An opportunity lost.

CMA misses chance to enforce competition on Exeter services

“People will have no option other than to pay the inflation-linked fare rises on controlled products such as season tickets.”

The Competition and Markets Authority ( CMA) has failed to promote railway competition in the interest of passengers. The latest lost opportunity is the lack of a meaningful intervention to prevent the same franchise owner operating routes between Exeter and London Waterloo, and Exeter and London Paddington.

This follows a decision to allow the Virgin/Stagecoach consortium to operate inter-city franchises on both the West Coast and East Coast Main Lines (removing choice for travel between London and Scotland), and an earlier blunder that allowed the merger of the Southern and Thameslink franchises (resulting in trade union power being able to assert itself to the detriment of users on the route).

There is a new chief executive at the CMA, Dr Andrea Coscelli, who has a lot of UK regulatory experience. But when it comes to rail, he has merely observed that the service offered on the South Western route to Exeter is “a crucial rail route to the South West, used by around half a million passengers a year, and it’s therefore vital that passengers do not suffer as a result of reduced competition”.

The CMA believes that without its intervention, FirstGroup may be able to increase fares for passengers between London and Exeter, as it will be the only rail operator running all services on this route. In response, undertakings have been given that satisfy CMA concerns.

However, this is only scratching at the surface of a railway regulatory structure that gives passengers less choice than in other markets such as airline travel. The result is that people will have no option other than to pay the inflation-linked fare rises on controlled products such as season tickets, which will increase by 3.6% in January. This is at a time when average pay is rising by just 1.7% annually.

The scale of the increase is not helped by the use of the Retail Prices Index (RPI) as the inflation measure, rather than the Consumer Prices Index (CPI) which stands at 2.6% and which is used by the Government to determine pension increases and other index-linked benefits.

The two index calculations give different results, as the make-up of CPI does not include mortgage and council tax costs and gives weighting to actual consumer spending patterns (it is a geometric rather than arithmetic mean of the statistical input).

It is an irony that when the concept of controlled fares was established at the time of privatisation, it was seen as a mechanism to protect passengers from unjustified fare increases by the franchised operators, and set at RPI -1% to encourage operating cost reduction if profit levels were to be maintained.

It is the opposite situation now. There is no pretence that it protects passengers from a potential abuse of market power - it is a device that allows the monopolistic franchise holders to increase fares to enable greater premiums to be paid to the Government for the right to run services.

Competition between franchises is more important than that from open access operators. The latter have been denied market entry in the belief that unless new markets for rail travel can be identified, the franchised operators will have less ability to make premium payments and Government revenue will be reduced.

This can be shown by a search for price bargains. The current London Midland franchise offers tickets between Euston and stations such as Crewe that are a fraction of that charged by Virgin West Coast. Similarly, in the West Country, alternative operators have prices that are below the Great Western Railway offer.

Peterborough is also a point of competition where there is substantial price benefit if Great Northern trains are used compared with Virgin Trains East Coast. The alternative trains are slower, but if travel is not time-sensitive the product represents a low- cost alternative and is often preferred.

This is competition in action, and as I write I’ve checked the London EustonCrewe fare for a single journey for next day travel. The 0946 London Midland service is priced at £17 Standard and £ 27 First, taking 2hrs 38mins. For the 1007 Virgin West Coast service, the price is £ 75.30 Standard and £ 95 First, taking 1hr 34mins.

For next day travel to Exeter, Great Western Railway is obviously taking more notice of the prices offered by what was South West Trains.

For travel on the 1215 Waterloo-Exeter the Standard price is £ 45.50 with a small supplement to travel First at £ 47.20, with a journey of 3hrs 29mins. The 1305 Paddington-Exeter is £ 48.40 Standard but an eye-watering £ 204.50 First, for a 2hrs 10mins journey.

The 3.6% increase in January 2018 relates only to the 40% of the fare box that is regulated, but this is mainly for fares where passengers have no choice if a travel to work journey using a season ticket is involved.

The train operating companies price the fares they control to reflect demand trends. Looking at data from 2016, when controlled prices increased by a modest 1.1%, the actual fares yield in the year was 2.2%. There is evidence that at present discretionary spending is falling, and if that continues the overall fare box income rise for 2018 could turn out to be less than the 3.6% increase applied to regulated tickets.

In truth, it is difficult to see through the complexity of how discretionary travel is marketed as opposed to essential journeys, but the evidence tells us that with a choice of companies offering different product solutions the overall take-up will generate more cash to contribute to the cost of running the network.

The competition that exists on the East Coast Main Line, with its two open access operators, is unique. You can take whatever indicator you like, but all three operators have higher passenger satisfaction ratings than on comparable routes.

Another open access operation has also been authorised between London King’s Cross and Edinburgh, aimed at replicating the product offered by low- cost airlines with the aim of increasing the rail market share.

The CMA has missed an opportunity to require the new South Western franchise holder to transfer its Waterloo to Exeter service to an independent operator. It must do better in future.