Assessment of business risks and uncertainties
VR Group is in the middle of its biggest rolling stock investment programme. This requires more profitable business operations and a higher cash flow. VR Group has a largely fixed cost structure, which makes it difficult to introduce rapid changes.
Business operations are significantly affected by weak economic growth and risks related to Russia. Structural changes in Finnish industries and their impacts on production volumes, and the competition in Russian traffic that would result from a new Finnish-Russian Railway Traffic Agreement are also major sources of uncertainty. Postponement or cancellation of the investments planned in forest and mining industries would affect future prospects.
In logistics, the general market situation has remained weak since the last quarter of 2014. Even though there were signs of an upturn in November and December 2015, economic growth is expected to remain weak.
The weak demand for and the low prices of raw materials in the global markets mean more risks, particularly in steel-related transport flows. Political risks connected with Russia, the sanctions imposed on the country and a weak rouble will continue to affect both rail and road traffic between Finland and Russia. VR is reacting to the weak markets and the resulting competition by improving its competitiveness and by adopting a strongly customer-oriented approach.
The gradual opening of competition will change operating patterns in passenger services and make it necessary to improve operating efficiency and adopt more customer-oriented operating models. Public transport in Finland is in a state of transition and improving competitiveness is a central part of VR’s passenger services strategy.
More competition in track construction and maintenance and its reliance on one big customer for its business are the most important domestic risks of VR Track. Tough competition on contracts in Sweden has resulted in low profitability of the projects. Tougher competition affects contract pricing and there is a great deal of pressure to remain competitive. Contracts lost by VR Track have led to operational adjustment measures.
Safety is at the core of VR Group’s business. The aim of VR Group is to minimise accident risks in cooperation with the Finnish Transport Agency and customer companies and to actively create a preventive safety culture. There have not been any major rail accidents since the end of the 1990s.
Finance risks are limited at the moment, apart from the market risks relating to the investment assets of VR’s pension fund.
In its risk management, VR Group divides risks into four categories: strategic risks, economic risks, operational risks and hazard risks. These are further divided into different types of risk. A plan of action has been prepared to prevent major risks from occurring and a person has been appointed to be responsible for each risk. A risk management situation report is delivered twice a year to the Group's Management Team in connection with strategy monitoring and operational planning, and once a year to the Board of Directors and the audit committee.
In autumn 2015, the Finnish Government suggested that the process of opening the country’s rail passenger services to competition might be speeded up. VR Group has concluded an agreement with the Ministry of Transport and Communications under which it has the exclusive right to operate rail passenger services until the end of 2024. Even a partial opening of passenger services to competition before that date would be a major uncertainty factor for VR’s business operations.
Finland remains in a state of economic uncertainty, which continues to have a negative impact on consumer behaviour. The competitive situation is expected to become more challenging in 2016, which will create more uncertainty and provide a major strategic risk factor.
The most important operational risks faced by VR involve possible disruptions of industrial peace that may result from uncertainty factors concerning employees and personnel adjustments. The condition of the rolling stock and especially the maintenance backlog arising from extreme conditions may cause operational disruptions and become a major operational risk factor. The weak state of Finland’s rail infrastructure is a punctuality-related operational risk.
VR has protected itself against business risks by means of insurance arrangements.