Friends of the Rail Forum

Fare payers have reached the limit, says rail watchdog

Dan Milmo
The Guardian, Thursday 19 February 2009

The government must protect recession-hit farepayers by pumping more subsidy into the railways at a potential cost to the taxpayer of at least £500m per year, according to the rail user watchdog.

Passenger Focus said public appetite for fare increases had "reached its limit" as it urged ministers to lower the cost of the most expensive commuter rail network in Europe. The financial burden of running Britain's trains will fall increasingly on fare payers over the next five years, with passengers expected to foot more than two-thirds of the cost. Anthony Smith, Passenger Focus chief executive, said rail travel had become the second most expensive item of expenditure in some commuter households.

"The government has got to look at that funding split. We think that the amount that the passenger has to pay has just about reached its limit," he said. Fare payers are expected to contribute £9bn to the rail network by 2014, with the government's investment due to fall from about £5bn a year to £3bn. The Department for Transport said that the annual cost of changing that balance in order to bring fares in line with other European countries could cost at least £500m per year.

"The government is committed to sharing the cost of rail services fairly between taxpayers and passengers. It is estimated it would cost an extra £500m a year to bring UK commuter fares in line with these other European countries, which are more heavily subsidised," said a spokesman for the DfT.

Analysts have warned that the funding settlement for the rail network is under pressure from the recession because the farepayer contribution is underpinned by growth in passenger numbers and fare levels. Both are now in doubt. The Association of Train Operating Companies has warned that passenger numbers might decline this year and next, while deflation could answer the wishes of Passenger Focus by forcing down fares. If the retail price index goes negative in July, as many economists are predicting, then rail fares will fall in 2010 because the July RPI total is used to set the next year's season ticket prices, which are capped at RPI +1%. With some economists predicting RPI of -2% in July, regulated fares could fall next year.

Fares fair

Editorial
The Guardian, Friday 20 February 2009

Like opera, or allotments, trains are minority interests funded partly by the taxpayer for the common good. People are 25 times more likely to drive than travel by tube or train, and more than twice as likely to take the bus. Even so, the national rail network receives an annual subsidy of around £4bn - a sum that is about to go into sharp decline, with severe consequences that no one can yet fully predict. Yesterday the official passenger watchdog warned that many fares had already climbed to unaffordable levels and called on the government to spend more, not less. But in a recession there may be a limit to how much taxpayers are able to pay to keep down the cost of a service that many people never use.

Yesterday's report on fares from Passenger Focus was notable for its eye-catching revelation that British rail travellers pay vastly more than passengers elsewhere in Europe for flexible, peak-time fares and for annual season tickets. It was also full of good sense about the absurdity of the advance booking system, which only experts can navigate, and which leaves the well-informed or organised traveller paying less than the unfortunate passenger who makes the mistake of trying to buy a ticket at the station. Less attention was paid to the section which showed that British services are often more frequent than in other countries, or the research which showed that people care more about reliable services and empty seats than the price of tickets. The point remains that trains are a social and environmental good, that people should be encouraged to use them and that, as things stand, the cost of doing so is way too high. Train travel may be a middle-class luxury. But that is because no one else can afford sky-high fares.

The horrible reality, however, is that government policy and the recession means fares are about to go up still further. Under orders to raise more money from passengers, and take less from taxpayers, train companies need to raise revenue by 7% a year in real terms between now and 2015. How they will manage to do that in the face of recession no one knows. Train travel is an accurate measure of the economy: it has increased sharply in the boom years, but may now fall away, just as companies need to raise the extra cash. By 2015 the government wants 75% of the cost of the network to be paid for by the people who use it.

The result is that most of Britain's major operators are facing a black hole in their finances, and looking for ways to cut costs. Most of them are sacking staff and axing frills, as well as pushing up fares - but these cuts, which yesterday led unions to warn of strike action, may only be the start. A memo prepared for train operators ahead of a meeting with ministers last month warned of "potentially devastating effects on the finances of some train companies". If revenues fall, they will not be able to make the promised payments to the government. They may try to push up fares, or renegotiate their franchises, or even walk away, with parts of the network ending up in de facto renationalisation. No tears should be shed for these private companies. But a lack of cash could lead to service cutbacks and less investment, exactly the sort of thing that has cursed British travellers for decades.

Somehow the money will have to be found. The system set up by privatisation, and adjusted repeatedly since then, is absurdly expensive, dependent on contracts for things such as hiring carriages that companies in other countries do not have to pay for. But even a fully renationalised system would require massive support. If rail travel is not to sink into a cycle of falling passenger numbers and ever-higher fares during the recession, the government will have to revisit the cash-generating franchise deals it negotiated on main routes while the going was good. Trains matter too much for them to be another victim of the crash.

Rail firms told to accept fall in ticket prices

• Minister refuses to protect franchises during deflation
• Operators may hike open fares to claw back revenue

Dan Milmo, transport correspondent
The Guardian, Wednesday 25 February 2009

The government is to boost recession-hit rail passengers by allowing fares to fall next year in a move that could force some train operators to hand back their franchises. The rail minister, Lord Adonis, has told train companies that he will not reverse a looming drop in ticket prices.

The rail industry reacted with dismay to the news, which will be confirmed by the minister when he appears before the transport select committee today.

Most rail fares, including season tickets, are capped at inflation plus one percentage point under a funding formula conceived when deflation was a non-existent threat to the UK economy. However, with the retail price index set to fall to -2% by this summer, regulated fares face a decline of at least 1% next year as the price cap rebounds on the industry. "If RPI falls then the government intends to allow regulated train fares to fall in tandem, rather than freeze prices to benefit the train operating companies," said a transport department spokesman last night.

Industry sources warned that the decision, despite strong lobbying for a fares freeze by the rail industry, could cause serious financial problems for some franchises. Train operators are tied into contracts signed during a period of strong demand for rail travel. Three of those contracts - National Express East Coast, South West Trains, and First Great Western - have pledged payments of more than £1bn each to the government. Other operators endure multi-million pound decreases in government subsidies every year.

None of those companies have admitted to financial difficulties, but one rail industry source said the industry would have to claw back lost revenues by pushing up non-regulated fares. Walk-up tickets and open return journeys are not price capped.

The civil servant in charge of Britain's railways, Dr Mike Mitchell, told MPs last month that five franchises - more than a quarter of the entire network - were on a "red light" in the Department for Transport's traffic light system for monitoring the status of franchises. A memo from the Association of Train Operating Companies warned that the most pessimistic forecasts could have "potentially devastating effects" on some train companies.

The document suggests several government-backed solutions, including financial backing for 1,000 extra staff for the network, even though operators recently announced plans to cut 1,500 jobs.

In the past, ministers responded to distress from franchise owners such as GNER - which operated the London to Edinburgh route - by stripping them of their franchises. However, under Department for Transport guidelines, a train operator must hand back all its franchises if it defaults one of them. Rail franchise ownership is concentrated among a small number of owners, with Stagecoach, Go-Ahead and National Express owning three each and FirstGroup owning four.

The government's funding settlement for the industry expects passengers to foot more than two-thirds of the bill for running the network over the next five years. However, Stephen Glaister, professor of transport at Imperial College, London, warned that a fare cut could endanger the entire funding balance. "There has always been a balance between the taxpayer and the farepayer. As revenues from farepayers will not be as big as the government thought, the taxpayer will have to step in to fill the gap," he said.

1. Explainer: Passengers hold the key

Dan Milmo
The Guardian, Friday 27 February 2009

One of the biggest criticisms of rail franchises from trade union leaders and MPs is that they make excessive profits for their owners. But the combined profit margin of train operators is a relatively modest 3.5%. More important in a recessionary environment is the amount that they generate for the government. Farepayers, through the ticket revenues that they give to franchises, are the linchpin of the government's rail spending plans in the next five years. Those multibillion-pound revenue streams are supposed to foot more than two-thirds of the bill for running the railways by 2014. By 2014 farepayers will be contributing £9bn per year to the railways, with the government supplying around £3.8bn.

Reaching that target requires annual passenger revenue growth of 7% a year over the next five years, underpinned by passenger volume increases of about 3% per year. Hitting those targets will be difficult in the next two years at least.

The Association of Train Operating Companies has warned of passenger numbers falling in 2009 and 2010, while deflation will lead to a reduction in fare revenues from next January. The government has no statutory right to curb Network Rail's £28.5bn spending programme, so it will have to make good any shortfall in passenger income. Nonetheless, the rail minister, Lord Adonis, is adamant that franchises will have to dig deep.

2. National Express chief comes out fighting as recession grips railways

• Boss pledges it will hold on to train franchises
• Firm slashes dividend and says more job cuts on way

Dan Milmo, transport correspondent
The Guardian, Friday 27 February 2009

Richard Bowker, chief executive of National Express, is vowing to hold on to the group's recession-hit rail business after the bus and train operator cut its dividend and refused to rule out more job losses yesterday.

Bowker is familiar with the almighty clamour that captivates politicians, shareholders and the public when an industry is deemed to be in crisis. As chairman of the now-defunct Strategic Rail Authority he was under constant pressure, monitoring the performance of train operators as the railways hauled themselves into the post-Railtrack era.

Yesterday it was his turn to be at the centre of industry concern as the business that he now runs outlined the recessionary pressures on its rail operations. "The world has changed," he said, amid mounting evidence that the railway boom is entering the sidings.

However, Bowker warned that the taxpayer had just as much to lose as the industry, in a week that saw the government refuse to help train operators. If privately owned franchises were taken back and re-auctioned, he said, then government coffers - and by implication the entire funding structure of the railways - would be depleted, because the days of £1bn-plus franchise bids were gone.

"You would get a smaller number than you did 18 months ago. That's not politics, it's economics."

He added: "The government is a partner. It is the biggest single beneficiary of the policy. They are bound into the economics of the industry whether they want to or not. But I hear what they are saying and that's why our focus is on self-help."

National Express said in full-year results yesterday that it would slash dividends and probably axe more jobs on top of 750 redundancies already announced, to ensure that it did not have to hand back its three rail franchises. While the business looks healthy - revenues rose 6% to £2.76bn and pre-tax profits were £109.9m, albeit down from £149.3m the year before - two legacies from Britain's boom threaten the group.

The first problem was created in August 2007 when, days after the French bank BNP Paribas first warned of a debt-market freeze, Bowker was delighted to win the prestigious east coast rail franchise that runs train services from London to Edinburgh. But it came at a high price: at the time, ministers and National Express executives said the agreement to pay the government £1.4bn over the course of the seven-and-a-half-year contract was "very good news" for passengers and the taxpayer. Analysts are now warning that the recession has turned a deal that was already a tight squeeze into a vice.

Secondly, National Express has to deliver steeply increasing franchise payments to the government - rising from £85m last year to £395m by 2015 - while attempting to whittle down a debt burden that stands at £1.2bn.

National Express said yesterday it too was talking to the government in the UK but so far no financial aid was forthcoming. "We have had discussions with the Department [for Transport] about the fact that the economy has changed dramatically for everybody." Asked if National Express had requested some form of assistance - whether through a relaxation of payments or cuts in services - he said: "I am not prepared to discuss what we debated, other than we have told them about the impact of the economic climate."

Instead, the group expects cost-cutting measures and a £30m reduction in the dividend to carry it through the next few years and avoid defaulting on the deal. "We absolutely expect to honour our contractual obligations. That's our position today." If it fails to make the payments, National Express will lose its east coast franchise as well as its National Express East Anglia and c2c contracts, because the rules say that if you default on one contract you default on them all.

In order to meet its next payment on the east coast of £133m, National Express needs revenue growth of 10% and an estimated increase in passenger numbers of 4%. The latest industry data does not bode well for east coast, or indeed any franchise owner that struck its deals at the height of the economic boom. According to the Office of Rail Regulation, the number of passenger journeys in the three months to December in 2008 fell 0.3%, year-on-year, across the entire industry. Growth in passenger revenue for the industry has also slowed over the same period, to 5.8%.

Those trends increase the pressure on every operator because their two main means to meet franchise commitments - appetite for higher fares and rising demand - are waning. The industry is left facing the options of aggressive cost-cutting and heightened ministerial diplomacy. "We may have to take a lot of cost out and there may be things that they would rather we did not do. We will take out whatever cost we need to. The plans that we have for 2009 mean that we will have a profitable rail division," Bowker said.

Rail accounts for a third of the profits generated by a group that also owns coach and bus services in the US, Spain and the UK. One analyst has argued that National Express shareholders might be better off if the group quits rail altogether rather than hold on to an east coast contract that, on its present trajectory, might struggle for profitability over its lifetime. Bowker, an established figure in the rail industry, knows that the reputational damage could be even greater. "There is a whole raft of issues that we have to think about. We take our fiduciary duties extremely seriously but we also entered into a contract and our brand is very important to us."

Meanwhile, a government consumed by the banking crisis is refusing to help. The rail minister, Lord Adonis, had the opportunity this week to offer some support. Instead, he told MPs that troubled train operators should not expect a state bail-out as he ruled out service cuts and fare hikes. Adonis said he expected franchise operators that had enjoyed profits during a long period of passenger growth to endure some financial pain. Deflation means that more than half of all fares are expected to fall by at least 1% next year and the government has refused to freeze ticket prices to help some operators.

Speaking to the transport select committee on Wednesday, Adonis said he expected franchise owners to make payments to the government "when the going gets tougher". He added: "You must take the rough bits with the smooth."

Bowker remains bullish. Analysts were impressed that the east coast franchise fulfilled the terms of its contract last year, including the £85m payment to the government, and the National Express boss talks of "an enormous amount of opportunity" for his group's rail business. But that has not stopped rivals, and former employers, from having a dig. Sir Richard Branson, the co-owner of Virgin Trains, has warned that the government must not do "deals behind closed doors" with National Express. For once, Bowker relishes the chance to revisit his SRA days.

"It is interesting to note that Cross Country [formerly owned by Virgin Trains] got into difficulty in 2003 and there were very strong representations at the time to do a deal. If you had applied the same philosophy as he [Branson] is espousing now, not only would the Cross Country franchise have gone, but it would have cross-defaulted on to Virgin. It is interesting how the passage of time changes views." But when it comes to changing the government's view of the industry, train operators are running out of time.