Railways In Crisis?
Firstly some disclosure... I use the train to commute to work, I am lucky that I use a service on which I get a seat, I get a disproportionate amount of work done and it effectively extends my day and productivity so my investment in my season ticket is worth it. I also quite like trains, the whole experience, but I recognise not everyone does and not everyone has such an enabling journey to and from work.
That said I am concerned for myself and for the potential impact on the country’s productivity and mobility with the latest round of fare rises.
We’re living in crazy times when you almost become desensitised to price rises and uncertainty but there are times when the potential implication just cannot be waved away with a resigned shrug. This feels one of those times to me.
Now we’ve said before we’re not about bashing businesses making a healthy profit from the services they provide but they need to be good at what they do, provide value for money and a quality service.
As you will be aware our main focus to date has been business energy, and that in itself is an industry of complex and opaque structures that doesn’t help promote transparency and the impression of value. It is interesting then to consider the similarities of the structure of the UK rail network with the UK energy industry, especially the train operating companies and their financial, political and management relationships with government. It really is an industry that takes a while to get a grip with. But that we have endeavoured to do.
So a brief attempted dissection of the rail industry set-up
- The government via the Department of Transport tender out franchises to ‘suitable’ companies, these are fairly long term deals (the latest West Coast Mainline franchise is for at least 14 years).
- The government retains the right to set a number of fare types centrally
- The government receives payments from the train operating companies to cover the fee for operating the franchise where revenue and profit targets are achieved
- The Department for Transport is however obliged to cover a proportion of train operators’ losses if their revenues are below target, presumably to encourage franchisees to take the risk on an uncertain market
- This obligation has at times been up to 50% of the total cost of the network
- This ‘subsidy’ is in itself subsidised by the taxpayer, whether business or individual.
- The government is keen to shift the cost burden from the taxpayer to passengers
- Government support has dropped significantly over the past five years, falling from £6.31bn in 2006-07 to £3.96bn in 2010-11
- Much of this spend is attributed to ‘network access charges’, a very similar argument to that which we see from UK energy companies about price rises being in part down to the requirement to overhaul the energy network.
The focal point of this blog is that the government is keen to decrease the taxpayer burden further and as a result has announced that rail fares could rise by an average of 8 per cent in January. When I say ‘could’ that isn’t in the sense of it may or may not, it is in the sense that as long as a train operating company raises its total fares on average by 8 per cent, individual fares could rise by much more.
So how are the train operators doing?
Well my service provider Virgin Trains (operating the West Coast Mainline franchise) have just made the record payment to the government for a long distance franchise, paying them £110m for 2010 whilst reporting a profit of £39.9m. Having said that, Virgin has received subsidies totalling £1.4bn over the 14-year life of the franchise so far. So a bit of a mixed bag, to be fair though I can vouch that the general punctuality, cleanliness, reliability and wi-fi capability of the trains is significantly better than their rivals.
South West trains, which run between Waterloo station in London and the stockbroker belt, and which is very much a local commuter service, earned the government about £150m in 2010... and I’m aware of the horror stories of chronic over crowding.
First Great Western, which operates between London Paddington and the West Country, Wales and Oxford, paid the government £106m in 2010.
On balance therefore all very healthy one would assume
But back in October, Philip Hammond, the transport secretary, announced that all government-set fares – which include season tickets and off-peak return fares – would increase by 3 percentage points above RPI for the three years from 2012. This compared to a rate of 1 percentage point above RPI from 2004. A significant increase and indeed in a recent discussion we’ve had with some senior rail insiders there was surprise expressed at the aggressive pricing positioning this placed train operating companies in.
Subsequently the Office for National Statistics figures have shown retail price inflation (RPI) for July – the figure used as the basis for calculating January’s fare rises – is 5 per cent. Don’t you just love that the government swing between RPI and CPI (Consumer Price Inflation) just to make the outcome worse for us. A digression but surely one accurate measure is better than arbitrarily using alternate measures?
So 5% + 3% and we are faced with that average increase of 8%.
The train operators have said fare increases were vital to ensure continued investment in the UK rail system, hmmm I’ve heard that somewhere before, substitute energy for rail and you’ve got the picture.
To justify it, Mr Hammond said: “We are now embarked on one of the biggest programmes of rail investment for 100 years, delivering more than 2,700 new rail carriages, a £900m programme to electrify more lines and the vital Crossrail and Thameslink projects in London.
“Due to the scale of the deficit, these investments would simply have not been possible without the difficult decision we have made to increase rail fares. I know this decision has not been popular, but I hope passengers will appreciate the improvements it allows us to make.”
Thanks Philip, that’s great if you live in London.
David Mapp, commercial director at the Association of Train Operating Companies, said the government had decided on the above-inflation increases to help pay for more trains, better stations and faster services.
“Increasing the money raised from fares will mean that taxpayers contribute less to the running of the railways, while ensuring that vital investment can continue, all additional money raised through the change to RPI plus three will go straight back to the government.”
Isn’t it funny that rail users are not tax payers and tax payers don’t receive a generic benefit from railways.
From an alternative perspective, David Sidebottom, director at Passenger Focus, has called for a review of fares policy as he cautioned “The way that train companies are allowed to set fares on individual routes is deeply unfair, some passengers, who may have seen no investment or improvements, can get hit year after year.”
And Shadow transport secretary Maria Eagle said “The cost of getting to work is, for many people, the biggest single item in the monthly budget – bigger than mortgage payments and bigger than rent”
Furthermore Alexandra Woodsworth, public transport campaigner of the Campaign for Better Transport, has said “We need affordable rail travel – not only to give passengers a fair deal, but to protect the economic health of our major cities”
And that really is the crux of this blog, businesses rely on the rail network both to get staff to work, and provide the ability to travel the country ‘on business’ cheaply, quickly, effectively and most importantly efficiently. Take a straw pole of commuters and I’m pretty sure none of the respondents would put a tick against each one.
For me it is cheaply (NO!!!), quickly (yes), effectively (yes), efficiently (yes)
So 3 out of 4 isn’t bad and that’s what got me thinking... we’ve made business energy cheaper for our customers, we’ve made business comms cheaper for our customers.... now how can we make business travel cheaper for our customers?
To progress this we’ve immersed ourselves in the UK rail network over recent months and we believe we have come up with a solution that will deliver rail travel for businesses that will be:
- Effective, and
- More efficient
We can’t solve overcrowding, the short run commuter routes into London aren’t our focus, but long distance travel into and out of our larger cities, including London are. Just the sort of routes that we need to use to keep in touch with customers and opportunities, potential and existing.
We’re not ready to launch yet, we have a few hurdles to overcome within a highly opaque industry dominated by a few large players that is heavily politically influenced in its activities …. we have some experience of industries like that already!!!
But when we are ready to go we’re aiming to bring the same ability for businesses of all shapes and sizes to reduce their energy costs to your travel costs.
Watch this space!
- The draft Energy Bill: a five-minute summary
- 60% increase in business energy costs as average turnover falls by 6%
- Business week in brief: 11th May 2012
- Ed Miliband and the Queen talk energy
- Interview with Steve Fitzsimons of new business energy supplier, Hudson Energy
- Business week in brief: 4th May 2012
- The see saw of corporate profit
- Business week in brief: 27th April 2012
- EDF Energy’s Business Customer Commitments: four key pledges
- Businesses buck the trend when it comes to smaller energy suppliers