Rail 727: ATOC defends franchising system

In the last issue, I set out the arguments outlined in a TUC-sponsored report that was highly critical of the way that the railways are structured. Fortuitously, the Association of Train Operating Companies (ATOC) has also put out a detailed document analysing the current state of the rail industry and, not surprisingly, has come to the opposite conclusion to the TUC’s report.

The ATOC report is an attempt to justify the current structure and, in particular, the role of the train operators since privatisation. The report highlights the undeniable fact that the railways are booming and emphasises that ‘crucial to this success was the introduction in the mid-1990s of competition between private train companies to win franchises to run passenger services’ and that ‘franchising is a key ingredient in the industry’s recent success in three key areas’.

ATOC suggests that operators are generating increased revenues, not because of fares rises but because of increased numbers of passengers; secondly, this growth is not the result of external demand factors as it has outstripped other European railways and resulted in increased market share; and thirdly that rail users have been registering record levels of satisfaction.

The report shows that between 1997/8, the first full year of the privatised structure, and 2011/12, revenues from the fare box increased from £4bn to £7.2bn (at constant 2012) prices. Nearly all of this, 96 per cent, according to the analysis, was the result of growth in numbers rather than fare increases. This is a very impressive and indeed surprising percentage but can be explained.

Take a deep breath, dear reader: the use of constant prices means that the inflation element of fares rises has been eliminated, and since during the first five years of this period, the formula was RPI – 1, over the whole period much of the rise in real terms is, indeed, down to increases in passenger numbers. However, if the current RPI + 1 is maintained, the proportion of extra income down to fares rises will become higher.

The operators themselves make around £300m per year in profits which they claim represents only around 3.1 per cent, a result they say, of the competitive nature of franchising. They compare themselves with supermarkets which operate on around 5 per cent but there is a difference – supermarkets, for all their faults, do invest extensively in their shops while the train operators do not.

Indeed, on investment, the authors of the report are skating on very thin ice. They say that the investment by the government has been possible because of ‘the growth in surpluses generated by train operators’. However, the truth is that if the direct payments made by the government to Network Rail are taken into account, only one franchise is actually profitable. The report says that ‘government support for the industry has been falling since 2006-7’ which has helped pay for this investment but most of the investment in rolling stock, infrastructure and station improvements has been paid for out of taxpayers’ money. Investment by private companies, including the train operators, has actually gone down according to figures from the Office of Rail Regulation from £750m annually a decade ago to around £500m now.

Indeed, the improvement in performance of the past decade – which actually only brings us back approximately to where British Rail was in terms of trains that are within a minute of the timetable – is down to the fact that Network Rail has accumulated a debt of more than £30bn, which is effectively an added subsidy since, as everyone knows, this will never be repaid.

The key question is whether the train operators are more efficient than their predecessor, British Rail. The report says that operators employ 10,000 more staff than in 1997/8, a 26 per cent increase whereas the number of passenger journeys per employee has grown by 37 per cent. This is an improvement but not a massive one. Indeed, given that in this period there has been around a 25 per cent rise in passenger train services, mirroring the increase in staff numbers, it suggests that there has been no great efficiency benefit delivered by the train operators. The proportion of staff per service operated remains exactly the same. That is excusable – railways are a people business and safety as well as service means that there are limits to the potential for staff reductions, but it does demonstrate that the key aim of privatisation, massively increasing efficiency through using the private sector, has not been achieved.

The most interesting part of the report is the analysis of the unprecedented growth in passenger numbers of the past 20 years. The figures are indeed impressive. Between 1997/8 and 2011/12, the annual average has been just a tad below 4 per cent while in the previous 14 years under British Rail it was 1.73 per cent and over the whole period under Queen Elizabeth’s reign a mere 0.58 per cent.

The report shows that economic growth on its own cannot explain the rise in passengers. In fact, it is clear that the recent rise has bucked a long term trend. So, sorry for the excess of figures, but in the 14 years up to 1996/7, economic growth was 53 per cent while rail passengers increased 27 per cent, and since then the respective numbers have been 33 per cent and 73 per cent.

Nor is it just London peak travel which has only risen 17 per cent in the past five years, compared with 73 per cent overall (the same as the national rise). The rise in rail travel – during a period when car use has actually declined – is as the report says ‘remarkably evenly spread across the country’.

OK, so is it due to rail fares rising less slowly than the cost of using cars. Apparently not – the report has a graph showing that broadly both have kept pace with inflation since 1997/8. Moreover, the growth in UK rail transport has outpaced the rate in other European countries such as France and Germany (though in both travel by rail per inhabitant is far higher). There is, therefore, a strong proportion of the growth that is not explained

Overall, ATOC’s attempt to prove the case for the role of the train operators is a commendable effort but fails in the key task of demonstrating that the success of the rail industry is the result of the work of the train operating companies and the franchising structure in which they operate. It succeeds in debunking certain myths but there is a big hole in the claim that growth down to the private sector.

The growth in railway patronage is an area is ripe for further research. It is time that we understood this conundrum and the only way to find out is to ask lots of new rail passengers and conduct a thorough survey. So here’s a suggestion: ATOC’s next major piece of work should be an attempt to analyse this growth, but quite possibly the owning companies would not like the answer as the ultimate explanation might have little to do with the ‘dynamic’ private sector or its marketing efforts.



UK safety performance is quite remarkable but comes at a price


The two terrible disasters on foreign rail networks in the second week of July remind us of the vulnerability of the rail network. Indeed, the fact that there are so few accidents is testimony to the diligence of railworkers, and the way that lessons of the past have been learnt. While the Canadian disaster appears to be rather unique to North American railway practices, the French disaster at Bretigny has awful resonance with Potters Bar, with faulty pointswork apparently causing an almost identical scenario – a train slewing across a platform of a suburban station at high speed.

Aviation, too, has suddenly looked vulnerable with the serious crash at San Francisco and then a fire on a Boeing ‘Dreamliner’, a name the company may live to regret. We live in an age when such major public transport accidents are far rarer than in the past, with both industries greatly improving their safety record. Nevertheless, the events of this one week show that standards must be maintained, yet decisions must be made intelligently.

There is no doubt that safety has been improved thanks to a great deal of investment which pushes up costs and ultimately fares. There has to be a balance and, moreover, processes have to be modernised and adapted. should  I am reminded of this every time I take a plane: the ridiculous questions about ‘have you packed the bag yourself’ are completely unnecessary given that luggage is now all scanned. And what is more daft than aircraft carrying vast amounts of lifejackets and the like when any risk assessment suggests they are unnecessary. (OK, a plane did plunge into the Hudson in New York four years ago, but the passengers got out mostly without their lifejackets).

There are similar processes in the rail industry that need to be modernised. It takes courage to do so because the tabloids and the dear old RMT are ever ready to pounce on anything seen as a ‘safety risk’. However, change and flexibility are important, and the failure to adapt has been one of the reasons why the cost base of the industry remains too high.

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