Higher inflation threatens a large increase in fares...
But no increase could be as bad with revenues still below pre-Covid levels. “However desirable a simpler fare structure may be, fares need to be tailored to individual markets”
THE annual increase in controlled ticket prices at the beginning of the year is based on the level of retail price inflation (RPI) in the previous July, and the bad news for rail users is that the figure for July 2021 is 3.8%.
That is not the limit of a likely increase, however, as the Government has in recent years been adding a further 1% annually as a contribution to the funding required for the high level of investment in rail facilities. As a result, there is the potential for a 4.8% rise in fares in January 2022.
It was only in March 2021 that passengers were required to pay an increase of 2.6%, which was the result of delay to the scheduled fares rise from January 2021. This was made up of the 1.6% RPI increase from the previous July with the supplement of 1% added by Department for Transport.
If a 4.8% increase is implemented from the beginning of 2022, the combined effect of the two increases will put the brakes on the recovery of rail travel, which was seriously eroded by the restrictions imposed on the use of public transport in response to the Covid-19 pandemic.
Revenue statistics show that in August, fare income was 57% of the pre-Covid level and it is the view of industry analysts that recovery during the coming months will not be greater than 80% of previous level of demand. In response, the franchised operators in England have been required by the Department for Transport to reduce services, which will continue with the May 2022 timetable being based on a 20% reduction of previously planned operations.
A similar situation has been revealed in Scotland, where services withdrawn as a result of reduced demand are not to be reinstated when the Abellio franchise is terminated at the end of March 2022 and rail operations are taken over by the Scottish Government. It is expected that 300 daily services will be cut from the timetable previously made up of 2400 trains, with the aim of saving £40 million in annual operating costs.
Below-average rises
The effect of fare increases is monitored by the Office of Rail and Road (ORR), and a rail fares index is published to compare year-on-year statistics. ‘Regulated’ fares are made up of Standard Class travel using season tickets, ordinary returns, saver returns, and longer distance off-peak returns. ‘Unregulated’ fares include First Class tickets, advance purchase and other reduced price offers.
The 2.6% increase in regulated fares in March 2021 was offset as a result of price reductions by train operators for unregulated fares to stimulate travel, and the net effect of this meant the overall increase was reduced to 1.2%. Statistics show that longer distance operators reduced the price of travelling First Class by an average of 2.0%, with unregulated Standard Class prices seeing a marginal 0.5% increase in the cost of travel.
The ORR provides data on the basis of three categories of rail service. These are London and the South East (which in 2021 accounted for 54.0% of revenue, with fares rising by 2.2%), long distance (with a 30.8% share of income and a reduction in average fare of 1.1%), and regional journeys (making up 15.2% of income, with price rises of 2.2%).
In terms of ticket type, ordinary fares (now classified as anytime) amounted to 30.1% of revenue and, as they are a regulated fare, they saw a 2.5% price rise. There was a similar increase in cost of a season ticket, which after the 2021 increase provided 17.7% of fare income.
A notable statistic was a decline of 4.1% in the price of advance purchase tickets, which accounted for 11.8% of network revenue. A third of all passengers (33.3%) made use of off-peak tickets, where price increases were restricted to
1.0% as many of these are not regulated.
Reduced commuting
The ORR includes data going back to the British Rail era, and investigation revealed a statistic from the 1989/90 financial year that season ticket travel was then in excess of 50% of total activity, with 408 million out of 812 million journeys being made. In the years prior to Privatisation, rail usage fell away to 735 million journeys in 1994/5, with a sharp decline in the use of season tickets as 328 million journeys were recorded (reducing the share to 44.6%). This trend has continued as, although the demand for rail travel has more than doubled in the last 20 years, use of season tickets as a proportion of total ticket sales of 1753 million in 2018/19 fell to 35.6%. This is a reflection of reduced demand for the daily commute as a result of a continuing trend to work from home or other remote location away from a fixed point of employment as a result of digital connectivity.
A reform to the validity of season tickets was introduced from June 28 this year, offering a discount based on travel restricted to two or three days during the week. Unfortunately, the prices have not been based on a pro-rata reduction, which made the exercise rather pointless. As travel to a fixed point of employment returns, it is likely that single use tickets will predominate, with increased demand for off-peak services.
The cost of providing peakhour services has been a longstanding cause of low utilisation, with rolling stock required only for a single outward and return trip during peak hours. There is a similar situation for traincrew, where individual diagrams were needed for both the morning and evening peak. A more even demand for travel during the day will be beneficial, as the ability to cut back peak hour capacity will bring resource savings.
Risk to investment
The need for inflation-linked fare increases reflects an assumption that operational costs will rise – particularly as many agreements link staff pay to a cost-of-living measure. But the shift away from peak travel will break this link and mean that an increase that is lower than the rate of inflation will not necessarily mean the need for increased financial support from the Department for Transport.
These circumstances may lead to the expected January 2022 fares increase of 4.8% being scaled back by removing the 1% supplement above the RPI index, or a delay for a period of months. A complete freeze in the increase is both unlikely and unwise given the long-term impact on future revenue.
If there is no increase at all, the 4.8% shortfall equates to a potential annual cost of up to £500 million (given annual passenger income exceeds
£10 billion) – and the same over a 10-year period could result in a reduction of £5 billion in industry funds.
In any case, there is no past evidence that increasing fares in line with inflation has impacted on continuing passenger growth, and the level of fare income is crucial to the funding of capacity enhancement schemes and the calculation of a financial return.
A fares freeze reduces the ability to demonstrate an investable benefit-to-cost ratio and has the potential to curtail ambitions for line reopenings, as lesser levels of income will mean greater revenue support payments.
Social exclusion
Economists have long recognised the wider benefit that rail offers for connectivity with employment, education, and the prevention of social exclusion. But there is an underlying assumption that fare income should be maximised to keep any revenue support, paid by the general taxpayer, to the minimum necessary. In the past there was a recognition that cheaper fares should be offered to allow essential travel to work journeys and access to lower paid jobs. This was provided by ‘Parliamentary fares’ or ‘workman’s’ tickets, which had to be provided by rail companies for travel at appropriate times – including a system to cover shift work. There remains a need to encourage the use of rail by sections of the community that have low disposable income, which has resulted in railcards being used as an enabler in defined parts of the market. Even before the Covid-19 pandemic, a joint initiative by the Rail Delivery Group and Transport Focus was established to identify how easier fares could be provided that reflected changing trends in the use of services. The conclusion was that a tap in-tap out ‘pay as you go’ system would be the most beneficial change, as this would ensure that the lowest fare for the journey was charged. This could be made to work for local journeys, but it is hard to see how the system would cater for the huge variety of ticket options available for longer distance journeys. These fares are market based, and it is significant that Avanti West Coast has introduced a new Standard Premium fare (a revival of the earlier BR Silver Standard product). A supplement of between £15 and £30 is charged depending on the journey, and it is offered on all services operated by ‘Pendolino’ trainsets, reflecting lower demand for First Class travel at the current time. Avanti’s initiative demonstrates that however desirable a simpler fare structure may be, fares need to be tailored to individual markets and that a ‘one size fits all’ philosophy will dilute the options available to maximise revenue.