UK: InterCity to rise again?

[John Ashworth]

InterCity dreaming is more than just railway nostalgia

The east coast line's fortunes have been revived since it passed from National Express to state ownership, raising hopes of a return to network integration last seen in the days of British Rail

o Dan Milmo
o The Observer, Sunday 22 November 2009

Lord Adonis, the transport secretary, has big plans for Britain's largest rail franchise. Asked by the Observer last week if he was considering changes to the government-owned East Coast service, he said: "I want to see these trains full and I want to see a fares strategy that encourages people to get on trains. Watch this space."

According to accounts filed this month by the east coast franchise's former owner National Express, the Department for Transport (DfT) will start its overhaul from a financial position that is stronger than the headlines over the past year would suggest. The London-to-Edinburgh route made an operating loss of £23.6m last year, but that was due to £50.9m of exceptional costs related to the looming demise of the contract. Strip out the one-off costs and cancel the franchise payments of £60.1m that were made to the DfT last year, and the franchise made an operating profit of about £90m.

According to projections seen by the Observer, the east coast franchise would have made a profit of about £31.5m this year if it had escaped the yoke of the DfT's payment schedule. An act that appeared to be crisis management – renationalising a flagship of rail privatisation – also looks like a shrewd business deal.

"The east coast line is essentially profitable. But that has been obscured by previous operators' promises of unrealistic premium payments, based on over-optimistic growth projections," says Douglas McNeill, analyst at Astaire Securities.

National Express pledged payments of £1.4bn over seven and a half years and its failed predecessor, GNER, gave up less than two years into an agreement to pay the DfT £1.3bn over a decade. East Coast is working to a much less demanding payment schedule.

The brighter outlook for East Coast could help revive the notion of linking it with the west coast route operated by Virgin Trains, and ultimately adding on the CrossCountry, Great Western and East Midlands lines to re-create the integrated InterCity network that operated under British Rail (BR) until privatisation in the mid-1990s.

According to one industry source, the idea of joining up the east and west coast routes makes financial sense, with the new London-to-Manchester-and-Glasgow franchise expected to pay a premium when the contract is renewed in 2012.

"If they were to pay their full share of maintenance costs, the expectation over the next few years is that the west coast and east coast would become fully profitable and financially self-sustaining franchises," says the source.

Virgin Trains, co-owned by Stagecoach and Sir Richard Branson's Virgin empire, made a profit of £56m last year but will be bolstered by taxpayer support to the tune of £50m in 2009 because it will undershoot sales targets as a result of the recession. It is also underpinned by a DfT subsidy of about £240m that, until last year, was paid to Virgin and was then passed on to Network Rail, the company that owns and maintains the UK rail system, in the form of track usage fees. Now that fee is paid directly to Network Rail by the DfT, helping the west coast route edge closer to becoming a premium-paying franchise.

However, the logic behind combining the east and west coast routes, possibly under government ownership, does not need to be driven by the finances. Roger Ford, industry and technology editor of Modern Railways magazine, has called for the reintroduction of the InterCity network on behalf of a group that is often sidelined in debates over the industry: passengers. Ford says that an InterCity operator with one website, a simplified fares structure and a unifying brand would galvanise an industry that has "lost sight of the passenger".

"It seems such an obvious thing to do," he says. "One of the problems facing the railway is that it is terribly fragmented with different operators. It is very difficult making a long-distance journey these days. There are so many different tickets and websites. What the railway has lost is an integrated national network that holds it together. InterCity is the face of the railway that everybody sees."

But Tony Collins, chief executive of Virgin Trains, does not see the benefits of combining the east and west coast, let alone folding in CrossCountry, which runs from Penzance to Aberdeen, the London-to-Swansea Great Western line, and the London-to-Sheffield East Midlands route.

In the dying days of BR in 1994, InterCity reported an operating profit of £97.9m. But Collins argues annual passenger growth of 20% on the west coast was unheard of during those years, although defenders of BR would say it did not benefit from the £9bn line upgrade that has allowed Virgin to ramp up services.

"The term 'InterCity' as a catch-all is out of date," says Collins. "Our route is now a complex mix of 'long commute', leisure and business travel, which each have different needs, and we are succeeding in the face of greater competition than ever before. Our routes all need astute marketing and management, which wouldn't come under a multi-legged monolith. One size doesn't fit all."

Given the opportunity to back the rebirth of InterCity, Lord Adonis declines. Speaking at a seminar on low-carbon travel hosted by the Campaign for Better Transport, he indicates that the patchwork of individual franchises will stay, albeit challenged by a revived East Coast.

"We do of course have inter-city franchises at the moment," he says. "I want them [the east and west coast] to be exemplary franchises and Virgin is seeing a huge increase in traffic."

For now, a government-owned London-to-Edinburgh franchise is the closest Britain will get to an InterCity revival.

Network Rail profits

Network Rail is expected to report post-tax profits of about £100m this week, but the owner of Britain's tracks, signals and stations relies heavily on the taxpayer for its impressive returns.

The rail industry expects the east coast and west coast franchises to become profitable without government subsidy, while paying their share of maintenance costs, during the next decade. But Network Rail must shoulder the burden of maintaining and upgrading parts of the network that cannot be sustained by the fare-payer.

The Office of Rail Regulation, which monitors Network Rail's finances, acknowledges there would have to be a smaller rail system if subsidies of around £5bn per year were cut.

Most of Network Rail's income of £6.1bn this year will be covered by a government grant of £4bn. This funds the day-to-day work of track repairs and keeping stations tidy. Big improvements, such as platform lengthening and rebuilding King's Cross station in London, are funded by a £22bn debt underwritten by the government.

The rest of Network Rail's income is provided by train operators, who pay for every carriage that runs on its tracks on a per-kilometre basis. Those fees – £1.8bn this year – are also subsidised. According to the Rail Industry Monitor, train operators received a subsidy of about £1.5bn in 2007, accounting for a fifth of their earnings.

Network Rail will celebrate the numbers, but its performance reflects tighter cost management rather than genuine commercial success.