Truth behind fares
Stand by for the annual media storm over fares. With inflation up, passengers face the biggest increase in ticket prices for years. PAUL CLIFTON considers the bigger picture
Stand by for the annual media storm over fares as the Retail Price Index is announced. But there’s a bigger picture…
Andy Wakeford, head of fares and retail at the Rail Delivery Group, tells a good story:
“Thirty years ago, I was a British Rail clerk. I was writing letters to disgruntled commuters. They filed complaints, saying: ‘I’m a commuter and my fares are going up outrageously. The trains are old, dirty and late, and you’re making a profit from them.’
“I generally replied that I had great sympathy, but what they paid in fares did not cover the cost of running the railway. Today the overall costs still vastly outstrip what we pay to travel. I realise this is not particularly helpful to commuters who are forking out more each year, but they are still getting a subsidised journey to work.”
The issue is one for us all as a society. The railway has two sources of income: the fare payer and the taxpayer, and the balance of payments between the two has shifted. Before it was roughly 50: 50, now passengers cover the costs broadly 70:30. Successive governments have adopted a policy of moving more of the cost of running the railway onto those who use it. Under a Conservative administration, there has been no sign of that changing.
It looks as if fares will rise by around 3.7% next January, which will be the largest increase for six years. Fare increases are based on the rate of inflation the previous July, as measured by the Retail Price Index (RPI). The RPI has risen sharply this year, largely because of the drop in the value of sterling that accompanied the Brexit decision.
This formula is rigid. The mechanism was designed in 1996, and the fares we pay now are based around the fares that were charged at the end of the British Rail era. Inequalities in the system then have, by and large, remained ever since.
“Yet again passengers are facing rises while performance has remained patchy,” says Transport Focus Chief Executive Anthony Smith.
“It underlines just how dramatic the funding shift has been from taxpayer to fare payer. I think there is a very strong case for revisiting whether that balance is right.”
Stephen Joseph, Chief Executive of the Campaign for Better Transport, agrees. “The railway is not separate from wider economic trends. Politically, there is a good argument that the Government should pay for a fares freeze this year. In the Brexit-affected economy, where people are not earning more, to expect them to pay more to get to work is a very big ask.
“Where there are a lot of commuters, there are also a lot of marginal constituencies. That really matters to a weak Government with a small majority. Labour is gearing up to do a big campaign around fares.”
The fares formula was previously RPI + 1%,
It will be less about the annual rise in the cost of a season ticket, and more about harnessing technology so people can focus on paying when they need to travel, and not paying when they don’t need to travel. Andy Wakeford, Head of Fares and Retail, Rail Delivery Group
plus a degree of what the railway called ‘flex’.
Wakeford explains: “We have become more and more constrained over time. It was recognised that if there was to be any restructuring of fares, you would have a situation in which some people would pay more than the average, and some would pay less.
“We called it ‘flex’. It ensured the train company could not profit from it. For every fare that went up by more than the average, an equivalent fare would go down.
“So we couldn’t put up the London to Brighton fare by £1, and take £1 off London to Uckfield, as only a tenth as many people go to Uckfield. It was a sophisticated solution which prevented a train company from gaming the system.”
A Conservative Government came up with the formula. The following Labour administration maintained it. In recent years, Labour and Tory politicians have turned it into a political football, suggesting that the train companies had manipulated the system.
The result: the industry’s ability to ‘flex’ fares was removed, with the annual pricing formula tied to the rate of inflation alone.
“We are locked in now,” says Wakeford. “Everyone says there is a need to simplify the fares structure, but the one mechanism to do so that is currently available has been removed. We no longer have the ability to balance revenue by increasing some fares and decreasing others.”
Joseph comments: “Flex has always been upwards - never downwards. I remember when First Great Western reduced some fares in Devon and Cornwall, so it could whack up the fares in the Thames Valley. I think past practice has poisoned the argument, and there would have to be a much tighter regime if ‘flex’ is to be used again.”
Smith adds: “We always said the amount of ‘flex’ should be reduced - we never said it should be removed, and we were very surprised when that happened. But what we need, much more than ‘flex’, is fundamental reform. Single-leg pricing and an end to split ticketing.”
The consequence of this year’s application of the formula will be a particularly severe public pasting for the railway. Public sector workers are being restricted to 1% pay rises for a fifth consecutive year. Fares will go up by three to four times that amount.
Both Transport Focus and the Campaign for Better Transport want the formula to switch from one based on RPI to one based on the lower CPI - the Consumer Price Index.
“There has been substantial criticism of RPI in general,” says Joseph. “The Office for National Statistics keeps saying it is a poor measure and should be abandoned. The Government only sticks with it because it can take more money that way.”
On behalf of the Rail Delivery Group, Wakeford concedes that “there is absolutely a case for moving to CPI, so long as we understand that whatever change you make to the revenue from passengers is balanced either by a change in support from the taxpayer or by cuts to investment”.
He adds: “This is an area where public understanding and reality divide. The vast majority of revenue is fixed by formulas. The vast majority of franchise costs are also fixed by formulas. All the fare increase is doing is balancing out the increased costs that have been measured by the same index - track access fees and so on.
Passenger income as a share of rail industry income
Politically, there is a good argument that the Government should pay for a fares freeze this year. In the Brexitaffected economy, where people are not earning more, to expect them to pay more to get to work is a very big ask. Stephen Joseph, Chief Executive, Campaign for Better Transport
“There is no benefit to train operators from the RPI increase. It is a recycling process where the rising costs elsewhere are reflected in a revenue increase.”
Evidence from recent years suggests that higher fares do not put people off travelling by train. Commuter flows are inelastic - most people who travel to work in London in particular don’t have a choice, because the increased cost of the journey is less than the increased differential in house prices between London and the wider South East.
Even during the economic crash of 2008, commuter numbers continued to rise. And although the rate of growth in passenger travel has tailed off, the industry sees this as a temporary blip in the overall upward trend.
The railway would like to break the link to the annual RPI-based fares increases.
“Simply saying fares must be pegged to inflation with no wriggle room to adjust them is not sensible - that is pegging regulation back to the situation in 1995,” says Wakeford.
“British Rail used to vary them more. It would put higher increases on routes that had seen greater investment, with lower increases on routes that saw none. Fares on the Great Western became higher than on Network SouthEast. It has led to considerable inequalities.”
That is why the peak cost per mile of travelling from Swindon to Paddington is 31p a mile, compared with 19p a mile for Winchester to Waterloo. It is without justification.
“We need to involve the cost of housing in London in this debate,” adds Wakeford. “If the railway is to serve the economy of London more effectively, it needs a service that is acceptable not just to stockbrokers in the suburbs, but to people on much more modest salaries who have to live further away. This is a complex debate that we need to have in the public arena.”
Inevitably the unions and some passenger groups will argue that higher fares mean more profits for fat-cat shareholders. Not so, suggests the RDG, pointing out that for the past two years the average profit of the train operating companies has been 2.9%.
Says Wakeford: “You need to view that as a management fee for running the trains. The whole point of franchising is that a fee is paid because it is cheaper than it would be for the same service to be run in the public sector.
“Look at East Coast. Even with their quoted profit margin, Virgin/Stagecoach run that route for less money than Directly Operated Railways required to run it.
“The route is subsidised by the taxpayer, and there is a contracting fee paid in return for the service provided. This is a hard thing to get across to the public, and there are plenty of people happy to manipulate public opinion on the basis that profiteering is taking place.”
Some London commuter routes turn an outright profit, when the total railway costs are measured. South West Trains passengers make a net payment to the Government of 2p per mile. Passengers in Scotland receive a subsidy of more than 20p per mile. A few MPs in the South have questioned whether it is fair that southerners should effectively subsidise northerners.
“We have a lot of sympathy with the RDG argument that the fares system is broken and needs fixing,” says CBT’s Joseph.
“It needs to be simpler, fairer, cheaper. But we think it needs government action to fix it. This might be the year the Government finally listens, at least in terms of switching to CPI.
“A big fare rise is hard to sell in a political battleground such as the marginal constituency of Canterbury, and Labour already has a plan of action, so the Conservatives will need to respond. In particular, it needs to help the growing number of part-time workers who require a proper offer from the railway.”
A significant change is coming. The new
What we need, much more than ‘flex’, is fundamental reform. Single-leg pricing and an end to split ticketing. Anthony Smith, Chief Executive, Transport Focus
South West franchise that starts on August 20 includes a commitment for First MTR to introduce part-time season tickets. This is a step into the unknown for the railway.
“This is a space in which we need an intelligent debate about how fares will be paid in the future,” says Wakeford.
“It will be less about the annual rise in the cost of a season ticket, and more about harnessing technology so people can focus on paying when they need to travel, and not paying when they don’t need to travel.
“This new volatility on revenues represents a more imaginative way to move forwards than the annual shouting match about the cost of a season ticket.
“If you were starting from a blank sheet now, you would not sell a season ticket to anyone. You would set up a relationship with the customer - depending on how much they travel with you, you would reconcile how much they owe you.
“It would be very different from the painful handing over of the credit card to take £ 6,000 once a year, which we know fuels so much of the angst among our customers. Fares need to be examined on a wider basis.”
There are difficult choices to make. The railway is clear that the current formula is both inappropriate and unfair. Successive governments have stuck with it because the system is at least uniformly unfair on everyone.
Failing to increase fares to match inflation, as Transport for London has promised to do until 2020, simply stores up investment problems for the future - unless it is also decided to reverse the policy that the fare payer should increasingly pay more than the taxpayer.
The Rail Delivery Group says it has attempted a dialogue with ministers to tell them that the current formula isn’t functioning in the public interest. But the alternatives - increase the subsidy or invest less - are unpalatable.
Commuters can at least see that they are getting something for their money. Performance may have tailed off, but they can appreciate a new Reading station, a transformed London Bridge station, building work at Waterloo, and an unprecedented volume of new trains being delivered over the next two years.
As one industry insider put it: “Like every other journalist, you have a date in your diary. Every middle of August, when the RPI rate appears, you have a chance to crap on the railway. Come December, with the detailed fares, you have another chance to crap on the railway. Then between Christmas and New Year, when everyone is feeling jolly, you can all crap on the railway again.
“This isn’t helping. But the debate has to move out of the pages of RAIL, with its informed readers, and into the mainstream of people who’ve never really considered the alternatives. Daily Mail and Sun readers need to be hearing this, too.”
Transport Focus’ Smith sums it up: “Fares are going up. People don’t like it. The industry hasn’t proved to them that it delivers sufficient value for money. Same old story.”