Rail 605: Rail companies face triple whammy with credit crunch and fares rises

It is a bit early in the year for Mystic Wolmar predictions but the railways are going to face a triple whammy in January which will set the tone for what will be their most difficult year since privatisation.

First, obviously, there is the credit crunch. Recessions always hit both leisure and commuter traffic on the railways. There is always something of a lag, but by January the effects of the credit crunch be beginning to show through and people will start basing their transport decisions on the expectation that money will be tight in 2009.

And that’s the second part of the triple whammy, season ticket renewal time. If the commuter train companies lose even just 5 per cent of their season ticket revenue, that will blow a huge hole in their finances. The crucial point is that the price of tickets is going up by an average of 6 per cent even though inflation is now falling, and lots of people will think twice about whether the train still offers good value given the third problem for the operators is that the boost they received from high oil prices has all but gone. Petrol is already well below £1 a litre and there is little sign of recovery in the oil price.

As an aside, why is it that high house prices are perceived as ‘a good thing’ by the government which, therefore, tries to implement policies that will keep them high such as cutting stamp duty on houses? And yet when it comes to oil, the government wants the price kept as low as possible and even abandoned a projected tax rise (which, in the event would not have been noticed as it would have been introduced at a time of falling prices)? Surely governments should strive for the opposite: low high prices allow young people and first time buyers to get on the ladder and they keep rentals down, which is generally stimulating for the economy; high oil prices are essential not only to damp down demand for environmentally damaging car use but also to encourage the shift towards renewable forms of energy and, furthermore to stimulate the extraction of oil from more expensive sources, such as difficult to access wells and tar.

The reduction in oil prices will have a severe knock on effect on the train operators (though it will save them money in fuel costs) because some of those motorists who sought the sanctuary of the railways when the £2 litre seemed a possibility, will now revert to their old ways, particularly if they have suffered delays in the leaf fall season. The train operators are eager to point to the fact that so far they do not seem to have been losing many passengers. That’s because there is a time lag, and why I am suggesting that January will be the crunch time.

A couple of weeks ago, I visited Westfield, the just-opened mega mega shopping mall at Shepherd’s Bush in West London and there was, so far, little sign of people keeping their wallets in their pockets, but it would be wrong to draw conclusions from that. The credit crunch will inevitably start hitting more and more people, and while they may visit Westfield, they will come out empty handed as I did (apart from a bag of sweets).

A report from UBS Research published in late October on prospects for the UK bus and rail industry suggests precisely this scenario. These research reports which are undertaken for investors, are often little more than the statement of the bleedin’ obvious produced by wet behind overpaid graduates but they are useful as they offer an outsider’s view of industry prospects. UBS says that passenger numbers will grow 4 per cent in the year to March 2009, and decline by 2 per cent in the year after that. However, as most rail companies report that growth continued well into the present financial year, that suggests there will be no growth in the period January to March, and possibly a decline.

Even what UBS calls a ‘relatively minor slowdown’ in numbers will have a disproportionate impact on profitability because of the way that franchises are structured on the basis of growth. The authors suggest that the companies with Southern commuter franchises, Go Ahead and Stagecoach whose profits will be worst hit while Arriva, First and National Express will suffer less because their franchises are not so London-based and their profits will be shored up by bus revenues, which UBS says will remain buoyant.

UBS therefore, is not predicting disaster but if even a ‘minor slowdown’ results in a big fall in profits, a lasting recession will clearly wipe them out altogether. That is when it will get interesting. Despite its previous bullish statements, there is no doubt the Department will have to renegotiate franchises if several are in deep trouble.

Interestingly, a paragraph tucked away in the National Audit Office’s recent report on franchising, Letting Rail Franchises 2005 – 7 rather gives the game away. Talking about the reductions in overall franchise costs, as a result of the high premiums negotiated by the Department in recent contracts, the NAO says: ‘achieving this reduction in subsidy will depend on a number of factors including the effect of any slowdown in the economy’.

In other words, if the recession deepens the risk is clearly with government which will be forced to renegotiate franchises. If one franchise goes into the red, then the company will be in trouble; if several are, it will be the government that is in deep water.

Stagecoach closes gates issue

It seems that Stagecoach’s decision to install gates at Sheffield station is immutable and will happen in the late Spring. Despite the furore the issue caused by the proposal (see for example my column in Rail 599) among local residents and local politicians, Stagecoach will not budge from its position. It has argued that the gates are a franchise commitment and are essential in order to protect revenue.

There have widespread objections locally because station is a through route for many local residents. Stagecoach has partly conceded to local demands by promising local people – and anyone else who asks and fills in a form – smart cards that will allow them to pass through the gates, a scheme that will cost the company in excess of £30,000 per year.

What makes the bullishness in the face of so much opposition inexplicable is that it will not be the main beneficiary of the scheme since most fare evaders using the station are travelling on Transpennine or Northern. Tim Shoveller, the young railwayman in charge of Stagecoach’s East Midlands Trains, has been vociferously arguing the case for the gates but accepted that for his company the gates are not essential: ‘In terms of our revenue, most tickets are checked on the train, and therefore it won’t make much difference.’

In order to shore up its case, Stagecoach has been releasing ‘evidence’ in support of the gates, but the statistics have proved not to be very robust. The company had suggested that there were 207 offences at the station in 2007 and the barriers would help reduce the crime rate. However, it emerged that the statistics related to the surrounding streets of the station as well and it is unclear how many of them occurred within the area that would be covered by the barriers. Indeed, given there are two major football clubs in the town, it seems a rather low rate of offending!

Then the company implied that as much as 30 per cent of ticket revenue was being lost, but this is not in fact the case. Rather, when there was a blockade for a day in October, ticket revenue at the booking office rose by that amount, which is clearly an entirely different matter and does not suggest that high a rate of ticketless travel at all. The company has now conceded, too, that gates are not a commitment in the franchise contract which, rather, states that it should introduce gates provided it obtains planning permission and safety approval, or otherwise it must use its ‘best endeavours’ to reduce ticketless travel.

Mr Shoveller commented that the councillors and MPs in Sheffield, who have also complained very publicly about the failings of the local taxi rank scheme, would be better off addressing a far more important issue for local rail services, the fact that trains take 150 minutes to reach London, a mere 150 miles away, and are therefore far slower than either the East or West Coast main lines: ‘The Midland Main Line is a prime case for electrification and it seemed for a while to be at the head of the queue. But now it may lose out to the Great Western which would be a great shame. I won’t be hear when electrification happens, but they will be and they should be making sure it happens. The authorities in Sheffield should be focussing on that issue, rather than on internal problems like gates and taxi ranks which are far less important.’

That robust attitude does rather remind me of the founder of Stagecoach, Ann Gloag, Brian Souter’s sister, who once parked 20 old buses in the centre of Keswick because the local council refused to agree to its planned development including a bus station. She won!

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