Memorandum submitted by Virgin Trains
1. INTRODUCTION
Virgin Trains is pleased to have the opportunity
to submit this memorandum on train fares and ticketing to the
Transport Committee. We support the views expressed in ATOC's
submission; our own response expands on points relating to long-distance
services, based on our experience of running the West Coast and
Cross Country franchises. It also explains the thinking behind
Virgin Trains' policies in this area and the impact they have
had.
2. THE IMPORTANCE
OF FARES
POLICY
Fares and ticketing policy has important implications
for the public and the industry:
— Price is clearly an important factor
in people's decisions about whether to travel by train, by other
modes, or even whether to travel at all. The extent to which train
fares can be readily understood and purchased also influences
this choice and public perceptions of how customer-focused train
operators are.
— Fares are central to the funding
of the industry and its future prosperity. Revenue from fare-paying
passengers supports investment in additional capacity and improved
services. If the industry's call on the public purse is to be
kept to reasonable levels and the potential for some TOCs to make
premium franchise payments is to be realised, pricing must be
used effectively to generate revenue.
At Virgin Trains our aim is to make rail an
attractive proposition against stiff competition from other modes
of transport, so that customers will choose the train in preference
to car, coach or the airlines. We have introduced two new fleets
to provide faster, more frequent and more reliable services. Having
achieved this, supported by government and our partners in the
rail industry, we must make sure that the trains are used by passengers
to their full potential.
To attract new customers, a high quality of
service must be complemented by fares that are affordable and
competitive. Moreover, customers need to obtain clear, accurate
information about these fares and be able to buy tickets easily.
The two graphs below show the success of the
improved services introduced by Virgin Trains, combined with marketing
and pricing activity to attract new customers, and some of the
best punctuality figures for five years. Journeys on CrossCountry
grew by 31% in the two years following the introduction of the
new Voyager timetable in September 2002.
On West Coast, year-on-year passenger growth
has averaged around 25% since the new Pendolino timetable was
introduced at the end of September 2004. In June 2005 the rate
reached 51%; the slowdown in July and August was due to the London
bombings.
3. THE MARKET
FOR RAIL
TRAVEL
Before examining the detail of fares offered
by Virgin Trains, it is helpful to consider the environment in
which they are set.
3.1 Competition
The market for long-distance travel in Britain
is highly competitive. The motorway network offers a convenient
alternative to rail on all major routes and car ownership is rising.
Meanwhile, airline, coach and car rental operators increasingly
seek to gain market share by competing on price. Market forces
therefore dictate that inter-city train operators will only attract
customers if they offer value for money.
The extent of competition is illustrated by
analysis undertaken in June 2002 by Steer Davies Gleave, which
estimated the following market shares on key West Coast flows:
| Rail |
Air | Coach | Car
|
London-West Midlands | 17%
| 0% | 2% | 81%
|
| London-North West | 33% |
6% | 2% | 58% |
| London-Glasgow | 16% | 41%
| 7% | 37% |
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On CrossCountry, rail's share is even lower and the car is
even more dominant.
People are constantly making real choices about how to travel.
Virgin Trains' Customer Satisfaction Survey shows that 38% of
passengers consider an alternative to rail for the journey they
are making. The variety of competition we face is confirmed by
the list of modes which these people seriously consider using:
| Private Car | 53% |
| Air | 27% |
| Coach | 16% |
| Another TOC | 5% |
| Hire Car | 3% |
3.2 Customer Profile
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The travel market is not homogenous and many factors influence
the price that an individual will consider reasonable and the
degree of flexibility that he or she requires. We offer a range
of fares that respond to these differing customer requirements.
In particular, we differentiate between business customers (travelling
on their employer's business), leisure customers (travelling to
visit friends and relatives, for a day out or on holiday) and
commuters (travelling from home to their place of work). As a
supplier of services, we take account of their respective level
of demand and their ability and willingness to pay.
3.3 Regulation
Our general policy is to apply market pricing to ensure both
value-for-money for customers and the need to generate revenue
for our TOCs (thus reducing the level of subsidy required).
However, market pricing is constrained by fare regulation,
which limits the extent to which the price of certain fares can
be raised.
We support continued regulation of season tickets because
of the dominant position rail holds for commuting into Central
London. However, we do not believe there is the need for Saver
regulation in long-distance markets, where strong competition
constrains the amount that can be charged and TOCs have demonstrated
that they will offer attractive advance purchase fares for leisure
travellers, even though they are unregulated.
4. COST OF
RAIL TRAVEL
4.1 Fares Range
To appreciate fully the cost of rail travel in Britain, it
is necessary to consider the wide range of different fares offered,
rather than looking at one particular fare in isolation. The fares
offered by Virgin Trains on some key routes are shown below. As
can be seen, prices range from the highest for Open fares to the
lowest for Value Advance.
| One-way Fares Oct 2005 |
| | | |
|
| from | London | London
| London | Birmingham | Bristol
|
| to | Birmingham | Manchester
| Glasgow | Manchester | Leeds
|
| £ | £
| £ | £ | £
|
First Open | 86.00
| 144.00 | 152.00 | 49.50
| 118.00 |
| Business Adv. First | 61.00-75.00
| 112.50-129.00 | 118.50-134.00
| — | — |
| Value Adv. First | 26.00-34.00
| 27.00-44.00 | 38.00-67.00 |
24.00-31.00 | 30.00-67.50 |
| Standard Open | 50.00 | 93.50
| 103.00 | 21.00 | 59.00
|
| Business Adv Std | 34.50-40.00
| 54.50-78.00 | — | 16.00-18.50
| 45.00-52.00 |
| Saver Return* | 34.90 | 55.00
| 90.60 | 26.80 | 76.70
|
| Value Adv. Std. | 9.50-14.00 |
12.00-23.00 | 17.00-34.00 | 7.50-10.00
| 14.50-29.00 |
| * Return price is shown for regulated Saver fare (not part of Virgin Trains one-way structure)
| | | |
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On Virgin West Coast only 4% of passengers buy First Open
tickets and 15% buy Standard Open, as shown in the chart below.
The rates-per-mile quoted by the RMT in its research, such as
£1.53 for First and £0.99 for Standard on London-Manchester,
are therefore far from typical because they refer only to the
Open fare. The RMT also mistakenly quoted return fares for a single
journey, which gave an entirely false view of the cost per mile,
even for Open to which they referred.
As illustrated in ATOC's submission (see chart for Manchester-London
below), the majority of customers on this, and other routes, buy
much cheaper fares. Taking account of all journeys made, the average
rate-per-mile on West Coast, is in fact £0.49 for First and
£0.17 for Standard. On CrossCountry, the average rates are
£0.37 for First and £0.13 for Standard.
The rationale for the different types of fare offered, the
levels at which they are priced, and the conditions which apply
to them is set out below.
4.2 Open Fares
Open fares offer full flexibility, enabling purchase and
travel at any time, requiring no reservation and imposing no restrictions
on change of journey or refund. These conditions are more flexible
than those of the nearest equivalent air fares, for which advance
reservation and advance notice of change of journey are necessary.
Open Fares are mainly intended for business travellers who need
to travel at peak times and need the ability to change their travel
arrangements. They are priced at a premium over other fares to
reflect the value of this flexibility and the ability to travel
unrestricted at peak times, in common with the most flexible fares
offered by airlines.
The SRA review of fares in 2002 confirmed the previous decision
that Open fares should not be regulated. From a social perspective,
regulation in this area would effectively direct public subsidy
to high-earners and businesses, rather than helping those who
are less well off.
Virgin Trains is unique among inter-city train operators
in offering major concessions for travel at peak times to large
numbers of people on lower incomes. We allow holders of Railcards
(Young Persons, Senior, Family, Disabled) to travel on any of
our trains at the Saver price, with the normal Railcard discount
and no requirement to book in advance. We also allow employees
of registered charities to travel, completely unrestricted, on
any Virgin Trains service at the Saver price. For these people
the Standard Open fare effectively does not apply. We have offered
these facilities since 2000.
4.3 Business Advance Fares
We recognise that, while some business passengers require
total flexibility and are prepared to pay for it, others are willing
to forego flexibility in exchange for discounted fares. That is
why we offer Business Advance fares, which offer a discount of
up to 40% on the Open price. These fares must be booked in advance
but allow travel at peak business times.
Our improved speed, frequency, comfort and are of great value
to the business market, enabling employees to use their time more
efficiently This is demonstrated by the strong growth in business
travel on Virgin Trains (21% more journeys on West Coast and 10%
more journeys on CrossCountry so far this year).
4.4 Saver Fares
Saver fares are offered for walk-up travel on off-peak services.
They were originally introduced by British Rail and have been
protected by regulation since privatisation. They are intended
primarily for leisure travellers, recognising that these people
are price-sensitive and are prepared to accept restrictions on
the time they can travel in return for a lower price.
Even without regulation, Virgin Trains would continue to
offer walk-up fares at a price that can be afforded by leisure
travellers. We believe that the ability to turn-up and go is an
intrinsic advantage of rail over air and coach travel and helps
to counter the convenience of the car. This facility is highly
valued by many customers and is an important factor in maintaining
a broad appeal for rail. It is reasonable that walk-up fares such
as the Saver cost more than advance purchase fares because of
the flexibility they permit.
4.5 Value Advance Fares
While Saver fares remain popular for walk-up travel, there
are great opportunities to encourage book-ahead journeys. The
SRA's fares review in 2002 recognised that one of the customer
benefits of privatisation was the introduction of cheaper advance
purchase offers to stimulate leisure travel. Virgin Trains has
been at the forefront of this development through our Value fares,
which are very reasonably priced for travel at off-peak times.
There are different price levels for Value Advance, with
the cheaper prices being available the further in advance one
books. We give full Railcard discounts on Value Advance, which
were not offered on British Rail advance purchase fares. Research
indicates that around 50% of customers using Value Advance tickets
would not have travelled by rail if such attractive prices had
not been available.
5. THE AVAILABILITY
OF RAIL
FARES
5.1 Yield Management
Availability relates especially to these cheap Value Advance
fares. A limited number of seats is set aside for such fares and
when those seats are filled on a particular train, customers must
either buy an Open or Saver ticket for the train concerned or
look for an Advance fare on other services.
The process of yield management, carefully controlling the
sale of discounted tickets, is necessary to meet the challenge
of accommodating increasing numbers of passengers without causing
overcrowding. Demand for travel is heavily peaked, which means
that if nothing is done to influence it, some trains become very
overcrowded whilst others are left with many empty seats which
go to waste.
It is common in all rail markets to offer lower prices at
off-peak times to spread demand, but on long-distance services
more can be done. Many leisure customers are prepared to book
ahead and want the reassurance of a reserved seat. By linking
a discounted fare to a reservation, it is possible to precisely
place passengers on services where it is anticipated there will
be spare capacity. Sales of the discounted advance purchase fares
are limited to protect space for customers who will buy walk-up
fares.
Yield management enables lower prices to be offered than
would be the case if only walk-up fares such as Savers existed.
It gives the train operator greater confidence that spare seats
are going to be well used and that discounting will not result
in overcrowding. By contrast, it is still common for the first
Saver train of the day to be overcrowded (even if no advance purchase
tickets are available) because there is no control of bookings
for Savers.
To the operator, a seat sold at a low price is better than
an empty seat and yield management gives us the chance to respond
more precisely to market demands.
5.2 Levels of Availability and Sales
The number of seats made available for advance purchase fares
varies from one train to another, according to the level of demand
(by day, week, time of year etc.) For example, on Virgin West
Coast, the following proportions of Standard capacity are typically
made available for all Value Advance fares: 39% on Monday to Friday,
46% on Saturdays and 32% on Sundays. On average around 50,000
Value Advance tickets per week are sold on West Coast and 25,000
on CrossCountry. 35% of West Coast Value Advance sales, and 25%
on CrossCountry, are made at the lowest advertised price level.
5.3 Booking Horizons
Selling fares in this way is obviously dependent on customers
being able to book well in advance of their day of travel. The
T-12 process, whereby Network Rail defines timetables at least
12 weeks ahead, is intended to ensure that this is the case. During
much of 2004 this target was not achieved, particularly at weekends
and public holidays (eg Christmas) when major engineering work
was taking place. The result was that West Coast and CrossCountry
trains were sometimes only opening for booking less than two weeks
before departure.
Understandably this situation brought the industry into disrepute.
The suspicion even arose that Virgin Trains was deliberately choosing
not to make cheap fares available, despite the problem not being
of our making. In fact it was a deeply frustrating episode for
us, as we wanted customers to take advantage of our Value fares
but we could not sell as many of them as we should have done.
To mitigate the situation, we relaxed the booking deadlines on
these fares, enabling passengers to book cheaper tickets nearer
the date of travel. We are pleased to report that T-12 performance
by Network Rail has improved greatly and we have received few
customer complaints about booking problems in recent months.
6. SIMPLIFYING THE
FARES STRUCTURE
Rail fares deservedly have a reputation for being complicated.
The TOCs inherited a plethora of fares with different names and
conditions and these have been added to since privatisation. Walk-up
fares are relatively easy to understand, with Open fares applying
at peak times and Savers off-peak. The complication has mainly
arisen with advance purchase fares, where British Rail had Apex,
SuperApex and SuperAdvance, to which the privatised TOCs added
their own new dedicated fares and promotions.
At Virgin Trains we are radically simplifying our advance
purchase range. The way that customers buy travel has been revolutionised
by the low-cost airlines and the Internet. When booking air, coach,
car hire or holidays, it is now normal to be offered the best
price available for a particular service, rather than a variety
of fares with different names and conditions. Customers can then
compare the prices for travelling on different services or different
days and make their choice.
We are adopting a similar strategy:
— We have replaced the old BR fares and original
Virgin fares with a unified set of Value Advance fares.
— We price Value Advance fares on a one-way basis,
offering single journeys at half the return price, rather than
only £1 less, which had been the case since BR days. This
gives customers a fair deal for single trips. It also allows them
to "mix and match" one price level for their outward
journey with another for their return, rather than having to select
the highest available price level for both directions, as they
had to previously (this new approach is now being adopted by other
inter-city train operators).
— It is now possible to buy any Value Advance fare
up to 18.00 on the day before departure, removing the complication
of having the cheapest fare only available up to 14 days before
departure, and the other two levels restricted to 7 days and 3
days in advance respectively. It means that customers benefit
from buying cheaper fares closer to departure on trains that still
have spare capacity. Of course they will still be subject to availability,
and we advise customers to book as far in advance as they can
to get the best price, a concept with which they are familiar
from other forms of travel.
— We are designing a new booking engine for the
Virgin Trains web site, giving customers the cheapest available
price for the services which interest them, rather than expecting
them to look through a long list of different fare types and prices
as they have to on rail web sites at present. This will be launched
in Spring 2006.
With this approach it is possible to offer a wide range of
price levels, which allows customers to benefit from lower prices
and enables more people to travel by train as spare capacity is
better used. However, it avoids creating a confusing array of
fare types, where each price level has a different name and different
conditions. The simpler system has been made possible thanks to
huge investment in the new National Reservations Service made
last year by train operators through ATOC, and our own advanced
VMAX yield management system.
At present, all permanent fares (including TOC-dedicated
tickets) must be made available through all sales channels nationally,
thus preventing an individual operator from making special offers
to its own customers. We believe that there should be greater
opportunities for train operators to sell particular offers through
their own channels—such as call centres, web sites and travel
agents—and we support ATOC's suggestion that these rules
be reviewed. This would allow customers to enjoy benefits such
as lower on-line prices for rail journeys, which they already
experience for air travel.
7. CONCLUSIONS
Virgin Trains has pioneered new ways of setting fares and
selling tickets on the railways and will continue to offer new
and exciting initiatives.
Our success in introducing one-way ticketing to the railways
is now being followed by other train operators, and we are now
leading the way in simplifying fares and offering easier purchase
of tickets.
This level of innovation is in response to market demands
and customer preferences.
Deregulation of advance purchase fares has led to innovation
and better deals for customers; the same could be true in future
for walk-up leisure fares.
Therefore, we believe that less regulation than at present
could lead to further advances in offering attractive fares for
customers.
Competition is very strong in long-distance markets, so we
must price at levels that travellers consider value-for-money
compared with other modes. This will protect our passengers against
any perceived risk of over-charging.
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