Why rail fares keep rising

Here we go again. It’s a new year but an old story. Commuters are up in arms about rises in rail fares and they’re looking for someone to blame.

Aside from the fact that central London was half empty yesterday and finding a seat on a train would have been no problem for most, they have a good point. This is the 10th successive year of above-inflation fare rises, and there is no sign of any change in policy coming until the next general election at least, and probably well beyond that.

But finding the right target for passenger anger is made difficult by the fact that transparency is not a feature of the rail industry and railway economics remains a dark art. The train companies, the Government, previous governments, and even Network Rail (responsible for the track and infrastructure) are all in the frame for blame. And actually, all of them deserve at least a bit of buckshot, if not a high-velocity bullet.

The railways may have been privatised in the mid-Nineties, but in reality they are a mix of private and state interests, with most of the purse – and other – strings still being pulled by the Government. Forget the notion of a raw capitalistic enterprise with energetic entrepreneurs seeking innovative ways to fleece the public: the train operating companies are pretend capitalists who have very little room for manoeuvre and invest very little. They complain that they make only a 3 per cent profit – or around £250 million annually – yet that is a misleading figure, based not on investment, as with a conventional company, but on turnover.

The train companies will receive a proportion of the extra fare income that yesterday’s rises generate, thanks to an opaque process that began last summer. Once the fare rises (which are based on July’s inflation figures) are known, the Department for Transport (DFT) and train companies begin negotiations over how the spoils should be divided. This is because rising fares will deter some passengers from travelling, and under the franchise agreements the DFT has to compensate the private companies for this loss.

However, given the recent inept performance of the DFT over the West Coast franchise, it would not be reckless to suggest that perhaps the train companies get rather more of this extra dosh than they need to cover any passengers lost as a result of the rises. The projections and the sums of money that follow are, of course, “commercially confidential”, and therefore not released to the great unwashed British public.

There is a real irony here. The legislation to regulate season tickets and off-peak fares was designed, at the outset of privatisation, to protect passengers from greedy private companies exploiting their monopoly position. Originally, the rises for “regulated” fares were set at the RPI measure of inflation minus 1 per cent, as a way of encouraging rail travel. In fact, since 2003 – when the formula was changed by the Labour government to RPI plus 1 per cent – the legislation that supposedly protects consumers has been used against them.

However, the situation with unregulated fares – which represent about half the income of the train companies – is completely different. Train operators are free to set all other fares, which include the very expensive peak fares on intercity and other routes, first class and advanced, and all of the increase will go to them.

For their part, the train operators argue that the extra revenue from unregulated fares is needed in order to meet the financial arrangements that come with the franchise deals – most of the train companies pay an annual premium to the Department for Transport. They say these unregulated fares are set commercially because operators face competition from airlines or the roads. But many people making occasional journeys at peak times have no option but to travel then, and are therefore heavily penalised for their lack of flexibility.

A spokesman for the train operators justifies the situation by saying: “Train companies have to meet tough financial commitments agreed with the Government when franchise agreements are signed.” It is also the case that since 2007 there has been a cross-party policy of increasing the share of the cost of the railways paid by rail users, which is now around two thirds, compared with less than 50 per cent six years ago. Yet this does not negate the fact that the train operators decide the level of unregulated fares and many have gone up far more than regulated fares. A peak return from London to Manchester in standard class, for example, is now a stunning £308.

Provided the DFT gets its sums vaguely right, the Government therefore will receive a substantial proportion of the money from increased fares. Ministers’ explanation for the rises is that this money will be used for investment in the railways – but the relationship between investment and fare rises is a distant one.

In fact, the amount of investment going into the railway for extra capacity such as improved track and better signalling is determined by a complex process of negotiation involving Network Rail, the Office of Rail Regulation and the Department for Transport. Ministers set out an investment programme in five‑year periods – the current one runs out in March 2014 – and allocate funds accordingly, and then the Office of Rail Regulation assesses whether enough money is available to carry out the plans. Network Rail then undertakes the work, primarily through contractors.

New trains are provided through a different, and similarly tenuous, relationship. The Government will determine that there is a need for new trains and build this into franchise contracts. The trains are then leased, with the operators paying for them out of their income from the fare box and any subsidy they receive from the DFT. However, the level of fare rises is not linked to the acquisition of new rolling stock. As one angry rail traveller tweeted yesterday: “Why should I pay more to travel in Lincolnshire when the services and rolling stock are so bad?”

Overall, then, there is very little relationship between yesterday’s fare rises and future investment plans. Indeed, for the past two years, the Government, in the face of public pressure, has backed down from proposed fare increases of RPI plus 3 per cent to the current RPI plus 1 per cent, which has resulted in a reduced income of around £250 million annually – enough to kick-start an investment programme of, say, £2.5 billion. Yet there has been no suggestion from ministers that this cut in fares income will reduce the amount available for investing in the railways.

The position of Network Rail – a state-owned company in all but name – adds to the confusion. It spends around £6 billion a year on maintaining the railways but has been sharply criticised for excessive costs. A report in the spring of 2010 by Sir Roy McNulty, the former chairman of Short Brothers, the airline manufacturer, identified wasted spending amounting to 30 per cent.

Network Rail is therefore being required to cut costs; McNulty reckoned it could save £1.8 billion by 2019. Justine Greening, who was Transport Secretary until the autumn reshuffle, argued that if these reductions were made then fares could, in future, be held steady, but few industry insiders believe that such big cuts could be made without compromising performance or safety.

So the real blame for the fare rises must lie with us, the passengers, and our appetite for rail travel. Ever since the early Nineties, passenger numbers have kept on rising steadily. Remarkably, even the long-term trend of passenger numbers falling during recessions has been reversed, as numbers have continued rising except for 2009-10, and even then the fall was very small.

The one way to ensure that fare rises are lower in the future is for more people to shun the railways and use the alternatives – or simply not travel. While numbers keep rising, even in times of recession, why should either the train companies or their political masters change the policy?

  • The only real competition to rail travel is road travel.

    As far as I can tell, a massive cost burden on the railways is the required safety levels. If we allowed the railways to kill people at similar levels to those killed on our roads, rail costs could probably be dramatically reduced…

    Of course that would be terrible, but taking the costs of road deaths (and crashes and the delays they cause) into account when costing road investment would make the playing field when deciding between rail “subsidy” and road “investment” a lot more level. Why don’t we privatise roads too, and charge the private owners (or perhaps even the drivers themselves) for delays, deaths, and other losses of safety in the same way we do the train operators and track maintenance companies? Oh, and give the HSE control of road safety too.

  • Johno

    Wow so its our fault for wanting to travel?

    Some of us have no choice but to travel long distances on the trains every day and our wages are not going up to compensate.

    Why should we keep having to pay when the current system is a business boys club? How can TOCs and ROSCOs keep making money for themselves rather than using the profits to reinvest in the network.

    This country is just a greedy boys club for business owners, a cartel for price fixing. Yet wooly keeps justifying the price rises by saying its out fault. Who’s board do you sit on my wolmar?

  • christianwolmar

    Well in a sense it is – the price of any good that is in demand goes up, and the government is taking advantage of that. I’m not in any way supporting the fares rises, as can be seen from the rest of the article,but merely stating a fact about the increasing demand on the railways., Of course many people do not have a choice, and I say that too, but interestingly there has been a big increase in discretionary travel, too

  • As far as I can tell from my daily journeys to and from work, most of the problems with unreliability seem to be due to infrastructure problems. So what I’d like to know is, how much of my extra 5% levied by the my TOC is actually going to Network Rail to rectify these problems? I’d be very annoyed to find out that I’m getting shiny new toilets and signage on the stations if I can’t make my journey on time!

  • Dan

    Well done Christian for one of the clearest articles on this issue likely to be seen outside the specialist railway press. Very well put.

    Tongue rather in cheek though I’m not sure why your Tweeter was complaining about Lincs …EMT have refurbished all the local trains that run on Lincs routes so they bear no recognition to the appalling std they had under Nat Exp (Central trains) – if only EMT could actually keep the interiors clean then that money would not be quite so wasted! Meanwhile NR are putting big money into the P’Boro – Spalding – Doncaster line aren’t they? But I take the Tweeter’s point. Unless your Tweeter uses Lincoln – Sheffield on an appalling ‘Pacer’ that is, then they have a point….

    I’ve just got back from using a 4 day Rover (only marginal extra cost over an OP Return!) to get up towards the Scottish border. Taking in some scenic routes I ‘enjoyed’ more than my fair share of Pacer Travel. These train really are staggeringly bad. Northern Rail TOC seems to have large numbers of them and they are all simply not fit for purpose A contract to build replacements at Bombardier Derby could have got the govt out of the hole created by issuing the Thameslink stock contract overseas – and replacement trains are needed as the Pacers will be out of disability compliance soon – yet no one seems to have a plan for their replacement do they? I thought cascaded GW ‘Networker’ DMUs might end up being the answer post GW electrification but I hear they do not meet loading gauge compliance because they are built to ‘Brunel’ size. I wonder if this is true?

    Christian – I know you are not long back from Trans Sib but I’d recommend a few days on a North East or North West Rover sampling the delights of Pacer Travel on some local routes (the scenery is partial compensation!) if you’ve not travelled on one for a while – interspersed with the usually overcrowded too short TPE trains – you can report back to the London crowd on how lucky they are!

    Anyway – keep up the blogs and articles – Happy new year

  • Dan

    I’ve just read the recent letters in the last Rail about Lincs services and the point about bad service frequency and 1950s levels of speed etc are in fact very relevant – so I pull back on part of my earlier points!

  • Paul Holt

    Penultimate paragraph: “So the real blame for the fare rises must lie with us, the passengers…” is truly astonishing. The penny needs to drop for CW is that rail fares are like taxation, we don’t have a choice not to pay it. Once that penny drops, CW can (finally) turn his attention to the unmissable target of taxpayers’ money being squandered and whose collars need feeling. Following that, he might address the subject on which he has been deafeningly silent, his vision for transport, including road, rail and air.


    I think a large problem is the raising of off-peak fares, ie the old ‘Savers’, to such a high cost that Advance tickets are often the only affordable way to travel on inter-city journeys. These are often impractical and hard to obtain, but they help TOCs fill up seats, and probably account for much of the travel by today’s computer trained younger generation, who do not realise how affordable BRs old ‘Supersavers’ were. I wish the government would impose a cap’ on off-peak ‘walk-on’ fares (say 20p per mile), and perhaps offer a 10% discount for buying them online (thus saving ticket office costs). The TOCs would then have more ‘turn up and go’ travel’ and would have to limit advance fares to predicted seat spaces based on average travel

  • nvelope2003

    The railways themselves – track and signalling – are in public ownership just like the roads. The passenger services are controlled by the Government but operated by private contractors like for example school buses or tendered bus services and only freight services are mostly privately operated with some limited subsidy. The railways are not in private hands like the supermarkets (except possibly the Co-op which is owned by its members). You are right in what you say about road safety standards though. These should be made as high as for the trains.