.

“I think the combination of how they went about improving operations as well as the fact that they really improved the bottom line makes them a clear winner,” David Narefsky, a partner at law firm Mayer Brown, commented.