Rail fares and franchises - Transport Committee Contents


Memorandum from the National Union of Rail, Maritime and Transport Workers (RMT) (RFF 02)

SUMMARY

  This note will seek to demonstrate that:

    1. The profiteering of the rail companies and cuts in government funding are the twin causes of passengers facing excessive fare increases.

    2. Government policy for funding passenger services has inadvertently undermined rail franchising.

    3. The consequences of the downturn for rail jobs, services and safety.

    4. Instead of using the rail industry to help beat the recession the Government is instead subsidising redundancies. The Government should intervene to save jobs in passenger operations, the railway infrastructure and at freight company DB Schenker (formerly EWS).

    5. Members of Parliament have shown that the Government has never made an assessment as to whether rail franchising provides the best value for money for the taxpayer.

    6. The RMT's six point plan for fair fares to save rail services and jobs during the economic downturn. Ultimately the current crisis demonstrates that the only serious option for the future of the rail industry is renationalisation.

1.  EXCESSIVE FARE INCREASES

Fare increases caused by profiteering rail companies

  January 2009 saw passengers facing average fare increases on regulated and unregulated tickets of 6% and 7% respectively. In fact, Arriva Cross Country, which will receive public subsidy in excess of £1 billion over the course of their franchise term, raised unregulated fares by an average of 11%.

  Additionally, South Eastern Trains raised regulated fares by an average of 8%, in line with their franchise agreement, on the spurious ground that the operator will be investing in new high-speed rolling stock. Of course, Southeastern is neither building the stock nor paying for upgrades to the railway infrastructure and will receive almost £600 million in public subsidy over the course of its franchise term.

  In December 2008 RMT published research which indicated the "Big Five" transport operators are converting above inflation fare increases into profits and dividend payments of between 10 and 33%. A full copy of the report is in Appendix A.
GroupReport period Operating profitDividend
Arriva6 months to 30/06/08 £14.8millionInterim dividend up by 10%
First Group6 months to 30/09/08 £48.3millionInterim dividends up 10%. £55.5 million paid in 2007
Go-Ahead12 months to 28/06/08 £77.2millionDividends paid £48.1million
National Express6 months to 30/06/08 £28.7millionDividends paid during the period of £40.2million
Stagecoach6 months to 31/10/08 £31.7million33.3% increase in dividend. £28.9million equity dividend


  The year-on-year "inflation plus" fare increases cannot be allowed to continue. It is difficult to avoid the conclusion that the operators are simply engaging in profiteering.

  The Retail Price Index now stands at 0.9%. The Pre-Budget report projection is that the rate will dip below zero during 2009 reaching minus 2% in the last quarter of the year. In addition thousands of workers are losing their jobs and employers are introducing wage freezes. Virgin Atlantic has imposed a wage freeze on 9,000 of its staff from March this year.

  In these circumstances the January 2009 fare increases are wholly unacceptable. RMT's view is that the DfT has to intervene to support rail passengers.

Fare increases caused by cuts in Government funding

  In no small part the above inflation fare increases are a result of the franchise agreements signed off by the DfT and the private operators since the demise of the Strategic Rail Authority and the "re-balancing" of ToC income announced in the 2007 White Paper Delivering a Sustainable Railway.

  The Rail Business Intelligence newsletter indicated that the July 2007 High Level Output Specification "revealed that the government is banking on straight-line growth in passenger revenue to cut support for the national rail network by around £1 billion over the five years of Control Period 4 starting on 1 April 2009". To off-set this reduction "growth in passenger revenue is expected to provide an extra £9.2 billion rising from £6 billion in 2008-09 to £9 billion in 2013-14".[1]

  Implicit in the policy was the calculation that growth in passenger revenues was expected not only through increases in passenger numbers but through year on year above inflation fare increases.

2.  GOVERNMENT POLICY FOR FUNDING PASSENGER SERVICES HAS INADVERTENTLY UNDERMINED RAIL FRANCHISING

  RMT warned in our written evidence to your Committee's inquiry; Delivering a sustainable railway: a 30-year strategy for the railways? "Finally, much of the growth in ridership in the past 10 years has been as a result of the strength of the economy. Any future downturn in economic fortunes will necessarily slow the growth rate in passenger numbers, an eventuality which would also lead to a reappraisal of the Department's revenue projections".

  The UK recession has indeed now led to a reappraisal on the DfT's revenue projections. Train operators which won franchise agreements on the basis of over-optimistic passenger revenue growth figures which in turn would pay for premium payments often in excess of £1 billion have, even with the cap-and-collar arrangements after the first few years of the franchise term, found that their franchise agreements are coming apart at the seams. Press reports indicate that the Department for Transport has placed a red-light next to five franchises. Question marks are now being placed next to National Express in relation to its future operation of passenger services.

  Government attempts to "rebalance" train operator income and insert challenging premium payments into franchise agreements was misjudged at the time it was written in 2007. There was of course no guarantee that passengers would put up with year-on-year inflation plus fare increases in order to meet a greater proportion of train operator income and help the ToCs meet their DfT payments even when the economy was relatively healthy.

3.  THE CONSEQUENCES OF THE DOWNTURN FOR RAIL JOBS, SERVICES AND SAFETY

  The response from the train operators is all too typical of how the private sector has behaved in the rail industry post-privatisation. They remain happy to receive huge sums in public subsidy and bear very little financial risk when economic fortunes are good, but when they are exposed to any serious financial risk the operators propose to cut jobs, attack service levels, threaten to run shorter trains, demand that franchise agreements are re-negotiated and even request that Government directly fund 1,000 extra staff to help the operators. These same operators were able to pay huge shareholder dividend payments, through the recession.

  To date the following job cuts have already been announced:

    — National Express Group has stated that a total of 750 jobs will go across the East Anglia and East Coast franchises. On the East Anglia franchise there will be 300 posts lost in total, with 242 job losses and the freezing of 61 vacancies. This will include the removal of restaurant services from the Norwich-London services.

    — Network Rail is deferring 28% of rail renewals (eg laying new track, installing new signals) meaning 800 jobs are at risk.

    — The UK's main rail freight operator DB Schenker (formally EWS) has announced over 500 jobs losses and is saying that it further significant numbers are likely to be at risk due Network Rail announcing a deferral in renewals work (above).

    — Despite the partial rejection by the Department for Transport of South West Trains plans to butcher ticket offices opening times, SWT has announced that 480 jobs will be lost including large number of ticket office and platform staff.

    — 300 as yet unspecified jobs at Southeastern.

    — 40 unspecified jobs at First Scotrail.

    — Proposed cuts to ticket office opening times at First Capital Connect leaving over 20 posts at risk.

  The three rail unions have written to the Secretary of State for Transport outlining our concerns in detail. This letter is attached as Appendix B.

4.  INSTEAD OF USING THE RAIL INDUSTRY TO HELP BEAT THE RECESSION THE GOVERNMENT IS INSTEAD SUBSIDISING REDUNDANCIES

  It is disjointed to say the least that when the Government is planning to use taxpayers money to intervene in completely private sector industries (which we welcome) such as the car industry, it is standing by and allowing the heavily subsidized rail industry to lay off skilled workers (arguably in "green jobs" due to relatively low carbon role of the rail industry). In effect the Government is subsidizing redundancies.

  It is astonishing that the rail industry, which is heavily dependent on tax payers' subsidy and based on a number of contractual relationships with Government, is being allowed to announce widespread jobs losses and is making strategic decisions which will result in further job losses. Why are the railway companies, which are so heavily reliant on taxpayer support and have made substantial profits, being allowed to throw thousands on the dole and cock a snook at the Government's efforts to tackle the effects of the economic downturn?

  The government should use the control it has over the industry to intervene to stop the jobs losses in railway infrastructure, passenger operations and the freight industry.

5.  THE GOVERNMENT HAS NEVER MADE AN ASSESSMENT AS TO WHETHER RAIL FRANCHISING PROVIDES THE BEST VALUE FOR MONEY FOR THE TAXPAYER

  Your Committee's report Passenger Rail Franchising argued "The objectives of the passenger rail franchising system are a self-contradictory muddle, providing no coherent framework or vision for the development of passenger services for future generations. The result is a system that is worth less, and costs more, than the sum of its parts. It is high time that the Government established a consistent and achievable set of objectives and a system capable of achieving them whilst providing good services and value for money to passengers and taxpayers".

  The government has consistently asserted that rail franchising system provides value for money. Yet Parliamentary questions have revealed that the government has never made an assessment on whether the current system of franchising, compared to running services in the public sector, provides value for money. The RMT would argue that is essential in the current economic climate that such an assessment is made.

  The full text of the parliamentary questions are attached as Appendix C.

6.  THE RMT'S SIX POINT PLAN FOR FAIR FARES TO SAVE RAIL SERVICES AND JOBS DURING THE ECONOMIC DOWNTURN

    — No re-negotiations of franchise agreement terms. The ToCs were happy to sign them off when they thought that money was to be made from increased passenger numbers and passenger revenue.

    — An industry-wide moratorium on job losses. Government should develop an industry-wide strategy to ensure that our railways can be managed in a way which mitigates against rather than exacerbates the effects of the economic downturn and assist in the battle against climate change. Railway jobs are "green jobs" and should be protected and expanded. As a first step it should intervene.

    — Regulated fares are linked to a formula where they rise in January on the preceding July RPI, plus 1%. Economic forecasts predict that RPI could fall below zero in July meaning that January 2010 should result in a fare cut for passengers. The government should at the very least ensure that the train companies and not the taxpayer bear the cost of this fall. The Government should also urgently consider reintroducing the pre-2004 formula that regulated fares should be based on the formula of RPI—1%.

    — A freeze on dividend payments. All profits should be re-invested to protect jobs and services.

    — If the train companies are unwilling to cooperate with this strategy the Government should intervene to operate passenger services in the public sector as part first step to renationalising the railways.

APPENDIX A

FARE INCREASES VERSUS COMPANY PROFITS OF THE "BIG FIVE"

  The big five use different trading periods for their reporting:
ArrivaInterim six months ended 30 June 08
First GroupInterim six months ended 30 September 08
Go-Ahead (for Govia)Annual 12 months ended 28 June 08 (Interim six months ended 29 December 07)
National Express GroupInterim six months ended 30 June 08
StagecoachInterim six months ended 31 October 08


  ATOC announced 2009 rail fare changes on 21 November 2008.

Train company
Increase in fares

Regulated

Unregulated

2008 rail division profit 2008 dividend based upon total Group results Company comments on Group results
ATOC listed average:

6%, b) 7%

Arriva Group

Interim six months ended 30 June 08

—  Revenue up to £415.5 million from 121.6 million

—  Operating profit up to £14.8 million from £1.1 million

Reflects first full six-month contribution from Cross Country and absence of franchise bid costs.

—  Interim dividend up 10%.

—  Dividends paid to shareholders £33.9 million up from £30.8 on the same period the previous year

CE David Martin "delighted by these results… great potential for further growth"
Arriva Cross Country6%, b) 11% Passenger revenue up 10.3%
Arriva Trains Wales6%, b) 6% Passenger revenue up 12.3%
First Group

Interim six months ended 30 September 08

—  Revenue increased by 11.2% to £960.6 million (2007: £863.6 million)

—  Operating profit increased to £48.3 million up from £48.2 million

—  Interim dividend up 10%.

—  Dividend of £55.5 paid during the period (2007: £45.6 million)

—  Dividends of £29.1 million proposed for approval during the period for the year ended 31 March 09 (2007: £23.9 million, full year 2008: £55.5 million)

CE Moir Lockhead "delighted to report another set of record results… the Board is confident of the Group's prospects."
First Capital Connect6%, b) 9% Revenue growth of 8%
First Great Western6%, b) 6.6% Over the next two years all front line staff will complete a training programme designed to raise customer satisfaction levels
Hull Trains1Not listed by ATOC
ScotRail26%, b) 6%—  Passenger growth up 4%

—  Passenger operator of the year at the National Rail Awards

TransPennine Express6%, b) 6.4%
Go-Ahead Group (65% of Govia)3

Annual 12 months ended 28 June 08

—  Revenue up 28.7% to £1.4 billion from £1 billion

—  Operating profit up 16.8% to £77.2 million from £66.1 million

—  Addition of London Midland and Gatwick Express franchises

—  Total dividend paid and proposed increased by 15.7%

—  Dividends paid £48.1 million (increasing from £43.6 million)

Sir Patrick Brown, Chairman "pleased to report another year of record results… we believe that we are well placed for the year ahead…"
London Midland6%, b) 0% —  London Midland commenced operations on 11 November 2007 and contributed £6.3 million of operating profit for the period.

—  Revenue growth has been above the franchise bid assumptions triggering revenue share to the DfT of 50% for amounts above 102% and 80% of the revenue in excess of 104%

Southeastern 8%, b) 6% 6.4% growth in passenger numbers, delivering a 13% increase in passenger revenue
Southern6%, b) 6%6.7% growth in passenger number, delivering a 13.2% increase in passenger revenue
National Express Group

Interim six months ended 30 June 08

—  Normalised operating profit up to £39.6 million from £28.7 million

—  Passenger revenue growth of 9%

—  Interim dividend up 10%

—  Dividends of £40.2 million were paid during the period (up from £36.4 million)

—  Dividends of £19.4 million were proposed for approval during the period (2007: £17.6 million)

Chairman Richard Bowker "Trading in the UK is encouraging"
C2C6%, b) 6%
National Express East Anglia6%, b) 6%
National Express East Coast6%, b) 7.4% 11% revenue growth
Stagecoach Group

Interim six months ended 31 October 08

—  Revenue up 50.7% to £486.4 million

—  Increase in operating profit by 25.3% to £31.7 million from £25.3 million

—  (Operating margin decreased by 1.3% to 6.5% from 7.8%)

—  Stagecoach received a £19.4 million dividend (up 76.4%) for its 49% share of the Virgin Rail Group. Virgin fares are to increase by (a) 6% and (b) 7%.

—  33.3% increase in dividend

—  £28.9 million equity dividend

—  Full year dividend for year end 30 April 2008 increased 31.7%. Final dividend of £28.9 million proposed for approval (2007: £20.4 million

Chairman Bob Speirs "Challenging short-term outlook in UK Rail; decisive management action in anticipation of this."

—  Planning for a significant drop in Central London Employment

—  Cost reduction programme including headcount reductions

East Midlands Trains6%, b) 7% 14.1% increase in revenue
South West Trains6%, b) 7.2%


1  Fares set by "open access" operators are not subject to fares regulation

2  ScotRail's regulated fares in Strathclyde were previously set by SPT and reviewed in May. Now Scotland has a single regulatory body, Ministers have aligned Strathclyde fares changes with the rest of Scotland from January 2009. The Strathclyde regulated fares increase is 4% to take into account the alignment. It would have been 6% in May 2009. Outside of Strathclyde, the regulated fares increase is 6%.

3  Govia is a joint venture between Go-Ahead Group (65%) and Keolis (35%)

APPENDIX: B

COPY OF LETTER SENT TO THE SECRETARY OF STATE FOR TRANSPORT: RT. HON GEOFF HOON MP ON 27 JANUARY 2009

RAIL AND THE RECESSION

  When we met last November together with the TUC we raised our concerns about the impact of the economic downturn on the rail industry and we welcomed your agreement to meet again to discuss these concerns.

  Since then the downturn has rapidly accelerated and in response the Government has taken a number of initiatives to seek to mitigate the effects of the recession and protect employment, including the recent jobs summit and the announcement of the creation of 100, 000 new jobs through such measures as new infrastructure projects.

  It is welcome that the Government is seeking to be proactive in this way and these various initiatives will of course involve billions of pounds of tax-payers' money and unprecedented state intervention.

  Against this background it is therefore astonishing that the rail industry, which is heavily dependent on tax payers' subsidy and based on a number of contractual relationships with Government, is being allowed to announce widespread jobs losses and is making strategic decisions which will result in further job losses. It appears that in effect the Government is subsiding redundancies in almost every sector of the rail industry.

  We have clear indications, for example, that Network Rail are managing their renewals contracts, including track and over head line renewals, in such a way that essential work is being deferred to a later date to achieve short term efficiency savings. The scale of these reductions is significant and we have been advised that on average there will be a twenty eight per cent reduction in renewals work. The result is that not only will contractors be laying off skilled staff because of the way Network Rail is choosing to manage its work, but essential upgrades are being delayed which will adversely impact on the provision of services to passengers.

  Network Rail admits in their own 2009-10 business plan that a "huge reduction in track renewals expenditure" will have a "major impact on the supply chain" with "20%—30% less heavy materials" resulting in "supply chain redundancies". We believe the decision will have a knock on effect on the rail freight industry and in addition a whole range of other industries such as Quarrying and Steel.

  Network Rail's actions are making a mockery of the Government's stated intention to bring forward infrastructure projects to boost employment. Network Rail is responsible to the Government and dependent on Government subsidy, yet its directors are creating a climate which will result in a hemorrhaging of jobs from the rail industry.

  It is also vital to draw your attention to the fact that again in the name of efficiency savings Network Rail are cutting the frequency of track inspections and routine signals maintenance. We are now deeply concerned that combined with the reduction in renewals work the cumulative effect will be to significantly raise safety risks to passengers and workers. We fear conditions are being created which could lead to another Hatfield, Potters Bar or Grayrigg.

  Similarly with rail passenger services, companies which rely directly on Government subsidy are announcing huge job losses. In the last two months alone the train operating companies have announced almost 2000 jobs will go, allegedly as a result of a slowdown in passenger growth. The announcement of these job losses is even more galling when we know the "big five" transport groups have recently presided over huge fare hikes and enjoyed dividend increases of between ten and thirty three percent.

  Again we would question why a part of the railway which is so heavily reliant on taxpayer support and has made substantial profits is being allowed to throw thousands on the dole and cock a snook at the Government's efforts to tackle the effects of the economic downturn. These redundancies will of course also adversely impact on the safety and security of passengers and the quality of service they receive. Reports that the train companies are now also seeking your permission to cut services and shorten trains, whilst at the same time demanding even more tax payer subsidy, demonstrates that they have no regard whatsoever for the wider public interest.

  You will also know the rail freight industry has and continues to enjoy the benefit of considerable indirect government subsidy and track access concessions to encourage freight on rail to assist in the battle to reduce carbon emissions. It must surely then be completely unacceptable for the UK largest rail freight company, DB Schenker Rail, owned by German State railways, to announce the loss of over 500 skilled jobs. This again not only flies in the face of the Government's aim to protect jobs but also raises serious concerns that the United Kingdom Government's rail freight policy is being undermined by overseas and commercial interests.

  The economic crisis demands concerted and coordinated action to protect jobs and services yet the main components of our fragmented railway industry which have benefitted from over a decade of massive state subsidy, rising passenger numbers and profits are now making decisions which will put thousands on the dole, undermine services and safety and squander tax payer's money.

  The rail industry depends on Government subsidy and we believe you should use the control this gives the Government to seek an industry wide moratorium on cuts in jobs and services, a freeze in dividends with all profits instead invested to protect services and jobs and the development of an industry wide strategy to ensure that our railways can be managed in a way which mitigates, against rather than exacerbates the effects of the economic downturn.

  We would be grateful for an urgent meeting with you to discuss our concerns.

Bob Crow

RMT General Secretary

Gerry Doherty

TSSA General Secretary

Keith Norman

ASLEF General Secretary

February 2009

APPENDIX: C

FROM QUESTIONS TO TRANSPORT MINISTER PAUL CLARK TABLED BY JOHN MCDONNELL MP

  John McDonnell: To ask the Secretary of State for Transport whether his Department has made an assessment of the value for money of (a) integrating rail infrastructure and operations in the public sector and (b) separating train and station operations from rail infrastructure maintenance and renewals.

  Paul Clark: No such formal assessment has been made. It is generally accepted that the structures put in place at privatisation were flawed. The 2004 Rail White Paper and 2005 Railways Act set out a new streamlined structure, specified by the Government and delivered by the private sector, under which rail investment is based on affordability and value for money as determined by the independent Office of Rail Regulation. This structure provides coherent and effective management and delivers safe, reliable railways that work efficiently. The new arrangements provide much-needed stability for the industry as a whole.

  John McDonnell: To ask the Secretary of State for Transport whether his Department has a comparator to assess the relative value for money of private and public operation of railway passenger services.

  Paul Clark: The Government's policy is that rail passenger services are provided by the private sector through competition to operate publicly-specified franchises. There are no public operations which could provide the yardstick for a comparator.

  John McDonnell: To ask the Secretary of State for Transport what assessment his Department has made of the value for money of operating rail passenger services in the public sector after each passenger franchise expires.

  Paul Clark: The Government's policy is that rail services are provided by the private sector to a specification developed in the public sector; therefore, no formal assessment has been made of the value for money of operating rail passenger services in the public sector.

20 November 2008

FROM QUESTIONS TO TRANSPORT MINISTER PAUL CLARK TABLED BY KELVIN HOPKINS MP

  Kelvin Hopkins: To ask the Secretary of State for Transport if he will make an assessment of the effect of operating train services in the (a) public and (b) private sectors in respect of (i) innovation, (ii) use of new technology, (iii) customer services and (iv) provision of information to customers; and if he will make a statement. [244224]

  Paul Clark: In 2004 our rail White Paper "The Future of Rail" recognised rail's status as a public service, specified by Government and delivered by the private sector. The £15 billion programme of investment in the network over the next five years, set out in last year's rail White Paper, is focused on concrete improvements in the number of services available, performance and reliability, safety, capacity and ticketing and fares.

18 December 2008






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Rail Business Intelligence No 299 2 August 2007 Back


 
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