Select Committee on Transport Appendices to the Minutes of Evidence

Memorandum by Arriva (REN 27)



  1.1  Arriva is one of Europe's largest private operators of public transport. It is based in Sunderland and employs over 30,000 people in the UK and mainland Europe. The focus of the evidence submitted by Arriva relates to the two franchises it currently operates in the UK which account for around 10% of the company's business:

    (a)  Arriva Trains Northern (previously known as Northern Spirit).

    (b)  Arriva Trains Merseyside (previously known as Merseyrail Electrics).

  1.2  Both of these franchises were formally awarded to the MTL Group of companies in 1997. It is the view of Arriva, which took over these franchises in February 2000, that the original award of these franchises to MTL was fundamentally flawed, because the business plans submitted by MTL in support of their franchise bids were financially unsustainable.

  1.3  Arriva, with the consent of the sSRA, assumed formal control of these two franchises in February 2000, initially for a period of only 12 months. Since that date, Arriva has sought to rebuild these businesses and has taken the initiative through senior management changes and extensive recruitment to rebuild the workforce. At the same time because of delays in the re-franchising process, which for the new Trans-Pennine Express franchise commenced in March 2000, Arriva has had to operate these franchises against a background of continuing uncertainty.

  1.4  In February 2000, the sSRA indicated that the re-franchising of Trans-Pennine Express and the new Northern franchise would be completed by February 2001. In the event this timetable was not achieved and, in late 2000, the SRA requested that Arriva extend each franchise for a period of two years. These extensions contained provisions that effectively have meant that Arriva has never had more than three months "security of tenure." The extension agreements also stipulate that all major decisions relating to the franchises, such as annual wage negotiations or any staff re-grading, require the prior approval of the SRA.

  1.5  It is the view of Arriva that the action it has taken over the last two years has now put these franchises on a stable footing that will be able to maintain robust, safe and reliable services. The opportunity now exists to improve progressively the services provided in the areas served by these franchises with a stable environment and targeted investment under long-term franchises.


  2.1  It is the view of Arriva that the business plans, on which the franchises were initially awarded to MTL, were fundamentally flawed. In the case of the Northern Spirit franchise, the business plan was based on the following assumptions for the franchise period:

    (a)  Ticket sales revenue increase of 43%. From £80 million to £114 million in real terms.

    (b)  Total staff reduction of 40%: From 3,100 to 1,900.

    (c)  Driver reduction of 34%. From 783 to 520 by the end of the franchise in 2004.

    (d)  Franchise subsidy reduction of 35%. From £222.6 million to £145.4 million.

  2.2  The subsidy profile in real terms (1997 £ millions) established for the Northern Spirit franchise is tabled below: It shows that MTL maintained the subsidy for the first two years and accepted reductions of around £27.5 million in 1999 and £21.3 million in 2000 with continuing reductions thereafter.



  2.3  This subsidy profile enabled MTL to achieve and abstract a satisfactory profit in the first two years of the franchise. However the financial viability of the franchise was clearly at risk unless it achieved the aggressive assumptions included in the plan. MTL did not achieve these assumptions and, in late 1999, the franchises were in effect insolvent and MTL entered discussions with the sSRA to re-negotiate the franchises' subsidies.

  2.4  In addition, in August 1999, MTL took an interim dividend of £2.9 million out of Northern Spirit. After its acquisition of MTL, Arriva investigated the legality of this dividend, was advised that it was illegal and funded its repayment to Arriva Trains Northern.

  2.5  MTL Group was bought by Arriva plc in February 2000. Following negotiations with the sSRA, the two franchises were awarded to Arriva for a 12-month period to February 2001. The subsidy agreed with the sSRA for this twelve-month period was maintained at the level that would have been paid to MTL and it was projected that, as a result, Arriva would incur a pre-tax loss of some £20 million. In its press announcement at the time of the transaction (18 February 2000), the sSRA stated that it planned to re-franchise both of these operations within the one-year period that Arriva had committed to operate the franchises.


  3.1  On taking control of the franchises in February 2000, Arriva undertook a detailed review of the businesses. This was completed in April 2000 and in the case of Northern Spirit, now Arriva Trains Northern, the following issues were identified:

    (a)  The franchise already had a driver shortfall of 34.

    (b)  There were severe shortages of other staff, including conductors.

    (c)  There was insufficient driver training resource without any systematic programme to recruit and train new drivers.

    (d)  The franchise had access to insufficient rolling stock.

  3.2  A number of problems existed in the Merseyrail Electrics franchise, where MTL had also reduced the number of driver, conductor and station staff. However, these issues were not as severe as in Arriva Trains Northern and Arriva was able to remedy the majority of issues relatively quickly.


  3.3  Detailed manpower plans were established for both businesses by April 2000. The manpower plan for Arriva Trains Northern was based on the following key assumptions, which at that time were believed to be prudent:

    —  Driver training resource: At the time of its acquisition, Northern Spirit had no resource dedicated to recruiting and training new entrants to the industry. Arriva Trains Northern took an immediate decision to increase this resource and by December 2000 Arriva Trains Northern had 14 fully qualified driver-trainers. These trainers had all to be recruited from the existing driver establishment and were required to undergo a 10-week training programme. This increased the short-term driver shortfall.

    —  Staff turnover: Up to April 2000, Northern Spirit was experiencing relatively low staff turnover with around 20 drivers annually leaving the company for other employment. The manpower plan assumed that this would increase to around 45 annually, with drivers leaving Arriva Trains Northern to join the inter-city and freight operators, who were then offering higher rates of pay and had increased their requirements as a result of growth and the anticipated introduction of the 35-hour week.

    —  Length of training: Driver training would typically take between 63 and 78 weeks depending on the complexity of route knowledge required.

    —  Working week: The 35-hour week for drivers would be introduced in October 2001. It was also assumed that the rest day working agreement for drivers, negotiated in April 2000, would be extended throughout the period of the manpower plan.

  3.4  Under the plan it was apparent that the driver shortage position in Arriva Trains Northern would deteriorate as a result of the introduction of the 35-hour week, increased driver turnover and the promotion of drivers to driver-trainers. The low point was forecasted to be in March and April 2001, when the shortfall was projected at 62 productive drivers and when the number of trainees was expected to be 116. In March 2001, the actual shortfall in productive drivers was 114.

  3.5  The increased driver shortfall was the result of three factors:

    —  Driver turnover. The number of drivers leaving Arriva Trains Northern increased by 400% in the first half of 2000, with 23 going to other train operators and 17 to freight companies. A main factor behind this unexpectedly high turnover was that the other rail operators, who shared crew depots with Arriva Trains Northern, raised their drivers' rates of pay substantially in 2000 and 2001. For example, Virgin and GNER raised their rates so that the differential relative to Arriva Trains Northern increased to around £10,000 per annum.

    —  Working week. The 35-hour week for drivers was brought forward to May 2001. ASLEF required this as a precondition for maintaining the rest day working agreement, which was fundamental to the operation of the service given the existing driver shortage.

    —  Training programme disruption. Although driver recruitment levels were achieved, the training programmes were severely impacted as a result of:

      —  The disruption to the network following the Hatfield incident and the widespread imposition of speed restrictions because of Gauge Corner Cracking.

      —  The problems caused by the Leeds First redevelopment project. Over the Christmas and New Year period in 2000, Leeds station was scheduled to be closed for two weeks. In the event, it was closed for four weeks followed by a further two weeks when there was extremely limited access to the Neville Hill maintenance depot resulting in a very restricted timetable. Arriva Trains Northern operates some 1,000 services each day through Leeds station and the continuous restrictions throughout 2001 on access to both platforms and maintenance facilities severely restricted driver training.

      —  Damage to the network caused by the widespread flooding in late 2000.

  3.6  Although Arriva Trains Northern had recruited a total of 143 trainee drivers between February 2000 and October 2001, the factors outlined above meant that the shortage of productive drivers worsened. By October 2001, the company had only 607 fully productive trained drivers, compared with 682 in February 2000. As a result, reliability on the network deteriorated with significant numbers of ad hoc cancellations.

  3.7  In October 2001, the SRA announced its intention to fine Arriva Trains Northern £2 million for failing to operate passenger services in accordance with its Franchise obligations. The SRA stated that "whilst the shortage of fully productive drivers could not fully have been anticipated by Arriva Trains Northern, the SRA believed that Arriva Trains Northern had failed adequately to plan and resource its operations so as to minimise the risk of disruption to the greatest extent reasonably practicable". Arriva Trains Northern accepts that, with hindsight, it should have reacted more quickly to the deteriorating driver position. However it would argue that its approach demonstrates that it acted in good faith and the circumstances it faced with the initial driver shortage compounded by the recruitment by other operators and the impact on training programmes of the infrastructure collapse were unprecedented.

  3.8  Since October 2001, the performance of Arriva Trains Northern has steadily improved. At the end of May 2002, Arriva Trains Northern had over 700 fully productive drivers with a further 190 in training, ahead of the plan agreed with the SRA. Arriva Trains Northern was able to restore, as promised, the full timetable on 2 June 2002. (Up to 10% of services had been temporarily removed in October 2001 as part of the recovery plan agreed with the SRA and the relevant Passenger Transport Executives. Of these 75% had been restored in February 2002.

  3.9  Recruitment of Arriva Trains Northern drivers by other operators has virtually ceased following the introduction in December 2001 of new terms and conditions for drivers.

  3.10  In summary, after an extremely difficult period, the actions taken by Arriva Trains Northern mean that the manpower resource is now in place to operate its services reliably and punctually.

Rolling Stock

  3.11  On taking over the franchise, Arriva identified that it was 18 units (nine x two-car trains) short of the stock necessary to operate its services robustly. Northern Spirit had been short of rolling stock since the start of the franchise in February 1997; and the shortfall had become more severe as franchise obligations to increase services took effect.

  3.12  In the franchise extension negotiations in late 2000, Arriva Trains Northern agreed with the SRA to undertake a study to determine the rolling stock requirement. The SRA agreed to fund any additional units required. The general shortage of suitable diesel-powered stock meant that additional units had to be sourced from other franchisees. As a result of this study, five x two-car units that would be available from October 2002 were identified.

  3.13  Of these, four trains were to be released by Virgin. The SRA has now advised Arriva Trains Northern these trains will not now be released until May 2003 and may then be required by another franchisee. The fifth two-car train will be available from October 2002.

  3.14  Arriva Trains Northern has introduced into service 16 new three-car Class 333 electric trains (to replace 40 year old units — which were then scrapped) on the limited electrified lines for commuter services into Leeds. However the orders for these trains, placed by MTL, did not anticipate increased demand. This has now been remedied with a fourth car being ordered for each train. Full 4-car train operation will be completed in late 2002.

  3.15  In its revised Best and Final Offer for the new Trans-Pennine Express franchise, Arriva proposes the introduction of 176 new units (55 trains) by May 2006 at a capital cost of £225 million. This bid could release trains currently used by Arriva Trains Northern and First North Western on existing Trans-Pennine services for "cascade" into the new Northern franchise. The SRA has not yet published its specification for the Northern franchise's passenger service requirement. However much of the additional capacity produced by the introduction of new trains on Trans-Pennine Express is likely to be absorbed in replacing the Pacer trains.

  3.16  The separation of the Trans-Pennine Express franchise out of the Northern franchise will remove the capability for the new franchisees to optimise the use of rolling stock across the two networks. This issue is currently being addressed by the SRA's Transition Team.

  3.17  In summary, additional rolling stock is required to ensure a robust service. Under the franchise agreement Arriva Trains Northern has not been in a position to provide this.

4.  Do existing franchisees provide satisfactory services, particularly in relation to safety, punctuality, reliability, comfort and frequency of services?

  4.1  Arriva has incurred substantial cost in trying to rectify shortcomings in the original MTL bid for Northern Spirit. There is still substantial scope to improve these services further.

  4.2  The unrealistic subsidy profile in its 1997 bid, which led to MTL's financial problems and the consequent pressures on Northern Spirit, confirm that services can only properly be provided by robust franchise agreements with franchisees who have substantial financial resources. This has been recognised by the SRA's agreement, for the extension of the franchise periods of each of Arriva's TOCs, of a subsidy profile formula giving a 3% operating margin. For 2001, Arriva achieved an operating profit of £11.5 million on a train turnover of £425.5 million, contrasted with the operating loss in 2000 of £30 million. The agreed Arriva Trains Northern subsidy for the 2001 extension was £249.6 million, broadly unchanged in real terms from the initial 1997 level.

  4.3  Punctuality and reliability in Arriva Trains Northern services has been adversely affected since February 2000 by extraneous factors (eg Gauge Corner Cracking, Leeds 1st and flooding) as well as driver and rolling stock shortages. This is now being rectified with the completion of track maintenance and the recruitment of drivers. The rolling stock shortage remains an issue.

  4.4  However, customer confidence and satisfaction and a robust and frequent train service will only be met by further substantial and continuing investment in rolling stock and infrastructure. Fare-box revenue alone will not finance these investment requirements.

5.  Plans for investment in the rail network in the region and whether they meet the needs of additional network capacity and other improvements?

  5.1  In its initial Best and Final Offer (submitted in March 2001) for the new 20 year Trans-Pennine Express, Arriva offered a franchise proposition that would be necessary to meet the stated aspirations of the SRA:

    —  Leeds to Manchester: 15 minute service frequency with a 45 minute journey time compared with the current 59 minutes.

    —  Sheffield to Manchester: Four trains per hour.

    —  Manchester Airport: Six trains per hour across the three corridors.

  5.2  As well as investment in new higher speed rolling stock, Arriva identified that additional infrastructure capability would be necessary:

    —  Leeds to Manchester: General improvements to existing track, costed with Railtrack (before its administration) at over £270 million.

    —  Sheffield to Manchester: The re-opening of the Woodhead route (closed in 1980) estimated at a cost over £400 million.

    —  Manchester Airport: The construction of a third platform at Manchester Airport. This work would be undertaken in conjunction with Greater Manchester Passenger Transport Executive in its development of its "Tramlink" at the Airport with an investment contribution of about £35 million from Train Operating Companies.

  5.3  All of the infrastructure improvements would have conjoined at Manchester, where there is a bottleneck. In its Best and Final Offer Arriva proposed to relieve this by a flyover at Ardwick for through traffic at Manchester Piccadilly at a further cost of about £250 million. Overall the investment in its proposal was £2.25 billion giving economic benefits of £1.8 billion. The investment in infrastructure would also have directly benefited the frequency of commuter and rural services of the proposed new Northern franchise and other operators, as well as the Trans-Pennine Express franchise.

  5.4  The SRA's revised instructions for the Trans-Pennine Express Best and Final Offer, for submission in April 2002, was for an eight year franchise and:

    —  excluded any investment in infrastructure works;

    —  limited any investment in additional service enhancements for the new franchise to an increase in subsidy equivalent to £25 million per annum over the eight years of the franchise (£140 million NPV); and

    —  indicated any substantial investment should be in rolling stock.

  5.5  Arriva's bid proposes the introduction of 55 new trains and improved passenger information systems with a total investment of £263 million, providing a similar level of economic benefits. However the investment in new Trans-Pennine Express rolling stock would only have indirect benefits for the new Northern franchise by permitting the "cascade" of displaced rolling stock to Northern services. This cascade should permit the release of the older less comfortable Pacer trains, but leasing costs incurred by the Northern franchise will increase accordingly.

  5.6  The investment in new trains alone cannot fully deliver the SRA's aspiration on service improvements. For example, the new trains, though capable of 125 mph (compared with the top speed of current rolling stock of 90 mph), only reduce the Leeds Manchester time by two minutes to 57 minutes. In addition, without infrastructure works the Sheffield-Manchester frequency and the Manchester Airport frequency cannot be delivered as the track is operating at its capacity.


  6.1  Arriva considers that the rail network has never been used more intensively or, as Richard Bowker says in his introduction to the SRA's Strategic Plan, "certain parts of the infrastructure have become congested or saturated". The improvements in capacity can only be delivered by investment in rolling stock and infrastructure.

  6.2  The history of growth in usage on Arriva Trains Northern's current Trans-Pennine Express service over the last 15 years, from the one train per hour service between Leeds and Manchester in 1986 to four trains per hour today, proves that there is demand for improvements in that service. The increased number of passengers on the new Class 333 commuter trains into Leeds and the need to add a fourth vehicle shows the demand is widespread and continuing.

  6.3  The effect of the reduction in congestion on the roads in the North of England, especially the M62, and improved rail journey times has been the subject of a long-term study by Faber Maunsell (previously Oscar Faber) and their resulting economic benefits model is one of the most respected. The benefits inherent in Arriva's proposals for the Trans-Pennine Express franchise are derived from that model.

  6.4  The example of the two best and final offers made for differing Trans-Pennine Express requirements shows that full economic benefits can only be achieved through investment in both infrastructure and rolling stock. The amount of the investment is, however, substantial.

5 June 2002

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