Examination of Witnesses (Questions 20-39)|
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 informationeven
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
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 increasessome
of them to very popular routes, maybe reductions on the less popular
routes or the less used at less used timesin 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 growthbecause 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 agoand that is quite
genuine. On West Coast we have also not weighted our fare increases
onto the popular routes, so our most popular routesBirmingham,
Manchester, Liverpool to London, et ceterathe 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
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
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 balanceand 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
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 Paperso 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.