Memorandum by Arriva (REN 27)
RAIL SERVICES IN THE NORTH OF ENGLAND
1. INTRODUCTION
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.
THE IMPACT
OF THE
INITIAL FRANCHISE
AWARD TO
MTL (1997—FEBRUARY 2000)
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.
|
| | 1997
| 1998 | 1999
| 2000 | 2001
| 2002 | 2003
| 2004 |
|
| Total | 222.6
| 224.5 | 197.0
| 175.7 | 164.2
| 156.2 | 150.3
| 145.4 |
|
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. ACTIONS TAKEN
BY ARRIVA
TO RE-ESTABLISH
THE FRANCHISES
ON A
ROBUST BASIS
(FEBRUARY 2000 TO
DATE)
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.
Manpower
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.
THE INFLUENCE
OF RAIL
SERVICES ON
THE ECONOMIC
AND SOCIAL
DEVELOPMENT OF
THE REGION
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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