Select Committee on Transport Minutes of Evidence


Memorandum submitted by the Association of Train Operating Companies

1.  INTRODUCTION—ATOCS ROLE

  The Association of Train Operating Companies (ATOC) is an incorporated trade association owned by its members, who are principally the private Train Operating Companies (TOCs) that provide passenger rail services in Great Britain. As well as being the official voice of the passenger rail industry, it also provides its members with a range of services that support their activities and enables them, in many cases, to comply with conditions in their Franchise Agreements and Operating Licences.

  This memorandum is submitted by ATOC on behalf of its TOC members and is complementary to the individual submissions that some TOCs will be making to the Select Committee.

2.  BRITAIN'S GROWING PASSENGER RAILWAY

  In the financial year 2004-05, Britain's passenger railway carried 1.088 billion passengers, the highest total since 1958, when the passenger network was around 60% larger. Over the last 10 years, the number of passengers carried has increased by around 38% and passenger kilometres have grown by around 40%.[1]

  This is the highest rate of sustained growth since records began in 1919 and the highest by any western European railway over the last 10 years. A table showing comparative European growth rates has been shown below:

Table 1


Source: ATOC Report into 10 Year European Rail Growth Trends, July 2005. Base year is average of 1993, 1994 and 1995.

  Analysis by ATOC of research undertaken by DfT[2] has demonstrated that the growth in usage has come from both existing customers using the railway more and new customers being attracted to rail. Growth has also occurred in all rails' principal geographic markets—long distance travel, regional travel and the London and South East market.

  By any standards, this performance is outstanding but it is even more remarkable given the severe challenges faced by the industry after the Hatfield crash in 2000. It is certainly not the record of an industry driving away customers through high prices or overly complex fares. Indeed we would argue the growth experienced has resulted, in part, from the innovative pricing strategies pursued by TOCs since privatisation, within the confines of a highly regulated environment.

3.  THE CURRENT REGULATORY ENVIRONMENT

  The current regulatory environment in regard to fares is more complex and onerous than many commentators suggest. An overview of current regulation is summarised below:

    (i)  Through Ticketing: TOCs are obliged as a condition of their Passenger Licences, to offer fares for every possible station to station journey in the country. In addition, many other through fares are also offered, to destinations such as London Underground stations.

    (ii)  Price Capping: Certain fares are designated as regulated (currently season tickets, short distance Standard Day Returns and Savers) and TOC Franchise Agreements contain conditions that "cap" the increases which TOCs can make to these fares. Until 2003, the cap was set at RPI -1 but following the SRA's review of fares regulation in June 2003, has been set at RPI +1. Capping is managed through a complex "fares basket" process. Around 46%[3] of all rail fares (by value of sale) and 50% (by volume of journeys) 16 are subject to this price regulation.

    (iii)  Inter-available Fares: As a further condition of their Franchise Agreements, all TOCs must become party to the industry-wide and DfT-controlled Ticketing and Settlement Agreement (TSA). This places an obligation upon TOCs to offer "inter-available" fares (ie fares that can be used on the services of any train company) on all routes.

    (iv)  Ticketing and Settlement Agreement: As well as regulating inter-available fares, this thousand page agreement also sets out many other conditions associated with the setting of fares and sale of tickets—the number of fares' changes per year and acceptable methods of payment for instance. Whilst the TSA does not place limits on the price changes that TOCs can make to unregulated fares, it does significantly constrain how they set and retail fares.

    (v)  Railcard Discount Schemes: All TOCs, as a further condition of their Franchise Agreements, are obliged to become party to the DfT-controlled Senior, Young Persons and Disabled Persons Railcard "Scheme" agreements. These agreements oblige TOCs to accept and support these Railcards, which offer discounts off a range of fares. Almost 7%16 of industry revenue is accounted for travel using one of these Railcards.

  In addition to this, further specific obligations and constraints are placed upon TOCs in PTE areas and in regard to the mandatory Travelcard agreement with Transport for London.

  In total, we estimate that around 49% of rail fares by value of sale and 52% by volume are subject to some form of regulation or other, putting aside the requirements of the TSA which affects all fares. It is also worth noting that rail fares are more highly regulated than those for any other form of transport offering domestic services within Great Britain.

  The extensive regulatory framework provides very considerable protection for passengers in those markets where rail is strong as well as preserving key consumer benefits. We support this framework but believe some aspects currently go too far, inhibiting innovation in both marketing and retailing. We will argue the case for measured change in the last sections of our memorandum.

4.  CREATING CONSUMER CHOICE

  Since privatisation, TOCs have continued to develop the range of market fares first introduced by British Rail in the early 1980s. They have done this for two, principal reasons:

Competition

  Britain's passenger railway is often regarded as a monopoly. It is not. In all markets, TOCs have to compete with private and company cars and buses. Longer distance markets are even more competitive with rail companies having to compete with express coaches and air carriers. The entrance of low cost air carriers into the market and the extremely low fares offered by coach companies has led to fierce price competition on longer distance routes.

  Rail's overall market share of the total transport market (including car and measured by passenger kms) is only 6%[4] and is relatively low in most geographic markets. Its share of the total domestic public transport market (as measured by passenger journeys) is only 16%.17 It is only in the central London and some other large conurbation commuter markets that rail's market share exceeds 40%, the benchmark generally used by economists to identify market dominance. Because TOCs operate in competitive markets, they must offer attractively priced fares in order to be able to compete effectively.

Volume and Revenue Growth

  Revenue growth is key to TOCs generating profits from their franchises and one of the principal areas of commercial risk they accept. The commitments within Franchise Agreements to improve and invest in new trains, stations and services are, to a large extent, based on TOCs generating additional revenue to pay for the associated operating and investment costs. The opportunities presented by revenue growth also allow TOCs to submit more competitive franchise bids, reducing taxpayer subsidies and increasing premium payments. Higher revenue growth was one of the key elements of GNER's successful bid to retain the East Coast Main Line franchise, which will deliver both significant new investment and £1.3 billion of premium payments to the DfT over 10 years.

  In this context, TOCs have been extremely innovative, within the constraints of the regulatory framework, in introducing attractively priced fares to attract new customers and drive growth. They have also increased some fares where demand was strong and the market demanded additional services. This has been particularly so for full fare Standard Open and First Class fares, which are primarily bought by business travellers. However, a key element of their pricing policy has been, and continues to be, the marketing of low price fares to the leisure market in order to fill off-peak capacity and to grow volume and revenue.

  The overall effect of these factors has been to increase consumer choice with customers being offered a wider range of fares than previously. The difference between the highest and lowest priced fares has also widened as a result of increases to the price of Open Return and full fare First Class tickets and the introduction of very cheap fares at the other end of the spectrum.

  However, fare levels have remained remarkably static overall in real terms, after allowing for inflation, since privatisation. The table below illustrates this and provides comparative indices for bus fares and petrol prices.

Table 2

CHANGE IN TRAVEL COSTS 1995-2005
Type of Travel Cost Change in Real Terms 1995-2005
Standard Class rail fares+3%
All rail fares (including First Class) +6%
Bus fares+15%
Petrol prices          +22% (estimate)
Source: SRA's National Rail Trends 2004, Office of National Statistics, Transport Statistics Bulletin. (Department for Transport) September 2005.


  The wide range of fares now offered, on many longer distance routes in particular, is often selectively used by critics as evidence of the high cost of rail fares in Great Britain. Typically, the most expensive Standard Class fares, Standard Open Returns, are quoted. However, this is highly misleading as the vast majority of customers do not buy these fares. To illustrate this, we have analysed the numbers of customers buying different types of fares on the London-Manchester route during 2004-05. The graph below shows that only around 15% of customers are buying the most expensive fares. Almost 85% of customers are paying £100 or less for a return journey and almost 75%, £50 or less. The lowest adult return fare offered by Virgin Trains on this route is currently £24 (equivalent to 4p/km).



    Source: ATOC Analysis, September 2005

  This picture is repeated on other routes that we analysed. On the routes from London to Birmingham, Newcastle, Bristol and Edinburgh, the proportion of journeys made using fares which were 50% or less of the most expensive Standard fare ranged from 60% to 80%.

  Whilst we understand consumer concerns about the resulting complexity of the fares structure, we believe these to be very considerably outweighed by the benefits of greater choice. The growth in volume over the last ten years reflects this. We also believe that consumers are becoming more used to shopping around for travel bargains and accept this as a worthwhile trade off for lower prices. Many airlines, particularly low cost carriers, have no defined fares structure at all but vary prices almost continuously to match demand and supply. The enormous growth in low cost air travel attests to the success of this approach.

  Overall, there have not been significant real increases to the overall levels of rail fares since privatisation but the greater choice of fares offered to customers has been effective in generating new demand and has contributed to the remarkable growth in volume and revenue witnessed over the last 10 years.

5.  INTERNATIONAL COMPARISONS

  Overall average fares in Great Britain are around 9.7p per km compared to 6p-7p for comparable western European countries except Italy (3p per km). However, the relatively high average pence per kilometre in Britain across all journeys is driven partly by four important factors:

    —    the relatively high cost of commuting on season tickets, particularly in London and the South East (an average of 8.6p per km), itself reflecting the high costs associated with this market;

    —    the relatively high prices for fully flexible Standard Open tickets and full fare First Class tickets (15p and 27p per km respectively) which in Great Britain are set at price levels reflecting the fact that they are premium products offering full flexibility and value added services to the business market;

    —    the relatively short average distance travelled by train users in Britain compared to continental Europe (pence per kilometre tends to fall with distance and rail users in Britain, on average, travel around half the distance of their French and Italian counterparts for instance).

  Adjusting for the first two factors alone brings the average pence per kilometre in Britain down to 7.5p, much more in line with other European countries.

  We also analysed average Standard Class rail fares for journeys between a number of continental European cities and the relevant capital city of the country concerned and compared these to similar journeys in Great Britain. The table below illustrates that, based on this analysis, average Standard Class fares in Great Britain are comparable or cheaper than those in Germany. Fares in France are cheaper at shorter distances but more expensive at longer distances. Fares in Italy are generally cheaper though broadly comparable for longer distance journeys.



  It is also worth noting that virtually all continental European railways operate a system of fares' supplements for certain types of trains and reservations. The table below illustrates the resulting complexity and highlights that there are no additional fees or supplements charged in Great Britain.

Table 5

FARE SUPPLEMENTS ON EUROPEAN RAIL SERVICES
CountryNumber of Train Types Supplement for Fastest Trains?Supplement for Any Other Trains? No Supplements Required Charge for Compulsory Reservation?
Great Britain  1 YNo
France  3Y YYes
Germany12Y YYes
Italy  9Y YYes
Spain  8Y YYes


  Based on our analysis, we do not believe that Standard Class rail fares in Great Britain are significantly more expensive than those in comparable European countries. Overall, average fare levels are higher reflecting, at least in part, some specific characteristics of the British market.

6.  THE AVAILABILITY OF CHEAP FARES

  The Committee expressed particular concern at the lack of availability of cheaper advance purchase fares due to problems with providing timetable information twelve weeks in advance of operation (often referred to as T-12), as required of Network Rail by the Office of the Rail Regulator. Reservations should be available a minimum of nine weeks before departure (T-9).

  Significant problems with achievement of T-12 have existed, largely as a result of the severe disruption which the network experienced as a result of the aftermath of the Hatfield crash in 2000. It should be noted that it is strongly in the interest of TOCs, that T-12 works efficiently and that passengers can depend on T-9. Without T-9 and T-12, the ability of TOCs to offer cheap advance purchase fares and to drive volume and revenue growth is severely curtailed.

  Over the last year, TOCs have worked very closely with Network Rail in trying to improve the position and, latterly with considerable success. T-12 was achieved on some routes for the summer timetable. For the key Christmas and New Year timetable, we are increasingly confident that all reservable routes will have reservations open by the minimum T-9 period as required and that most routes will have timetable information available from T-12. However, although much reduced, the risk of short term engineering work remains and may impact on some routes.

7.  THE FUTURE

  Since privatisation, the rail industry has experienced remarkable growth, partly at least, due to TOCs offering attractive fares that have encouraged existing customers to travel more and that have attracted new customers. We also believe that much of the regulatory regime has worked well and we generally welcomed the changes introduced by the SRA in July 2003.

  However, if growth is to continue, we believe that some measured changes to the existing framework are required. In London, following the Government's Rail Review, this is already happening and ATOC/TOCs are engaged constructively with the DfT and TfL in the development of proposals to simplify fares based on the successful zonal model that already exists for Travelcards. Similar discussions are taking place in regard to the possible extension of the Oyster "pre-pay" Smartcard to rail routes. For other areas, we have set out our ideas below:

    —    On longer distance routes, we continue to question the need for regulation of Saver fares. Rail is not dominant in these markets and the capping of these fares has led to some significant distortions in the market and has exacerbated overcrowding at peak periods of leisure travel.

    —    The Ticketing and Settlement Agreement is overly complex and prescriptive. We are considering putting forward proposals to the DfT later this autumn to restructure this agreement and provide more freedom to TOCs in how they are able to set and retail fares.

    —    The fares basket approach does not entirely lend itself to innovatory new products such as carnet tickets or "shoulder peak" prices. The current approach should be reviewed.

  We believe these to be measured proposals that will not affect current regulation in regard to through ticketing, inter-available fares, Railcards and price regulation in markets where rail has a high market share.

  Finally, we'd like to note that several TOCs including Virgin Trains, Midland Mainline and GNER are investing significant sums in the development of revenue management systems. These are designed to manage demand more effectively and, most importantly, support the sale of cheaper tickets to fill off-peak capacity. This investment complements the £90 million of TOC investment (over 10 years) already made in a new industry reservation system designed, in part, to support yield management systems. If the industry is to exploit fully these investments, which are potentially a major driver of future volume and revenue growth, TOCs must have the necessary commercial freedom. Our proposals are designed to achieve this.

8.  CONCLUSIONS

  In conclusion:

    —    We believe that Britain's passenger rail industry has achieved remarkable growth over the last ten years, fuelled in part by a wider range of attractively priced fares.

    —    Overall average fare levels have not risen significantly in real terms since privatisation and, once reasonable adjustments have been made, are comparable with the Standard Class fares offered by other European railways.

    —    Whilst we accept that some consumer concerns exist in relation to complexity, we believe that consumer choice benefits outweigh this and that the market is increasingly used to shopping around for the best offers available.

    —    The availability of cheap, advance purchase fares, has improved considerably over the last 12 months and we are confident that the Christmas/New Year timetable will see further significant progress towards the full achievement of T-12.

    —    We believe that, whilst much of the regulatory framework has worked well, some measured changes are needed to allow TOCs to exploit fully the commercial opportunities available and to continue to grow volumes and revenue.

3 October 2005









1   Source: National Rail Trends 2004. Back

2   Source: National Travel Survey 2003. Back

3   Source: ATOC analysis, from Rail Business Information Systems (Lennon). Back

4   Source: Transport Statistics Bulletin (Department for Transport), September 2005. Back


 
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