Why fares reform is essential… and why it won’t be easy
THE case for reforming rail fares is now overwhelming. If nothing else, the pandemic has dramatically accelerated changes in working patterns that had already been taking place, and which have now rendered the railway’s traditional weekly, monthly and annual season tickets unfit for purpose.
This may have been accepted by the business end of the Department for Transport, but there are reasons why the Secretary of State (and equally importantly, the Treasury) might be less enthusiastic. The political risk is significant, because however sensible the reform and however great the benefits to a majority, a losing minority always shouts loudest and changes to fares frequently become what every Transport Secretary wants to avoid - bad news.
The financial risk is considerable. Major changes to a fares structure that generates £10 billion annually invoke the Law of Unintended Consequences with a vengeance. The Passenger Demand Forecasting Handbook, an amalgam of rail industry experience built up over decades, can predict the effect of increasing or decreasing peak or off-peak fares incrementally with reasonable accuracy, but it cannot predict the effects of major changes to fares structure.
Lastly, there is (or was) contractual risk. The fares regulation schedule in each franchise agreement allowed the DfT to impose changes to fares regulation and to reduce or increase franchise payments based on a reasonable calculation of the effect.
This was used to change RPI - 1% to RPI + 1% in 2003 and claw back the additional income, and it was used in 2007 to make operators switch their non-Travelcard London area fares to a zonal structure so that Oyster could be implemented on national rail. But there is an element of negotiation involved, and even if changes to fares were revenue-neutral across the network, there’s a risk that DfT would find itself paying out more than it managed to claw back.
However, as DfT is now taking revenue risk, that contractual risk is eliminated, and the implementation of any fares reform greatly simplified. Passenger numbers and revenue are at a post-war low, mitigating the financial and political risks. And although ‘do nothing’ is typically assumed to be a safe option, that may no longer be so.
For many years, it has been taken for granted that the commuter market is inelastic - in other words, insensitive to price. It’s now entirely plausible that the pandemic has rendered it elastic, so if the industry fails to encourage commuters back to the office with fares which address their new ways of working, revenue will be lost for years afterwards.
Timing matters, too. A suitable commuting product needs to be in place by the time people return to work, as the pandemic subsides. A year or two afterwards is too late.
In the current circumstances, swift implementation and adjustment in the light of experience is a better strategy than delaying for extensive analysis - which is unlikely to deliver a robust prediction for changes so far beyond incremental in a market so changed.
In short, now is the time to tackle the thorny issue of fares (not that the task will be easy). Three obvious objectives stand out:
Reform commuter fares to match modern working patterns.
Simplify fares so that tickets can be sold effectively through today’s self-service channels.
Reform the way prices are set, to reduce anomalies and restore public trust.
Reform of commuter fares is a clear and present need. Carnets are a possible approach, but they are not without issues.
The classic Paris metro carnet works because central Paris is gated, and gates date-stamp the tickets and cancel the magnetic stripe.
Belgian Railways sells a national ten-journey ticket for 83 euros (£75). When passengers wish to make a journey, they write the date in one of the ten boxes printed on the ticket. It’s priced for reasonably long trips with a good chance of a conductor checking tickets en route, but even so, some passengers may only enter the date when a conductor appears, and a ticket dated for the 1st of the month can be reused on the 4th with a stroke of the pen.
On Britain’s commuter network, with many ungated stations and short-distance journeys, this would present a significant revenue protection risk. Ticket validators (like the Composteurs in France, and similar machines at Italian stations which stamp the date on a ticket before the passenger boards the train) could solve this, but at a cost.
A smartphone app may provide a simpler solution. Passengers could buy a carnet of e-tickets, activating each one on the day they wanted to use it - perhaps within a certain distance of the starting station (using GPS) to avoid people activating them only when they see an inspector.
Smart ticketing remains the ultimate solution, where passengers touch in and out with a smartcard season and receive a discount when they make a given number of journeys within a certain period. Smartcards allow vast scope for innovation in how commuter travel is priced, but only with major investment.
In terms of fares simplification, one of the problems (possibly the biggest problem) in selling train travel clearly online is that the OffPeak Single (the former Saver Single) costs only £1 less than the equivalent Off-Peak Return (the former Saver Return).
In British Rail days this made commercial sense. BR offered discounts on round trips to encourage optional days out and weekends away, but it did not want to discount one-way
“Passenger numbers and revenue are at a post-war low, mitigating the financial and political risks. And although ‘do nothing’ is typically assumed to be a safe option, that may no longer be so.”
tickets which were typically used for nonoptional journeys.
BR initially introduced Saver Returns without an equivalent one-way, at prices which were often less than the Ordinary Single. Passengers travelling one-way would be sold a Saver Return and think this was a mistake, so BR introduced Saver Singles at £1 less than the return.
Today, that rationale is overshadowed by the need to retail effectively through self-service channels. Operators have wrestled with the problem of how to show round-trip prices on their website, showing and comparing the cost of return fares against the cost of two one-ways with varying degrees of success. Fares also need to be presented clearly on a self-service ticket machine. And if smartcard ticketing is to be used, passengers must understand what they will be charged when they touch in and out.
The easiest way to achieve this is with an allone-way fare structure, where a simple choice of flexible, semi-flexible or cheap inflexible fare is offered for the outward journey and also (completely independently) for the inward. This allows cheap advance fares for an outward journey to be matched with a flexible fare for the inward, for example.
Advance fares are already one-way, and most Anytime Singles are already half the price of the Anytime Return. But the former Saver Returns are regulated, so cannot be increased without DfT agreement. And simply halving the Off-Peak Single hits revenue.
Nevertheless, LNER has been trialling an Off-Peak Single priced at half the Off-Peak Return on several flows, including EdinburghLondon, to gauge the effect on revenue and to inform the wider application of this principle. Although the trial means that some people pay less and that no one pays more, it has already generated some negative media attention - for example, passengers from intermediate stations still pay what they have always paid, but the one-way trial price from Edinburgh is now cheaper. (I refer the reader to my second paragraph!)
Lastly, a review needs to address the way prices are set across the network - no simple matter. Fares anomalies (where the fare from A to B plus B to C is cheaper than A to C) are nothing new, but their number has increased significantly as different pricing managers following different operator pricing policies have set fares for different segments of the same route, with yet another operator pricing the overall journey.
Under the Competition Act, pricing managers employed by different train operators are legally prevented from talking to each other, and fares regulation can also limit the scope to address anomalies. The result has been the emergence of split-ticketing websites and an undermining of public trust.
At first glance, a mileage-based tariff seems an attractive solution, but this also needs thinking through.
Zonal fares remain preferable in urban areas shared with bus and tram.
On inter-city routes, allowing fares to set themselves through a distance-based calculation would be commercial suicide in the face of competition from coach and air, neither of which base prices on mileage.
On short and medium distances outside urban areas, relating Off-Peak and Anytime fares to distance could indeed deliver consistency as a basis for rebasing fares and removing anomalies. But as there are currently wide variations in price for a given distance between different UK regions, a single national rate per mile is unlikely to work. In any case, it may be desirable to flex prices, even within a given region where a route serves a less affluent area or faces significant bus competition.
A mileage-based tariff is a blunt instrument, but there are other ways to enable coherent pricing. For example, each operator could price its own specific route, with a through fare composed of the relevant route segments added together, with or without a discount for distance.
For example, the fare from Brighton to Scarborough would be composed of Brighton to London, London to York, and York to Scarborough segments, each priced by the principal train operator for that segment. The end-to-end fare would never be more expensive than the sum of its parts.
However, with DfT now taking revenue risk and in effect regulating its own fares, there is scope for more co-ordinated price-setting even under the current fare setting arrangements. The problem here is the lack of any so-called ‘guiding mind’ - the vacuum between a government department unsuited for direct ‘hands-on’ management and train operators now shorn of direct interest in fares, growing passenger numbers or balancing cost and revenue.
For this reason. the current concession arrangement isn’t a viable long-term solution. A dedicated arms-length rail management body seems essential. Without significant new legislation, it would be easiest to create a new organisation within the Network Rail umbrella, and hammering out a long-term fares strategy for the industry should be one of its first jobs. A tough one, admittedly, but as the saying goes: somebody’s got to do it…