Rail fares and franchises - Transport Committee Contents


Examination of Witnesses (Questions 60-79)

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

4 FEBRUARY 2009

  Q60  Mr Clelland: Can all of your staff then be satisfied that they can look forward to job security for the next few years?

  Mr Bunting: I do not think that anybody can look forward to job security for any length of time at the moment. I do not think that is a credible option.

  Q61  Mr Clelland: Notwithstanding the recession. I understand that. I have to say that does not seem to be affecting the railways too much, in terms of the numbers of people who are travelling and the kinds of profits which are being made. For instance, are the catering staff able to look forward to a secure future as far as the East Coast line is concerned?

  Mr Bunting: Yes, we are continuing to provide an excellent catering offer, which undertake more food-to-seat rather than putting people in restaurant cars, which frees up more space. We are trying to reflect healthy options, healthy eating, people wanting to change the way they eat on the go; so we are looking at the whole catering process, to make sure it is what the customer needs; and we are making some changes in terms of how we deliver the product to people.

  Q62  Chairman: Is that accurate, Mr Bunting, or is that a euphemism for cutting back on catering?

  Mr Bunting: No, it is not a euphemism at all. If we do not have satisfied customers, we will not grow our revenues; we will not maintain our profits. Everything we are trying to do is to make a journey on National Express services a more enjoyable one and to get the value-for-money scores higher. We will not do that by not giving people the things that they want when they travel with us.

  Q63  Chairman: That does not ring quite true. You do not exactly have a choice of catering when you are on a train, do you?

  Mr Bunting: A lot of people go to Pret or they go to Costa before they get on the train; so we want to try to make them buy with us when they are on board. We need to improve. We need to improve the quality of their coffee to compete with what has become a bit of a high street success story; so we have to work hard to make sure our standards rise to meet the expectations of the customer that they are now getting on the high street.

  Q64  Chairman: Have Virgin cut the catering?

  Mr Leech: No, we have not. For our new service we have made some changes to the type of service that we are offering or the type of food. What we have actually done is to spend more money on it; so the amount of money we are spending on our food has gone up. In a similar way to National Express, we are making more commitments to providing organic food in first-class, locally produced. What we have done is invest more in it. We have introduced a very good sandwich offer in first-class during the middle of the day, which is having an extremely good response from customers, as being more what they want.

  Q65  Mr Clelland: So we have happy customers, happy staff, good profit levels. I wonder why we need to have this inquiry at all! Everything seems in the garden seems to be rosy.

  Mr Mapp: We are not complacent and we clearly have a lot of things that we need to do to improve, and my colleagues have already illustrated some of those areas. We are not complacent. Nevertheless, the objective evidence from the National Passenger Survey is that overall, across the network, across all passengers, there is a reasonably high degree of satisfaction.

  Q66  Ms Smith: I want to look at the dividends picture because, although many of the operating groups do take their profits in from other transport services, nevertheless the dividend picture is as it is. Unless you want to disaggregate that for us, I think that we just have to take the picture that we have. According to information from the RMT, FirstGroup's dividend was up 10% in 2008, despite the operating profit not really being up by the same degree; Stagecoach increased their dividend by 33.3% last year, on an increase in operating profit by 25.3%. Clearly in some cases, therefore, dividends increased beyond perhaps the level you would have expected, based on the increase in profit margin. Profit margin is not a problem; it is what you do with the profit that interests me. Would you accept that, in these particularly difficult times and given the renewed interest in long-term investment in our transport services and across the economy, there should be more of a focus on reinvesting profits rather than increasing dividends, in terms of satisfying the short-term interests of shareholders?

  Mr Mapp: You have to remember that, in addition to the profit element of what we do, there is also the element of subsidy and, increasingly, premium payments to the Government. Many train companies are now in franchise arrangements whereby they receive no subsidy and, over time, will be paying increasingly large amounts of premium payments to the Government. By the time we get to the middle of the next decade, around 2014, the net payment from train companies to the Government—that is premium payments net of subsidy received—is round about £1.2 billion. Clearly that money goes back into the Department for Transport's pocket; it is there for investment; it gets recycled through Network Rail, through train companies and other stakeholders, to invest in the industry. There is therefore a significant investment revenue stream, if you like, being generated through that mechanism that goes back to the DfT. Of course, train companies themselves do also invest in their operations. We have had some good examples already of the kind of investment that has been made. There has to be a reasonable balance overall between shareholders, who must expect to get some return from their investment in transport companies; there must be some return for the taxpayer, which I think there is through the premium system; and there must be a return for customers. I think that the high level of satisfaction across the network which we have already talked about illustrates that at the moment that balance is about right.

  Q67  Ms Smith: I do not think that really answers the question, with respect. My question is, given that the developing consensus that the interests of the country, of the UK economy generally, is in long-term investment rather than short-term returns to dividends, can we expect to see lower returns to shareholders in future rather than some of the big increases that we saw last year?

  Mr Furze-Waddock: Can I add to what David has said? In addition to all of those mechanisms, you will find, certainly in all recent franchise agreements, that there are protections for the Government against operators making windfall profits in the form of a revenue share arrangement where, if revenue exceeds—

  Q68  Ms Smith: It is not profits I am interested in; my interest is dividends to shareholders. Profits are good if they can be reinvested in the industry and if you give a reasonable return to your shareholders—fine. It is that balance I am talking about.

  Mr Furze-Waddock: That is what I say. If we do exceed certain levels—and in some franchises there is also a profit share as well as a revenue share—then that money does go back to the Government and it is there for the department to reinvest. Those levels are set out and predicted at the start of a ten-year franchise in the same way as we predict the revenue for a ten-year franchise. They are there from the outset in a published document.

  Q69  Ms Smith: Can I suggest to you that, on the basis of the increases in fares that we have seen—I am a user of East Midlands trains and I have suffered a big increase in my rail fare and, as Eric has pointed out, he has as well on his route—I have not seen any increase in passenger satisfaction. Stagecoach is running that service now as opposed to what was National Express. We have seen a reduction in the quality of the service; a reduction in the catering offer—quite significant reductions—and yet we are seeing these fares increase. Is it not reasonable for customers to expect that some of that increase in fare should lead to an improvement in levels of customer service, in terms of routes, frequencies and the offer on board? I do not think that is the case at the moment.

  Mr Mapp: Let me make two points in response to that. First—

  Q70  Chairman: Mr Mapp, first I would like to ask the individual operators. Which operators can tell us there is going to be an improvement as a result of these increases?

  Mr Bunting: Madam Chairman, can I give you a specific example? In the life of the East Coast franchise we are committed to invest £44 million in improving the service for our customers. That is a big chunk of money that will be ploughed back into our franchise for the benefit of our customers, and I think that is really positive.

  Q71  Chairman: Mr Leech of Virgin?

  Mr Leech: We have invested a huge amount of money over the life of the franchise and we are continuing to invest. An example at the moment is that we are spending nearly £2 million on improvements at Euston station. We are spending a lot of money on improvements at Liverpool Lime Street. We are investing more money in the catering; we are now running a full evening meal service on 40 of our services since December, which we were not doing before. There is a whole series of investments which we are making. We see that as important. You cannot just stand still. Even though we have just introduced 30% more services and quicker train services, we are not resting on our laurels. We have seen it as being very important that we continue to invest in improvements to services. That is where we are putting the money.

  Mr Horton: For the Southeastern franchise, as part of the commitment we made when we took the franchise, we are committed to investing £76 million in passenger and staff facilities. That process is well underway and includes the introduction of high-speed services as well, as part of the integrated Kent franchise. I think it is a similar pattern that, when train operators take on franchise agreements, they also make commitments to invest. Part of our obligations as part of taking on that franchise is to make sure we deliver on the commitments we make to Government.

  Q72  Chairman: Mr Horton, in your franchise you can have an increase of RPI plus 3%—much higher than anybody else. What is the reason for that?

  Mr Horton: That is correct. There are two reasons, and it was part of the franchise parameters set by Government when we bid for the franchise; so this was going to be binding on all the bidders for the franchise. There were two reasons given for that. The first was that the level of fares in Kent had been historically at a lower level than some other train operators in London and the South East. The second reason was that there was an investment of £690 million in the replacement of slam-door rolling stock, which had taken place just as we took the franchise on. Those two specific reasons meant that, for the first five years of our franchise, the formula was RPI plus 3%. After that, it reverts to the RPI plus 1% formula, consistent with other franchises.

  Q73  Ms Smith: On more than one occasion on the route that I use we have seen staff trundling up and down the carriages with cans of water, because the water boiler in the area where they make teas and coffees has broken down. That leads me to believe that perhaps costs are being cut in terms of maintaining some of the catering services on board, for instance. It may be happening elsewhere too. Is this the case? Are we seeing cutbacks in terms of the maintenance of operations like catering on the trains? Certainly that is the inference that many passengers are drawing in terms of the operations on other lines.

  Mr Leech: In our case, on the catering we are not only spending more money on food which is given to customers but we have invested money over the last year with Rail Gourmet, in changing all of the equipment and the infrastructure that supports it at stations. We have completely replaced all of the crockery that we have. We have invested a huge amount of money into our catering because we want to improve it. The maintenance of our trains, making sure that there are reliable services on board the trains and that equipment is maintained—that is a high priority as well.

  Q74  Chairman: I might go along with that, except, Mr Leech, there was a time when there was continual flooding from the kitchens on Virgin Trains, and I was told that it was because the dishwashers could not operate on a tilting train. A pity no one thought about that before.

  Mr Leech: We have taken them all out and replaced them; so that is no longer a problem.

  Q75  Sir Peter Soulsby: Can I ask you about the future and whether you see scope for alternative ways of pricing train tickets. I am aware that, I think it was, Dr Mike Mitchell from the DfT, in recently giving evidence to the Public Accounts Committee, spoke quite warmly and positively about so-called `airline pricing' on the easyJet/Ryanair model. Clearly, it has attractions in that it fills aeroplanes and, who knows, it might fill trains in the same sort of way. It may be that the model is not appropriate, but certainly there are some things that some of the operating companies do at the moment that are moving in that direction. I just wonder whether you see that as a potential future way of matching supply and demand in a way that is, frankly, more dynamic than the fixed fares you have at the moment.

  Mr Bunting: We have invested, our East Coast and our East Anglian business, in revenue management systems which match and mirror what the airlines have done. In fact, if you go on our website now, you will actually find what we call our `lowest fare-finder' where we will actually help you locate the lowest fare available on the day and on the train you want to use, so we have put a great deal of faith and indeed quite a bit of investment in state-of-the-art revenue management systems which work on a similar basis to the airlines', and I know that colleague companies are all working to that agenda.

  Q76  Sir Peter Soulsby: Is that not somewhat at odds with the so-called `simplification' of the ticket structure which is supposed to have taken place?

  Mr Mapp: Well, I think actually it fits pretty well the simplified fare structure that we finished introducing in September of last year with our three main types of fares, any-time fares, off-peak fares and advance fares, and advance fares provide ample scope for train companies to offer a range of advance-purchase fares in the way that the airlines do. The investment that Paul has described in revenue management systems for the two of the National Express franchises, and I think that investment has been mirrored in other franchises as well, allows train companies to exploit that opportunity.

  Mr Morgan: That is the Hull Trains model actually. It is a condition of our licence that we have to keep some space for people with walk-up, inter-available fares, but basically, as a small operator, we need to fill our trains, so we work on the easyJet/Ryanair model and that is what has been very successful for us.

  Mr Leech: Something that is happening is that these things are coming together, so it has become possible to buy advance fares nearer and nearer to departure, so all operators now offer them on the day of departure and some until very late in the day. In fact, since January on Virgin Trains, you can now buy an advance ticket for the day before right up to midnight on the day before travel, so the idea that advance fares are only available a very long way out simply is not the case.

  Q77  Mr Martlew: I think there is a great fog over pricing and the customers do not believe what you, gentlemen, are telling us. It may come as a surprise to you, Mr Leech, but I am quite a fan of Virgin. They look after their staff, they are good with their customers and they have invested a lot of money in the rolling stock, albeit through the TOCs. On the franchising, is it not a nonsense, the fact that a company that has a good reputation and is well-liked by the passengers is not taken into consideration and it is actually a blind bid when you go into the new franchise?

  Mr Leech: Well, that is a matter for the Department to decide.

  Q78  Mr Martlew: I know who is responsible, but I am asking for your comment on it.

  Mr Leech: I would say it is a nonsense, but in many procurements for other services, certainly if we procure services for ourselves, then we do take account of the performance of previous suppliers, so, in making this response, I am not making a partisan response for Virgin. My personal view is that, if you are appointing somebody for an important contract and they have been your supplier before, it would be normal to take some account of how well that supplier has performed. That is what I would do in contracts that I manage, but clearly it is a question for the Department for Transport.

  Mr Martlew: Does the franchising system not work in reality? You, gentlemen, actually complained about how much money you are having to pay to the Government, but you actually bid for that, that is how you got the franchises. Would it not be better, and I am not really advocating this because I would like it to go back into public ownership, for train companies to buy the business and then be regulated the same as the water utilities are regulated, so you actually buy the business?

  Q79  Chairman: Is there anybody that has an appeal for?

  Mr Mapp: The existing model has worked reasonably well and the numbers in terms of passengers and so on, I think, demonstrate that, but we are, at the end of the day, commercial companies and we are fairly flexible in the way in which we work. Any sort of franchising framework that allows us to earn a reasonable return, and I emphasise "reasonable return", is something that we would be willing to work with, so yes, clearly we have views and we would certainly want to be consulted in terms of any future franchise changes, but, in a sense, we are sensible and pragmatic in that context.



 
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