Memorandum submitted by Renaissance Trains
Limited
A request has been received from Annette Toft
for a written submission from Renaissance Trains Limited to the
inquiry into passenger rail franchises in the form of a description
of open access passenger operations. Similar questions to those
listed in the terms of reference have been used although some
further information has been provided which it is hoped the Committee
will find useful.
Renaissance Trains is a promoter of open
access passenger services, forming Hull Trains in partnership
with GB Railways (later First Group), which commenced operations
in 2000. Renaissance is currently promoting the operation of new
train services between Wrexham, Shrewsbury, Telford and London
in partnership with Laing Rail—the owners of the Chiltern
railways franchise.
Passenger open access operations have characteristics
that offer a combination of better value for money in terms of
operating the services and external economic value that can be
higher than that achieved by the franchised operators.
CONTEXT
The pattern of passenger train services continues
to reflect operating strategies developed by British Rail, which
focussed on high levels of resource utilisation rather than detailed
product design to serve individual markets.
Thus the product offered for long distance express
passenger services was standardised around fixed coaching stock
formations that typically offered 500 seats. A high service frequency
was also operated to maximise the use and productivity of the
rolling stock and traincrew, with services often running at times
of the day when there were few takers.
The result of running high capacity fixed formation
trains and the belief that they should operate for as many service
hours as practical meant that the rail product was deliberately
concentrated on a relatively small number of point-to-point flows.
At stations served large car parks were provided, and "rail-heading"
as it is known (driving to the station) was the general shape
of the product rather than relying on the use of local rail feeder
services.
This strategy appealed to the higher value market
(first class and full fare) as feeder trains were often run with
poor quality rolling stock and even though operating over quite
long distances (50 miles plus) often did not have first class
accommodation or catering services. As local trains the availability
of space for luggage was also a problem.
HULL TRAINS
Hull Trains is the first UK open access operator
and it can be seen that the approach is quite different. Although
Hull is a significant population centre it did not offer sufficient
business to run regular 500 seater trains and so was discarded
by BR as a core route to and from London. Passengers wishing to
travel between Hull and London were encouraged to travel by road
and "rail-head" to Doncaster to catch the regular services
provided from that point. Passengers travelling from London faced
the need to change trains and use unsuitable rolling stock.
It is worth saying here that many population
centres were similarly treated with examples such as Sunderland
(where a new open access operation is now proposed), Blackpool,
Bradford, Grimsby/Cleethorpes/Lincoln, and Telford/Shrewsbury
(also subject to a new open access service proposal). In Scotland
there has in the past been a similar debate within rail planning
circles about removing through trains between London, Aberdeen
and Inverness although in this case stakeholder objection has
been strong enough to head-off the idea.
Hull Trains operates without subsidy and is
able to do for the following reasons:
— It runs 180 seater trains rather
than 500 seater formations.
— Product quality matches that provided
by other long distance express operators, and as a result encourages
passengers to travel throughout by rail between London and Hull
rather than "rail heading". Indeed full catering with
hot meals and buffet services are operated at weekends, which
is not generally the case for other operators.
— It only runs trains where there
is demand and the six current daily services on weekdays have
an average load factor of more than 80%. There is very little
wasted capacity. This is achieved by a very different approach
to sales channels with passengers buying tickets over the Internet
and by telephone. An internal travel agency is also provided to
allow an account management relationship to be developed with
large organisations based in Hull. Tickets are sold for specific
seats on specific services.
— The company is locally based and
approximately 75 staff are employed at Hull. All staff are encouraged
to provide the highest level of individual customer service and
help to vulnerable passengers such as the disabled. An emphasis
is given to training and development and a number of staff have
progressed from the junior role of providing catering and hospitality
to qualified train driver. A high loyalty factor and low turnover
has been achieved with resultant high motivation.
— A strong relationship has been built
up with local stakeholders to increase awareness of the services
and contribute to the local economy.
— Marketing expenditure is high relative
to turnover and many bespoke value for money travel offers are
available to specific market segments such as families who would
not normally be able to afford the fare.
— High standards of performance and
safety have been achieved. The company has leased new rolling
stock and is operating the newest trains on the East Coast Main
Line (class 222 type).
— Passengers can use services with
inter available tickets on a turn up and go basis and all national
railcards are accepted. This is particularly important for the
student market.
The purpose of an open access operator
is to attract new rail customers who have previously regarded
the service offered on a given route to be poor in product terms.
This particularly applies where this involves a change of train
where the feeder service is not of sufficient quality to reflect
expectations for the overall journey.
In business case terms the margin of expected
revenue over costs must be sufficient to attract investment to
cover start-up costs and initial trading account losses as volume
is built up by marketing action.
In achieving this aim there are substantial
external economic benefits that are of a great value in areas
where local stakeholders are seeking to regenerate the population
centres concerned.
Open access operators are not eligible for direct
operational subsidy although they may qualify for European or
regional funding in terms of job creation. As the services are
new the jobs created are not at the expense of others in the railway
industry and there is also the opportunity for wider job creation
by using locally sourced suppliers in areas such as catering,
uniform, train cleaning and maintenance, and office services.
The nature of the business risk is different
from the franchises as independent companies are not able to relay
on Government support if things go wrong, such as the severe effect
on railway revenues after the Hatfield accident, and to a lesser
extent after 7 July incident in London.
Open access operators also carry the risk of
adverse change to the track access charging regime, whereas franchises
are indemnified from this risk.
There is also less ability to influence policy
that might affect operational costs and track access terms as
the promoters of open access operations are outside many of the
consultative processes.
How well does the process for gaining track access
rights work?
Renaissance Trains has recent experience of
the process as it is seeking to operate a new service between
Wrexham, Shrewsbury, Telford and London Marylebone, which is being
backed by Laing Rail—the owners of the Chiltern Railways.
It should be relatively straight forward to
gain track access rights (provided all statutory licence conditions
are met) under what is known as a "section 18" application.
This works by proposing a timetable to Network Rail that fits
with other services on the route without importing undue performance
risk—although obviously any additional train services will
mean there is some increase in this risk. Perfect performance
would only be achieved if there were no trains.
Once the terms of the access contract are agreed
this is submitted to the Office of Rail Regulation who advises
stakeholders of the intention to operate the service and provides
the opportunity for comment on any factors considered appropriate.
The most usual comments are in relation to concerns about revenue
abstraction and the perceived threat to performance.
The process is of course iterative and many
meetings are held to satisfy the parties concerned.
There is limited experience of actual open access
operation as this is confined to Hull Trains but in this case
the increase in new traffic and subsequent external economic value
has outweighed any revenue abstraction issues, as the rail market
as a whole has been increased at stations served so there are
benefits to the franchised operators as well, who earn commission
on ticket sales at stations and benefit from higher awareness
of rail services in general as a result of marketing action.
Where a timetable cannot be agreed with Network
Rail the applicant has the option of making a "section 17"
application to the Office of Rail Regulation. This is a more complex
process, as the Regulator has to identify why Network Rail has
refused the application, which may be due to competing claims
for the available capacity. This is resolved by detailed analysis
of the economic benefit of the various proposals.
Are track access contracts of the right length?
The length of the access agreement needed reflects
the commitment to leasing rolling stock and the length of time
taken to build up the market until it becomes profitable.
If rolling stock is new it is unlikely that
a competitive lease can be secured for less than 10 years. If
second hand rolling stock is used there are likely to be substantial
refurbishment costs that need to be offset over a similar 10-year
period, as otherwise undue costs will be faced in the early years
of operation, which may well be unprofitable until the market
builds up.
Business models with which I am familiar indicate
that a break-even on the profit and loss account is achieved by
year three, with losses in the early years recouped by year five.
Again the business case would require a 10-year access agreement
to allow investors to earn a return from years six to 10.
COMPETITION AND
VERTICAL INTEGRATION
It is not the principal aim of the open access
operator to compete with other passenger operators. Regulatory
policy is to avoid undue revenue abstraction on existing flows
and demonstrate that the new services generate additional travel
from population centres that are poorly served by rail.
Despite this open access operators have the
potential to influence the behaviour of what might be described
as monopoly franchises by setting high standards of product deliver
that provide a benchmark for others in terms of the price/service
mix. This might be seen to influence those operators where services
are regarded as poor value for money which can be seen from the
National Survey Statistics published by Passenger Focus to be
directly related to fare levels and the standard of product and
customer service provided.
Close contact must be maintained with Network
Rail in optimising network performance and a number of industry-wide
mechanisms are in place to deliver this.
The key issue for the open access operator
is "fair" terms of access to the rail network, which
is a crucial function of independent regulation.
14 July 2006
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