HEADLINE NEWS
Faced with the prospect of franchises going bust, the Government has stepped in to take financial control of passenger services.
Franchises suspended and replaced by direct awards; Lockdown hits heritage railways hard; Delays threaten South Wales Metro; East Midlands stops most of Class 153 fleet; New owner for Weardale; More Mk.3 stock heads to scrapyard; Freight companies respond to coronavirus crisis; Meteor creates hybrid ‘Gronk’; ‘710s’ start on Lea Valley Lines.
THE Government has implemented the only feasible short-term option during the coronavirus crisis of suspending passenger rail franchises and replacing them with direct awards to the existing operators.
The agreements allow the Government to take responsibility for overall operational costs, and specify the level of service required to meet the need for key workers to reach employment. The retention of a small profit margin has been allowed so that TOCs can meet their own financial liabilities.
Timetable frequencies on main line routes had been reduced for a second time on March 30, replacing the first cutback that was based on providing a Sunday service during the previous week. But as an example of the challenges being faced by train operating companies, passenger volume is reported to have reduced by 85% on LNER services where, despite being a popular route for business travel, most journeys are for leisure purposes.
The reduction has been less for local journeys in large conurbations, and in London there have been complaints that the lower frequency of London Underground services has led to overcrowding that has prevented the recommended social distancing between passengers. In response, the Mayor of London said that increasing levels of staff sickness and selfisolation meant that a Government request to increase frequency could not be implemented.
The overall national network income from ticket sales and miscellaneous items, such as car parking charges, was close to
£11 billion in 2019 – but operating costs absorbed all but £200 million of this, leaving the TOCs with wafer thin margins of little over 2%.
It is not a difficult calculation to see that income has fallen far below the cost of providing the train service. The very small margin over operating costs has not allowed the TOCs to retain reserves to cover a sustained reduction in receipts, and there is no capability to absorb losses even in the short term.
The result is that it is not possible to meet the cost of rolling stock leases, the employment of staff on permanent contracts, and Network Rail track access charges.
The financial situation facing the East Coast Main Line open access operators (Hull Trains and Grand Central) is acute, and has to be approached on the basis of business support funding that is available for other private sector companies throughout the economy. The DfT is supporting their continuation within the future overall plan for the route, but
Hull Trains announced all its services would be suspended from March 30 given the negligible demand, and Grand Central followed suit from April 3.
VISION OF THE FUTURE
The suspension of franchises is a prelude to the ideas reportedly contained in the unpublished Williams Rail Review, which is said to have recommended that future agreements should be structured as concessions. Bids would be based on the operating cost of running a specified timetable, with projections of future passenger numbers being removed from the equation.
This approach would mean that all farebox takings would accrue directly to the DfT, as is the case for the Thameslink Southern & Great Northern franchise operated by Govia, although deficiencies in this structure have become evident as the TOC has no incentive to provide a quality of service that encourages passenger growth.
If this strategy is widely adopted it will be necessary to provide incentives that reflect actions that improve income from marketing initiatives and revenue protection activities, which have all but disappeared from TSGN services.
The suspension of contracts will remove for the time being the likely financial failure of a number of franchises. This reflects the more recent awards that are characterised by forecasts for significant passenger growth following investment in new rolling stock and the operation of more services that Network Rail has not always been able to run given the cancellation and delay of projects.
TOCS IN TROUBLE
LNER’s predecessor Virgin Trains East Coast had to accept it was not going to achieve the increase in revenue that would allowhigher premiumpayments to be made and, without any agreement with the DfT to reset the terms, it had no alternative but to surrender the contract. Although the Arriva Rail North franchisewas terminated for performance reasons, it was almost certainly before the contract was surrendered as the company recorded a loss of £223 million in 2019.
Other TOCs known to be facing unsustainable future losses as a result of low or non-existent revenue growth include South Western Railway, Greater Anglia and Essex Thameside. But the suspension of current franchises, and the uncertainty about the future demand for rail services, will allow new arrangements to be negotiated that are most likely to be based on the concession model.
■ As a footnote, the Government is continuing with HS2 construction where works are critical to the timescale for project delivery having been given assurances that the workforcewill be protected in accordancewith guidelines for safeworking practices to ensure social distancing.
“The TOCs have wafer thin margins of little over 2%”