Last year's operating profit of Euros 253 million - the first by Germany's national railway since 1945 - was clearly not a flash in the pan, as DB has just announced a profit after interest payments for the first half of this year, and expects to make a profit of Euros 400 million for the full year.

DB's financial performance is even more impressive considering the weak state of the German economy. Aggressive marketing of passenger services, for example by a campaign with supermarket chain Lidl, helped DB to buck a 1% drop in the overall passenger market with a 3% increase in long-distance rail traffic. However, DB still has work to do to get its railfreight division Railion out of the red.

Overall, DB is a much leaner railway than when so-called rail reform took place in 1993. Productivity has jumped from 328,000 passenger/tonne-km per employee in 1993 to 862,000 in 2003. DB is now carrying about 10 billion more tonne-km than it was in 1993, and passenger traffic has increased by about 7 billion passenger-km.

"... the separation of infrastructure from operations, which has been carried out by most of western Europe's national railways at the behest of the European Commission (EC), is bad for railways" - Hartmut Mehdorn, CEO German Rail (DB)

Mehdorn's long-term, but so far frustratingly elusive goal, has been to privatise DB as an integrated railway. But just as DB's financial performance is starting to come good to pave the way for flotation on the stock exchange, the political climate for privatisation has worsened. National elections have been called for September 18, and there is no guarantee that the Social Democrats, led by Mehdorn's close ally Gerhard Schroder, will win.

Mehdorn strongly believes that the separation of infrastructure from operations, which has been carried out by most of western Europe's national railways at the behest of the European Commission (EC), is bad for railways. Mehdorn has often pointed out that the only financially successful railways around the world are fully integrated ones.

He has a point. North America's unified private freight railways are profitable, and are doing particularly well at the moment, but they struggle to fund adequate long-term capital investment programmes. The privatisation of the big three JR railways in Japan has been a financial success. However, the outright privatisation of New Zealand Railways ended in failure, with the government being forced to take back ownership of the infrastructure. The private owner simply could not earn enough to fund the cost of maintaining the track.

But most German politicians have observed what can go wrong much closer to home: namely the spectacular demise of Britain's fully-privatised railway infrastructure company, Railtrack. German politicians have no desire to follow Britain down this path or to end up having to put public money into private companies. Mehdorn may well argue that if Britain had privatised British Rail as a fully-integrated railway things might have turned out differently.

Germany is also coming under increasing pressure from the EC to split DB into separate infrastructure and operating units. The EC is determined to break the monopoly of the traditional national railways in order to have a single market for rail transport.

Mehdorn's argument for privatising DB as a single company is that DB must have access to private capital if it is to continue its modernisation and growth strategy. But DB has had the largest capital investment budget of any railway in Europe and sometimes the world. DB invested Euros 79 billion between 1994 and 2003, and the annual figure peaked at just under Euros 10 billion in 2002. Investment has dropped back sharply during the last year, because of government spending cuts. Nevertheless, the investment has allowed DB to expand its high-speed rail network, upgrade stations and conventional lines, and renew a large part of its train fleet.

If privatisation is still on the cards after the election, a more likely scenario is for Germany to fall into line with the rest of Europe by finally separating the infrastructure from train operations. The infrastructure would remain state owned. This could pave the way for the privatisation of DB's passenger operations either as a whole or just the high-speed services, followed by Railion when it starts to make a profit.