The UK annual inflation rate for July 2014 was published on 19th August. Retail prices (RPI) increased by 2.5% in that year, whilst the measure of price increases paid by consumers (who often change their purchases when prices rise) was just 1.6% (CPI).

Why does this matter to Railfuture? Well, because the RPI rate for July is used by the three governments in Britain to set the average fare increases that it demands passengers must pay.

Therefore from January 2015 regulated fares will increase on average by 2.5% in England. That’s if the Chancellor of the Exchequer announces in his Autumn Statement that he will, for a second year in succession, waive his intention for an RPI+1% increase each year to boost treasury coffers. All the English media reported the increase as being 3.5%, to include the +1% (see footnote at bottom), but few believe George Osborne would increase fares by that much four months before the general election.

Since this article was written, George Osborne, the Chancellor of the Exchequer, has said (7th September), as predicted here, that regulated fares will only go up by RPI, and not RPI+1% as the media widely reported. Moreover, there will be no 'flex' to allow some fares to go up above that.

The Scottish government has confirmed that it will increase regulated peak-time fares by RPI and there will be no increase whatsoever for regulated off-peak fares. The Welsh Assembly Government is likely, but is yet to confirm, that it will increase all regulated fares by RPI.

With the Scottish independence referendum highlighting the differences between the nations (Scottish residents pay no tuition fees and have free prescriptions) the Prime Minister will surely be unhappy to stir up resentment in England by demanding passengers pay 1% more than the Scots and Welsh.

So, if we’re confident that rail fares will only increase by RPI we’ll all be happy then?

Well, no. Firstly average pay (excluding bonuses) has increased by just 0.6%, so fare increases will be four times that. The Bank of England expects average salaries to rise by 1.25% this year, just half the assumed fare increase. Secondly Railfuture believes, and has been saying for several years, that fare increases should be based on CPI, which is almost always lower. It’s the official metric used by government (RPI is now seen as antiquated) and crucially is used by the government to set pension and welfare increases.

There’s a third concern. The train operating companies (TOCs) are given freedom to further  increase some fares by up to 2% (known as the flex) providing that they reduce other fares (there is no lower threshold) so that overall revenue from regulated rail fare increases should increase by the specified percentage. This flexibility is intended to change passenger behaviour in a positive way to the rail industry to even out demand (although in reality there is little evidence it achieves this and many suggestions that it is abused to cheat the system – see annex below). This means that some passengers could be facing increases of 4.5%, and the train operators can choose which fares to apply this to (it’s not conditional upon better services being provided). Moreover, they could keep increasing the same fares by a higher amount each year.

See Railfuture’s press release on the day of the RPI announcement covering the above concerns.

See Railfuture’s analysis (done in 2013) of the impact of a decade of RPI increases compared to using CPI.

Fare increases are an emotive subject, hitting people in their pockets, and the media rarely cover the subject in depth. Railfuture director Jerry Alderson considers some of the underlying issues below, concentrating on the position in England where the Department for Transport has a huge say in the running of the passenger railway.

Are all fares rising?

We will not know that until the fares are announced, probably in late November 2014. We can be fairly certain that almost all ‘regulated’ fares will rise. These fare types were defined by the government in the mid-1990s as those it considered the public replied upon and would be seriously disadvantaged if they became unaffordable. They relate to standard class only and are mainly the season tickets used by regular commuters, "anytime" single tickets around major cities (from which the price of a return fare is derived) and “off-peak” longer distance travel. They represent a high proportion of the tickets sold but only a fraction of the vast array of available ‘unregulated’ fares. The latter can, and do, go down as well as up. Indeed, in real terms many advance fares are much cheaper now than 20 years ago, some being amongst the lowest comparable in Europe.

Unregulated fares

The train operators can adjust all other fares as they please with no upper limit other that what the market would bear. Operators have also had the freedom to vary fare restrictions often, but not always, to the detriment of passengers. For example, when evening peak-time restrictions are introduced barring use of off-peak tickets, some passengers have had to buy a more expensive ticket (which is not regulated and has increased higher than others over time) rather than a cheaper ticket (which is still regulated). Therefore on some flows the proportion of regulated tickets bought has gone down. In fairness to the TOCs, they are ‘between the devil and the deep blue sea’ when overcrowding at certain times is so high with no ability to increase capacity (the government tightly controls purchasing of more carriages and upgrading of infrastructure to operate more trains) that persuading passengers to travel at other times is the only option. Sympathy for the TOCs’ dilemma evaporates, though, when they cause overcrowding in the first place by creating ‘cliff edge’ fare differences at certain times of the day and leave First Class accommodation empty by not pricing it sensibly.

Railfuture’s vice president Barry Doe, a renowned fares expert, has said, with the benefit of hindsight, that the government made a mistake by regulating the cheaper tickets and should have regulated the most expensive ones instead. Because of this mistake 20 years ago the gap between the cheapest and most expensive tickets (particularly those where people need to make last-minute trips at peak-time) has grown dramatically. In addition some of the benefits of certain rail cards have been eroded (such as the Network Rail Card where a minimum Mon-Fri fare was introduced).

Whilst freedom to set fares can lead to passengers being exploited the operators know that the best way to run the railway is to fill as many seats as possible rather than running near-empty trains. An empty seat serves no-one’s benefit. Therefore some fares do fall, others increase less than inflation, and with their ability to introduce new fares at will, especially promotional offers, there can be some incredible bargains. Chiltern Railways has recently been selling tickets between Birmingham and London for just 25p. However, because the government takes almost all additional revenue beyond what was envisaged when the franchise was signed, there can be little incentive for operators to work hard to grow patronage

Who’s the villain?

So, the government pulls the strings, demands fare rises (pocketing some of the extra revenue) and the train operators do their bidding, making a fast buck along the way, often without doing much to earn it, but also offering amazing bargains?

As is often the case in life, everyone deserves some of the blame, but the root causes are historic.

How we got where we are

The causes of fare increases can be traced by a series of events. Here are some edited highlights.

  • Annual increases for regulated fares set to RPI - 1% (i.e. a fall in real terms) at time of privatisation to make the railway more efficient and benefit passengers
  • Successive governments had starved British Rail of investment – infrastructure was ripped out, the system was rationalised, maintenance holidays become widespread – 500 miles of track should have been replaced each year but BR could only afford to replace 300
  • Railtrack is born and believes that assets can be sweated further – rail can last longer and only 200 miles needs replacing each year
  • Ladbroke Grove disaster occurs.- government grandstanding instils fear within industry; vast sums spent introducing new safety system over four years
  • Hatfield disaster – broken rail causes ‘collective nervous breakdown’ with fear of how much other track may be unsafe; massive ‘catch-up’ renewal programme over almost a decade
  • Railtrack way out of its depth in believing the West Coast Mainline (WCML) could be renewed and upgraded using moving-block signalling not deployed on a comparable heavily-used mixed-traffic mainline anywhere else in the world; it severely underestimates the cost by an order of 400%.
  • Railtrack cannot recover from Hatfield and WCML PUG2 upgrade without government bailout; forced into administration by government; managed by incredibly expensive lawyers for over a year
  • Costs increase across the rail industry to an alarming degree – taxpayer share of costs leaps to 70%
  • Government wants to contribute significantly less to running costs: not interested in, or incapable of, making railway more efficient; decides simply to make passengers pay a greater proportion of costs; long-term aim is taxpayer 25% passenger 75%; introduces RPI+1% increases in 2004 (instead of RPI - 1%)
  • Passengers see little for higher fares - minimal enhancements to the railway network to cope with rising demand (underground station ‘box’ built at St Pancras but stands idle as government will not find a mere £70m to open it to the public)
  • High-Speed 1 opens following injection of taxpayer money: government decides to recover a small part by introducing supplement fare for HS1 domestic trains and annual RP1+3% increase in south eastern rail franchise
  • Network Rail gets to grip with its job; rail costs stabilise but do not fall despite ‘rail renewal catch-up’ nearing completion; government approves funding for two ‘big ticket' schemes
  • Labour’s Secretary of State for Transport, Lord Adonis, asks Sir Roy McNulty to look at efficiency of rail industry and propose operational savings 
  • Coalition government decides to reduce its contribution by expanding RPI+3% across England but backs down before first rise is due; remains at RPI+1% in England for 2011, 2012 and 2013
  • Sir Roy McNulty’s report suggests that £1 billion a year could be saved; Rail Delivery Group set-up to implement some proposals but most are ignored (such as customer-facing staffing reductions); much closer working between Network Rail and TOCs piloted in ‘deep alliance’ with South West Trains, which improves performance but doesn’t lower costs
  • Ten years of continuous RPI+1% fare increases has not stopped passenger growth but probably limited it – fares become a strong political issue; RPI+1% abandoned for 2014 – reverting to RPI for first time in a decade
  • Four months before election that government is predicted to lose – fares rise by ???
Britain’s railway economics

Over the last sixty years no government has had a good reputation when it comes to the railways, either starving it of investment, or making passengers put up with poor services. However, since 2007 (when funding for Crossrail and Thameslink was approved) the amount of taxpayers’ money being invested year-after-year to grow and improve Britain’s railway infrastructure has been unprecedented since the government became responsible for the railway back in 1948. The ‘spin’ that both Labour and Coalition governments have used is that fare rises are funding these enhancements (such as the rebuilding of Birmingham New Street and Reading stations). The train operators use this excuse as well. Travellers in England are expected to fund more of it though.

In reality passengers have been made to pay today for ‘jam tomorrow’. However, it’s often other people’s jam. Many enhancements are not being made to improve the quality of travel for the current passengers but to provide capacity for more people to use the railway in the future. The number of passengers on Britain’s railways has doubled since 1996 and much of the system is bursting at its seams.

Most industries would use accrued profits or borrow money to fund future growth confident that revenue from new customers would provide a return on investment. Britain’s railway is not a true commercial business (few railways in the world could provide a public service and survive commercially). Continuing increases in patronage over the next two decades, as is predicted by many experts, will at best lead to a ‘break even’ railway with revenue paying for renewals but not enhancements. It’s the economic benefits to the country that the railway provides that will fund those enhancements – not the ‘fare box‘ – even if the widely reported ‘structural issues’ within the railway are resolved.

Many years ago Railfuture President Christian Wolmar defined his ‘golden rule of railway economics’. This said that ‘the more passengers the railway carries the more subsidy it will require’. Is he right?

Well, the current railway actually runs at a profit if you suspend disbelief and pretend the track is free to use. Train operators generate a net payment to the treasury. The subsidy roughly equates to Network Rail’s cost of operating, maintaining and renewing the network. The operating expenditure has stabilised – the subsidy per passenger and per passenger kilometre is back to where it was in the 1990s. The issue today is the large amount being borrowed to enhance the network to meet growing demand and the huge burden of servicing a Network Rail debt that stood at £41.6 billion in April 2014.

What does the future hold?

So, can the railway’s economics get better by themselves? The answer is a resounding no. The debt mountain is scheduled to grow and therefore the interest payments will grow. No impartial expert has provided, with evidence, a solution (involving restructuring and/or efficiency) that would bring down the railway’s costs to offset those growing interest payments.

Nearly every industry has reduced its costs as it has made greater use of technology. Many will remember the television adverts from the late 1970s of car factories full of robots and barely a technician in sight. The railway has seen very few examples of such radical change.

Many say that the railway cannot dramatically reduce labour volume because it is heavily labour intensive. This does not apply to other industries dominated by human ‘talent’. Broadcasting is a case in point where video tape machines were once so expensive compared to people that programmes were rehearsed over and over again during the day so that the complete programme would be taped using a single video recorder for 90 minutes in the evening. Today machines are cheap and a much more efficient scene-by-scene ‘rehearse and record’ approach is used. Likewise entire trades such as film processing were abolished. Computer graphics are produced in seconds compared to an hour’s work using stencils.

In both 1914 and 1945 around half a million people were employed in Britain’s railway. Since then a third of the railway has closed along with two thirds of the stations. The highly labour-intensive wagon-load freight has vanished, along with staff at small stations, firemen and some train guards. Modern ticket vending machines have become commonplace and internet services have removed human contact at retail points. Highly-inefficient steam engines have been replaced with ‘start-and-go’ diesel and electric trains. Many signal boxes have closed, level crossing keepers retired, whilst high-tech measurement trains look for track defects (rather than an army of boots on ballast) and sophisticated tampers, stone-blowers and track-laying trains do the work formerly done by men in their hundreds.

Today’s patronage is roughly the same as it was back then. However, despite all of these changes the total workforce is some 220,000 – just a 50% reduction – but many of the surviving jobs require skills that command high salaries, such as drivers, signallers, signalling-engineers and so on. Figures from the Rail Delivery Group, which exclude financing costs, say that 25% of the cost of the railway - some £3 billion – is staffing.

Despite Network Rail continuing with centralisation and automation such as replacing 800 signal boxes and power signal boxes with just 12 rail operating centres, it envisages annual savings of only £250 million achievable by 2047.

Unless the government decides to write off the debt, funds enhancements to cope with demand, funds significant modernisation to reduce operating costs, both without burdening the railway with interest payments, then few if any educated observers are publicly suggesting fares falling in real the future.

To quote Richard Bowker, the former chief executive of the abolished Strategic Rail Authority, there are only two sources of funding the railway: the taxpayer and the passenger. If the political imperative becomes affordable and value-for-money fares then the government probably has no choice but to reconsider the balance between the two.

An International Comparison

It is often said, almost always without any explanation, that Britain’s rail fares are amongst the most expensive in the world. It’s easy to say but hard to prove convincingly because comparisons between apples and pears are open to many interpretations.

We can certainly say, using an exchange-rate comparison between Sterling and the Euro, that the most expensive train fares in Britain are amongst the highest, perhaps even the highest, train fares in Europe. We can find plenty of examples where it can be cheaper to fly across the Atlantic than take a train 1,000 kilometres in Britain (although a comparison is arguably meaningless when comparing a walk-on service with a limited capacity book-ahead airline). Whether other countries could find their own examples is not widely reported.

For an expert’s view consider this comparison between rail fares in Britain and mainland Europe:

Experts in such comparisons would look at methods beyond simple foreign exchange conversion and might consider how many minutes someone on average salary would have to work to take a 160 km/h intercity train for 500km. They might also do a comparison between a train fare and a basket of household goods.

Here’s a comparison based on the simple attempt to get people to use public transport as much as possible and a car as little as possible if at all 

In Vienna on 1st July 2013 the public transport tickets, which allow unlimited use on all modes in the city for either a single journey or a period of time, increased by 5%. On 1st July 2014 they increased again, by almost 5%, making a 10% compound increase over two years. Inflation in Austria is below 2%.

That is way above inflation, and far higher in real terms that the assumed January 2015 increase in Britain.

As it applies to all fares (bar one) it affects a lot of people. The money is being used or fund improvements to the underground, trams, railway and buses. Even so, surely it is going to lead to lower use of public transport, which is directly contrary to the local government’s plan.

Well no, the above-inflation rise could lead to higher patronage. What?

The clue is in the ‘all fares bar one’.

The annual season ticket for the whole of the Vienna core area (that means pretty much everything – certainly the whole of every underground and tram route) was lowered in 2012 from €449 to €365. It was held at that price in 2013 and remains at that price now.

The simple ‘euro a day’ fare for the whole year is incredibly good value. By raising the fare for single journeys, day passes, weekly passes and monthly passes, the annual ticket has become cheaper to have. Three years ago it was the equivalent of 182 single journeys. It is now just 152. For day passes it has gone from 62 days to 51 days. Put simply if you want unlimited usage just one day a week it is cheaper to buy an annual season.

As more people buy annual seasons then those people will use public transport more because every extra journey is free. Obviously, as some point it will need to be raised (although the Green party called for it to be even lower) but there is enormous political support for public transport in Vienna.

Annex – Example of a TOC using the flex to its benefit

In the main article above it was suggested that TOCs could abuse the ‘flex’ to raise revenue above the percentage specified by government. Here’s how.

When the Labour government introduced above-inflation fares as a policy in 2004 it set an initial fares basket based on patronage levels that year. Those same volumes are still used today, a decade later, to calculate the likely revenue of a ticket between two points, even though the patronage may have changed considerably compared to other pairs of locations.

Suppose that in 2004 there were 100,000 off-peak tickets sold from Newhaven to London, and 100,000 from Worthing to London. Now suppose that in 2014 the prices of the tickets are the same at £20 and that the regulated increase is RPI (2.5%).  If the TOC increases the price of the Worthing ticket by RPI plus the flex of 2%, and increases the price of the Newhaven ticket by RPI minus the flex of 2%, the basket would balance and you would expect overall revenue to go up by 2.5%.

However since 2004 Newhaven has become depressed and Worthing has prospered, so in 2015 there are 150,000 journeys from Worthing but only 50,000 journeys from Newhaven.  This means that there are net 100,000 journeys on which the TOC makes an extra 2%, which equates to an extra 1% on 200,000 journeys, or 3.5% overall including RPI. On this example that is £40K more revenue than if the basket had been updated with latest journey volumes. 

With thanks to Chris Page for the example. 

Footnote – RPI+n% policy and single-fare cap

According to a Parliamentary Briefing Note the RPI + 3% increases for England were set to run for three years (Jan 2012, Jan 2013 and Jan 2014), although this was reduced to RPI +1%, in the first two years and to just RPI for the third. It is unclear if there is a policy on future fare increases in England of RPI+1% It says "Since January 2004, annual rises in regulated fares have been limited to an average of RPI+1 per cent (for 2014 this is RPI). In addition, train companies can apply the 'fares basket' or 'flex' rules, which permit them to vary their increases by up to 5 per cent (from January 2014 this is 2 per cent) providing that the averaged rise across all their regulated fares is RPI+1.” The media have assumed that RPI+1% is the default..

Currently the maximum single fare has been capped at £250 with the maximum return at £500.

Read previous article by this writer: Tube Staffing.