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
| Country | Number of Train Types
| Supplement for Fastest Trains? | Supplement for Any Other Trains?
| No Supplements Required | Charge for Compulsory Reservation?
|
| Great Britain | 1
| | | Y | No
|
| France | 3 | Y
| Y | | Yes |
| Germany | 12 | Y
| Y | | Yes |
| Italy | 9 | Y
| Y | | Yes |
| Spain | 8 | Y
| Y | | Yes |
| | |
| | |
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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