Rail fares and franchises - Transport Committee Contents


Examination of Witnesses (Questions 20-39)

MR PAUL FURZE-WADDOCK, MR PAUL BUNTING, MR GRAHAM LEECH, MR CHARLES HORTON, MR JIM MORGAN AND MR DAVID MAPP

4 FEBRUARY 2009

  Q20  Mr Leech: I accept that point entirely but, hypothetically, if everyone had exactly the same journey patterns as they had over the previous 12 months, would the increase in revenue through the fare box be more than 6%?

  Mr Mapp: The average is an average and it represents the general level of increase across all customers; so I think that, all other things being equal, the increase would be 6%, yes.

  Q21  Chairman: Do any of the individual operators want to answer that question?

  Mr Morgan: Perhaps I could respond on behalf of the open-access operator. We have two very cheap fares on our last train between Hull and London of £9 single and £15 return, which have not changed. The rest of our fares have gone up by 6% and we anticipate 6% more revenue as a result of that. Hull Trains is an easy one, because it is a small business.

  Q22  Chairman: Do any other operators feel able to answer that question? How much do you expect your revenues to increase by? Mr Bunting, can you tell us?

  Mr Bunting: Generally we would assume it would be less than 6%, because of the price elasticity of that, the headline being 6%. It is probably worth explaining how that figure comes about for our regulated fares, which are based upon an RPI figure, in this case July 2008. We then have a process for inputting 100 million different fares into the system to get them through to the end user. The level at which they were set therefore reflected an historic rate of inflation. Obviously, the speed with which the economy has moved recently has made that seem quite anomalous, in the way that you pointed out at the outset. We are working within a regulated framework, agreed with the DfT in our contracts, and we are trying within that framework, as colleagues have highlighted, to get the most use of our railways—

  Q23  Chairman: So how much do you expect your revenue to increase?

  Mr Bunting: Somewhere below the 6% figure, depending on the elasticities.

  Q24  Chairman: Mr Furze-Waddock, what can you tell us about your company?

  Mr Furze-Waddock: I would agree entirely that, overall, we would have anticipated that the increase would be somewhere slightly below the average figure; but of course we are at the moment monitoring on a weekly basis the effect in the economy, to see how those forecasts will hold good.

  Q25  Chairman: So what do you expect your revenues to increase by?

  Mr Furze-Waddock: I cannot forecast what the revenue is. That would be market-sensitive information—even if I could forecast it accurately.

  Q26  Mr Leech: Could each of the train operating companies say what their biggest increase in fare is on any individual route, in percentage terms?

  Mr Furze-Waddock: I do not know, I am afraid.

  Mr Mapp: As Paul emphasised, we have 100 million fares in total and the majority of those, but not all of them, were increased in January. To say off the top of our heads what the highest increase was per operator is somewhat difficult; but the averages that we published, and have been completely open about, do represent the average increase that will be experienced by a customer.

  Q27  Mr Leech: Given that we have asked train operating companies to come here today to discuss fare increases, I think that it is not an unreasonable question. I think that it would be reasonable to assume that each of the operating companies would know what their biggest increase in fare would be, given that that is what you were coming to speak to us about. Does anyone know?

  Mr Bunting: For National Express, our regulated fares are RPI at the time, which was 5%, plus 1%; so that is 6%.

  Q28  Chairman: No, you are being asked what the highest increase of your fares is.

  Mr Bunting: And I was going on to say, Madam Chairman, that for the unregulated fares it is a higher figure, which is RPI plus 2.4%, on our East Coast business.

  Q29  Mr Leech: With respect, Mr Bunting, that was not the question I asked. We already know that there is discrepancy. The average is the 6%, but what is your biggest increase on an individual route?

  Mr Bunting: On the unregulated fare it is RPI, which was 5% plus 2.4%—7.4%.

  Chairman: I will not pursue that further. You are refusing to answer it here. Unfortunately for you, however, we do actually have figures available, which have been produced by Passenger Focus amongst others; so we can find out. It is a pity, however, that, when you are asked to come to a meeting like this, which arises from great concern about the level of fares increases, you are not able to give factual answers to pretty obvious questions.

  Q30  Sammy Wilson: Perhaps I could just follow on from the question that John Leech asked a moment ago. I know that it is difficult for you to forecast the likely outcome of the fare increases but, given that the figures we have had for the first six months of 2008 would indicate that revenues of at least three of the companies that we have been supplied information with, the revenue figures have gone up by substantially more than the RPI plus whatever increase was placed on that. In fact, some of the revenue figures are a 50% increase; 28.7% increase; 11.2% increase. Does that not indicate that, just as the earlier questioners have been saying, whilst these may be your average figures, given the way in which you have allocated the increases—some of them to very popular routes, maybe reductions on the less popular routes or the less used at less used times—in reality, you have loaded those price increases onto the journeys which are undertaken by most passengers?

  Mr Mapp: What you have missed out from the equation there is volume increase. Those revenue increases are indeed a mixture of fares increasing but of course they are also underpinned by growth in passenger numbers. During the course of 2008, across all train operators, we saw a growth in volume of between 5% and 6%.

  Q31  Sammy Wilson: Are you saying in answer to John Leech's question that, while you had volume increases in the first six months of 2008, you are assuming no volume increases in the first six months of 2009? You are telling us that, on the one hand, in the first six months of 2008, yes, your revenue has increased substantially more than your average fare increase, but in 2009 you are not expecting the same amount?

  Mr Mapp: Just to be clear, the question that Mr Leech asked was what was going to be the revenue increase resulting from the increased fares in January. I think that we have, as witnesses, given our estimate of what that effect is. Of course, on top of that there may be some passenger growth, but clearly a background factor here is the weakening economic position. To go back to the principle, the numbers that you were quoting earlier are a mixture of passenger growth and revenue increase through higher fares.

  Sammy Wilson: I assume that you must be anticipating some passenger growth in the first six months of 2009. Therefore if, as we have been told, about half of your passengers will find a decline in the amount of money they pay, half will experience an increase in fares, then you would have assumed that the figure that you had given us was simply assuming no growth—because you have said that all you are anticipating is your revenue going up by the average fare increase.

  Q32  Chairman: Mr Leech, you were trying to answer.

  Mr Leech: Yes. Perhaps I could explain that with the situation on West Coast and hopefully this will pick up on some of the concerns around the earlier questions as well. On West Coast it is true, as I said, that the average price being paid is the same as a year ago—and that is quite genuine. On West Coast we have also not weighted our fare increases onto the popular routes, so our most popular routes—Birmingham, Manchester, Liverpool to London, et cetera—the price increase has been 7½%, which is the figure we quoted as the average. We have applied that across the board on all our important flows; but we are planning for major growth on the route. We are planning for an increase of three million passengers on our trains over the next year, and that is because of the improvement in services that I was talking about. Our focus is entirely on getting that growth. It is encouraging more people to travel; the fares have to be affordable for them; and the revenue growth that we are aiming for is to come from more people using the railway, not from getting them to pay higher prices on average.

  Q33  Sammy Wilson: In that case you would expect to have higher revenue growth than your average price increase. Can I just come to the average price increase? RPI plus whatever. I think that all of you have taken the maximum percentage on top of RPI. Why was RPI, as it was in July 2008, the chosen figure?

  Mr Mapp: It was not chosen for January 2009 in particular. It has been the mechanism that has been used over the period since privatisation. The reason for choosing July, as my colleague Mr Bunting alluded to earlier, is that there is quite a significant logistical exercise in changing fares. We have around 100 million fares in the database; the majority of those fares tend to change in January. Simply the process of setting all those fares and then mechanistically making sure that our systems are updated, staff briefed, and so on, takes quite a considerable period of time. This year, as in every other year, the RPI number in July is therefore used as the basis for setting fares, and the period after that reflects the period of time it takes to implement those increases.

  Q34  Chairman: Could you give a commitment then that if the RPI reduces or indeed becomes negative next July, you will be cutting fares?

  Mr Mapp: It is an interesting point. The way in which the RPI—

  Q35  Chairman: Can you give a commitment that if the RPI reduces next July or becomes negative, you would then cut fares?

  Mr Mapp: The RPI formula is something that is controlled by the Department for Transport; it is not something that is controlled or set by train companies. We do not have discretion in how—

  Q36  Chairman: No, but I am asking you the question. If the RPI is reduced next July or indeed is negative, as some predictions have said it will be, does that mean that train fares will automatically be reduced by that amount plus 1%?

  Mr Mapp: I will give you the straightest answer that I can. The RPI formula was conceived, developed, in a period on the assumption that—

  Q37  Chairman: I am asking you the question. I am not asking you about how this has arisen. I am noting that all of you have increased fares to the maximum allowed, with the RPI plus 1% or RPI plus 3%, and then variations that go even higher. If that RPI were to be down or negative, would you then automatically reduce fares in the same way that you have automatically increased them?

  Mr Mapp: If the formula is applied then, yes, the answer is yes, but it is within the DfT's decision how the formula is applied and how it is interpreted. It is not a train company decision.

  Q38  Graham Stringer: I am slightly surprised that you have been so coy about the fare increases and you have not referred back to the 2007 White Paper. I would not particularly expect you to defend the Government, but is not one of the reasons you are looking for more revenue is because the Government is reducing subsidy?

  Mr Horton: I am Managing Director for Southeastern franchise. The first year of our franchise we received a subsidy of £145 million to operate our services. By the end of our franchise that will be a position, up to 2014, where we will pay a premium back to the Government of £11 million. That balance—and the reason why there is RPI plus 3%—is to shift the balance between taxpayer and the fare-payer so that, in relative terms, the fare-payer pays more for those services. Government's justification for that is the very substantial investment in new rolling stock and also the fact that, in the particular case in relation to Kent, historically Kent's fares were lower than some other train operators in London and the South East.

  Mr Furze-Waddock: That is the same for the FirstGroup franchises as well. The RPI factor is a key driver of the revenue and that is the key driver in itself of the premium that we agree to pay or the reducing subsidy.

  Q39  Graham Stringer: I am just surprised you did not say that to the Committee. What I have difficulty coming to a view on, I actually think the average fare is a bit of an irrelevant figure because you are doing quite separate things, are you not? You are trying to get new people onto the trains, which is an admirable thing, and you are also trying to get a bit more out of people who have to travel at particular times. To judge whether the RMT accusation that you are profiteering as opposed to just responding to the Government, I would need to know whether you accept the RMT's judgment on your profits: that your profits have been increasing at a disproportionate amount.

  Mr Mapp: Before I respond to your question about profits, perhaps I could reiterate the point about government policy, which was clearly set out in the 2007 Railways White Paper—so it is no secret. That policy of rebalancing the support for the rail industry between fare-payers and taxpayers so that taxpayers pay a lower level of support is something that is then implemented through franchise agreements. It is something about which the Government has been quite open. It was in the Railways White Paper, and it is something that is reflected in our franchise agreements. In terms of profits, I think that we have nothing to hide. Our profit margins are not excessive. Depending on how you measure them, they are 3% of total train companies' costs or about 5% of rail industry turnover or sales.



 
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