Reforming UK long distance passenger rail April 2015

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viaMAXI GmbH & Co. KG i.G.

mobility consulting & interim management

Weinkampswende 12, 30539 Hanover, Germany.

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Position paper entailing -

Proposal to bring about modal shift in domestic UK long distance passenger rail

Author: Nick Brooks Passenger Rail Consultant.

Date: 22nd April 2015

CONTENTS:

1. INTRODUCTION 2

2. SUMMARY 3

3. THE WIDER BENEFITS OF COMPETITION IN LONG DISTANCE PASSENGER RAIL 4

4. CRITIQUE OF THE CURRENT UK FRANCHISING SYSTEM 8

5. PROPOSAL 11

6. CONCLUSION 14

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INTRODUCTION: Passenger numbers carried on the UK rail network and number of passenger miles rose by 69.5% from 2003-2015, more than doubling since rail privatisation in 1993. It is hard to say whether this was down to franchising per se. After all, with the privatisation of British Rail by the Conservatives in the mid-1990s, long distance passenger rail franchising was only meant to a stop gap measure – to protect a minimum level of service to regional cities – until open access operators came along. While franchising has undoubtedly forced operators to act in a more commercial manner (e.g. filling up off peak trains with cheaper advanced fares), it can be argued that unrelated socio-economic reasons have also fuelled the growth in rail travel. Fact of the matter is: Railways still need to play a greater role in the transport mix. This reflects the purpose of the European Commission’s White Paper on Transport from 20111. However, four years on, its objectives are not very close to being fulfilled. In short – The UK needs disruptive change in long distance passenger rail. A dramatic rethink needs to be undertaken, rather than just lip service. This paper will firstly argue that greater rail competition would drive competitiveness, service quality and modal shift. Secondly, it will propose a new pricing model (“Pure Market Pricing”, abbreviated as “PMP”) that further raises the attractiveness of long distance rail. The final result should be better value of money for the UK taxpayer (i.e. less total subsidy of long distance passenger rail system).

1 Please see http://ec.europa.eu/transport/themes/strategies/2011_white_paper_en.htm

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SUMMARY:

All evidence demonstrates that long distance passenger rail competition (on the same

tracks) is beneficial for the consumers, the environment, market share and rail industry

profitability.

My proposal is to introduce Above Rail competition on all British long distance

passenger rail routes by means of two key changes –

(1) Overlapping „franchises“2 so that regulator’s minimum desired service levels

can be maintained

- In conjunction with -

(2) “Pure Market Pricing (PMP)”, intelligent demand-based yield management,

selling the last available seat on each service about 5 minutes before departure.

To be more precise:

2+ train operating companies (“TOC”s) on all UK long distance passenger routes,

offering approx. same number of train services (i.e. alternating with each other)3.

“Pure Market Pricing (PMP)” (i.e. yield management) - should be mandated to

fill the last seat on every train approximately 5 minutes before departure.

Results:

Greater diversity in pricing during different demand periods (“demand smoothing”)

would appeal to a much wider range of customers, i.e. low earners as well.

The two dominant factors defining competition would be

(i) Price and (ii) Service Quality.

If there is cheap, reliable local public transport before & after the long distance

train journey too, then the entire mobility chain can compete with car travel.

Rail would become less of a financial burden to the taxpayer – many more travelers

each paying (on average) a little less should boost total farebox revenue.

In a nutshell - Financial, societal and environmental goals will be met.

2 Assuming there is not already open access competition. If this is the case on the same route between exactly the same station/city pairs at comparable times of the day (i.e. in peak as well as off-peak hours), then only one franchised operator is necessary. 3 Assuming there are 2 overlapping franchises, this in itself is no reason to reject an application from a new

open access operator, even if the new open access can only serve specific times of the day. The open access model should remain an option for new entrants not wanting to or unable to offer regular services.

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Assumptions:

The current low barriers to entry for new entrants in UK passenger rail are

maintained.

Sales channels remain neutral (regardless of ownership), so that all train pass-

engers are automatically offered the cheapest tickets for their journeys.

THE WIDER BENEFITS of competition in long distance passenger rail:

Definition of long distance passenger rail competition: This means long distance conventional or high speed trains on (i) the same tracks4 at (ii) the same speed5 with (iii) no pricing collaboration6.

Here are current examples from within Europe -

1. Two smaller operators (Hull Trains & Grand Central) versus dominant operator

East Coast on the UK’s East Coast Mainline (“ECML”).

2. New – started 21st March 2015 - MTR Express competes vs. incum-bent SJ on the 450km/280 mile route between Stockholm & Gothenburg.

3. Thalys versus DB high speed trains between Dusseldorf/Cologne in Germany and Brussels.

4. N-TV (Italo) versus incumbent FS in Italy - not just on one single route, but an entire network between most major Italian cities.

5. Three-way competition between incumbent CD and two new entrants, Regio Jet and Leo Express, between Prague and Brno in the Czech Republic.

6. SNCF TGV versus SNCF low-cost subsidiary Ouigo TGV on the same route between Paris, Lyon and Marseilles (i.e. competition within the SNCF group)

In my humble opinion, Italy is the EU member state where long distance rail

competition is the farthest ahead (in terms of both passengers carried & revenue).

4 Competition on parallel routes, e.g. Birmingham to London on either Chiltern Railways or Virgin Trains WCML, does

not count, because this does not help residents of the in-between towns, such as Banbury. 5 Competition on the same route but different speeds of service, e.g. rivalry between commuter operator London Midland

and long distance operator Virgin Trains between Crewe and London, also does not count. 6 Prices genuinely have to differ in order to entice passengers to a particular operator; there are no prior price

consultations between the competing operators.

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How does competition “raise the game”?:

Just like in other industries, even in passenger transport (i.e. with airlines), competition

causes both dominant players and new entrants to innovate in terms of (i) pricing and

(ii) quality of service. It sharpens the focus on customer needs.

It also leads to people changing to Rail who previously flew, drove, took the coach

or did not travel at all because they could not afford the train.

Competitive advertising drives awareness for Rail and the destinations that it serves.

Leisure trips rise when new ideas are promoted, especially among older people

who can travel at off-peak hours and have money to spend.

For example, between Dusseldorf, Cologne and Brussels, there is active competition

between the high speed trains of DB and Thalys.

In Dusseldorf, Thalys recently promoted its brand through wrapping local trams.

Local tram in Dusseldorf, NRW, Germany, covered in a Thalys wrap.

Previously, German citizens only really knew one single railway brand (i.e. DB), which they grew up with – it never needed to raise much awareness of itself.

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Have previous examples of competition been a success? In all known examples above (on page 4), competition has led to –

1. Lower average fares.

2. Increased number of services

3. New (or upgraded) trains.

4. More passengers.

5. Increased total Rail industry revenue.

6. Increased modal share (for Rail).

Here is some real data: 1. Data taken from the LENNON rail ticket database between 2007-12 shows how,

on the ECML7:

Passenger journeys increased by 42% at stations with competition, 27% at

those without.

Revenue increased by 57% at stations with competition, 48% at those without.

Average fares increased by 11% at stations with competition, 17% at those

without -> fare rises at stations with competition were lower!

2. From July 2012 until January 2015, the HKX train from Hamburg to Cologne in

Germany regularly earned up to 1 million euros from 45,000 passengers per month

(published figures). DB’s reaction to the new competition was very revealing:

It stopped raising long distance fares on that route (previously, as a monopoly,

price increases had taken place almost every year).

It did not withdraw a single service (out of a total of 20+ per day).

It put newly refurbished coaches into service onto that route first of all… and

freely admitted that this was because of the new rival.

3. “The Economic Footprint of Rail in Europe” report8 of Nov 2014 states on pg. 33:

“In April 2012, the private railway undertaking (NTV) started to operate high

speed services … in direct competition to incumbent Trenitalia.

This is the first ever experience of a high speed market where two competing

operators provide services along the same routes.

Despite the severe economic recession which impacted Italy, total passenger

numbers are increasing, which suggest that competition…. attracted new

passengers”

7 Tony Lodge (March 2013), Rail’s second Chance: Putting Competition Back on Track, Centre for Policy Studies. 8 http://www.cer.be/index.php?eID=tx_nawsecuredl&u=0&file=uploads/media//The_Economic_Footprint_-_web_-

_final_final_30_Sept.pdf&t=1428690638&hash=0628e670e00c09ca674713ee58a9f9987d2145f8

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Potential to increase premiums and reduce subsidies: The prevalent attitude at the UK Department of Transport (DfT) appears to be that competition on long distance rail routes reduces the premiums that franchise holders pay to government.

On the contrary – between 2009 and 2011, premiums paid by the franchised operator on the ECML called “East Coast” actually increased rather than decreased, despite competition from two open access rivals.

Source: Rail 2020, Commons Transport Select Committee, 20139

Consequently, if a specific long distance route is currently profitable (e.g. Virgin Trains WCML), total profit of all competitors on that route should be higher than beforehand. The owners of these operators would benefit, regardless whether public or private10.

9 Tony Lodge (March 2013), Rail’s second Chance: Putting Competition Back on Track, Centre for Policy Studies. 10 This paper states no opinion on whether operators should be publicly or privately owned. There are examples of both

publicly and privately owned rail operators that have been both well run and badly run.

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CRITIQUE OF THE CURRENT UK FRANCHISE SYSTEM:

There are 2 key components to my criticism: (1) Franchising needs to be optimised. (2) The pricing system needs fundamental change.

Admittedly, franchising has had some commercial benefits: There are incentives embedded into the current long distance franchise agreements that encourage operators to boost turnover and ridership. Furthermore the growth in advanced fares over the past decade have provided, to a certain degree, (internal) competition against the anytime fare for the route concerned.

As a reminder, advanced fares are for a specific train service departure with a specific operator (similar to catching a specific flight, which many people are used to) while the anytime fare allows travel on any service between two stations on a route or city pair, regardless with which rail operator.

Advanced fares may have cannibalised some users of the anytime ticket, but they have won over far more new customers that did not use the train for long distance travel. For example many price sensitive customers (e.g. OAPs) have changed from coaches and cars to trains over the last decade, which has undoubtedly fuelled some of UK Rail’s growth in recent years11.

However, all UK long distance franchises – with the exception of on the ECML –

remain Above Rail monopolies – “Railolopies”. In fact, it’s very similar to DB & SNCF in their home markets Germany & France– These incumbents also offer lower cost advanced tickets for specific departures as well as an equivalent of the anytime fare. In their domestic long distance passenger rail markets, DB and SNCF enjoy 99% and 100% market share respectively.

Virgin Trains WCML service and a domestic DB ICE in Germany. From both a pricing policy and a market share perspective, there is not a great deal of difference.

11 Source: ATOC “Growth & Prosperity” Report, July 2013

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But UK franchise holders need to feel more pressure:

Without immediate rivals breathing down their neck12, UK franchise holders tend to innovate less and charge higher prices. Managers are liable to believe that customers who book close to the departure date and want speed & comfort of a train “will book anyway – they haven’t got a choice”. In my opinion, demand is wrongly perceived to be mostly inelastic. Furthermore, long distance franchises are not known to be hugely innovative; they have no need. There is little motivation to improve the passenger experience - the pressure is not there. Huge investments make little sense when the franchise might be lost to a different group next time around. Instead it is the (few) open access operators – having to solicit every pound they earn - that come up with real innovations, such Grand Central’s carnet ticket (one ticket for 5 trips). This has spurned franchised rivals to respond – e.g. Virgin Trains East Coast has introduced a flexible off-peak traveling13. Can it be coincidence that those operators facing competition consistently land at the top of customer satisfaction surveys? Here is a survey from 2012, where those long distance operators experiencing same tracks or “different route between same cities” competition (on services departing London) all scored above 90% satisfaction levels14.

Source: National Passenger Survey, Autumn 2012 (Open access operators are coloured darker) Grand Central, First Hull Trains and East Coast face long distance competition on the same tracks between London and regional cities in Yorkshire & North East.

12 Exception: the East Coast Main Line between London and Yorkshire, Teeside and Tyne & Wear. 13 https://www.virgintrainseastcoast.com/special-offers/travel-savings/off-peak-train-tickets/ 14 Tony Lodge (March 2013), Rail’s second Chance: Putting Competition Back on Track, Centre for Policy Studies.

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Overcrowding is not a reason to stop competition:

On the contrary, competition can help to ease overcrowding.

Lord Hollick, Chairman of the House of Lords' economic affairs committee, correctly noted in March 2015 that overcrowding on the West Coast Main Line (WCML)’s long-distance services only takes place “on Friday nights & some weekends”15. Furthermore, overcrowding on the WCML is “largely a problem on commuter trains” instead. Lord Hollick is right; long distance trains – just like planes & coaches - do not carry the same high percentage of daily commuters.

But the rail network is not a normal market, and even long distance operators’ room for manoeuvre is constricted. The obvious solution to overcrowding is to vary fares to incentivise passengers to use less busy trains, thereby relieving the pressure in the peak hours. In short, there needs to be “demand smoothing”.

The pricing structure is too rigid:

Alas, this kind of demand smoothing is not encouraged. Instead, the government

imposes price controls so that peak hour long distance services into London “remain affordable” for the wider good of society and business.

The pendulum swings the other way too - on late night Virgin Trains, last minute tickets are not allowed to cost too little, to maintain the perceived value of the railways. Pendelinos then operate largely empty, which in itself is damaging for the environment.

Parallel to this, slower and much less comfortable late night or overnight coaches are charging up the motorways between the same cities (e.g. Manchester and London). They are often full, because not everyone has the foresight to book a cheaper rail ticket in advance.

Nobody seeks to address this obvious imbalance – neither railway executives who still believe that trains are too prestigious to have “bargain basement” prices - nor the coach operator that wants to earn a good profit from the system.

I predict that most passengers on overnight coaches would take late night trains if pricing were genuinely competitive. For that matter, coach passengers traveling earlier in the evening, let’s say at 7pm from e.g. Manchester to London might swop to a 10pm train departure instead if short-term (i.e. same day) pricing were still attractive. This would help fill those empty trains! Fact of the matter is – seats on a train are a perishable good. Every empty seat is a wasted opportunity. Even if, by means a more competitive pricing strategy, full off-peak trains only earn the same revenue as current services that are half-full, then surely it is worth it – this would means less people on the road. 15 Please see http://www.businesscarmanager.co.uk/hs2-waste-50bn-say-lords-committee/

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PROPOSAL:

I suggest 2 key changes: (1) Franchising needs to be optimised. (2) The pricing system must be overhauled.

1st change – Introduce overlapping franchises:

Overlapping franchises on the same rail tracks for all UK long distance routes16.

This way, the regulator can still stipulate the level of service it requires.

Both operators should offer approx. the same capacity, with alternating services.

There can still be an “anytime fare” for the peak hours, for long distance

commuters who still want the flexibility of boarding any train.

Integrated ticketing and timetabling would still be possible.

This change alone would drive some innovation. If there were two operators with competitive pricing and service innovations, fighting to get passengers into their respective trains, demand would likely rise and industry revenue would grow.

Once brand loyalty is established, some customers will likely be willing to pay a premium for their favourite operator.

Is this enough on its own? Would it prevent overcrowding or almost empty services late at night? Not necessarily! Therefore, there is a 2nd part to my proposal.

2nd change – Introduce “Pure Market Pricing (PMP)”: What does this mean?

Train-tied fares that vary according to demand, available until departure.

Each booking tied to a compulsory (free-of-charge) seat reservation17.

There should be no upper or lower limit on the prices that can be charged – it should be left to the market (popular trains will earn a lot of money).

At the same time, it should be mandated that the train does not sell out too

early. Selling out all seats long before departure means revenue is wasted.

Equally, it should be mandated that the last ticket is sold 5 mins before

departure (ideally, but not necessarily, in an upward pricing curve, with the

cheapest tickets being sold months before departure).

In other words, advanced fares should be available right up to departure, so that they are available to walk-up passengers too, with the aim of a perfectly full train.

16 It is not critical, but more than two franchises could also be allowed. After all, many air routes are served by three or

more competing airlines. 17 SNCF in France also has booking system seat reservations on TGVs are mostly compulsory.

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Further details: Basically, passengers should be incentivised to use to use less busy trains, relieving the pressure in the peak hours & spurring cut price travel during off peak times.

This is called demand smoothing. Flexible pricing could also encourage employers to alter their work patterns. For example, workers could shift to a different schedule, traveling into office later in the morning; working at home first of all for a few hours. With compulsory seat reservations, internet and power sockets, even the train could become a mobile office for an hour or two each morning.

Market forces would work well - if an operator gets too greedy, demand will cease and it will have to put prices down in order to fill all seats. If there is little demand, then prices should fall (in order to reach 100% occupancy). Lower prices tend to have the bonus of generating word-of-mouth marketing (helped along by advertising). In turn, this stokes demand. As demand increases, prices would automatically go up. The operator’s sales performance should be measured on when the last ticket was sold.

If a service is regularly too cheap, either the operator’s marketing is below par or the regulator has to think again about the necessity of providing it.

How it would work (technically): There are already software providers that can yield manage every train to ensure 100% occupancy, with the very last seat being sold just before departure.

It is even possible to sell live, yield managed fares at ticket offices and machines (i.e. not just on websites). Indeed, it should go one step further – dynamic fares could be looked up on an App and then redeemed by means of payment card or mass application National Rail smartcard (with credit uploaded) at a reader, either on the platform or inside the train. Imagine a “pay as you go” travel product that processes yield managed fares for specific departures, including trains about to depart in the next 5-10 minutes.

This way, those customers who want to turn up & travel can do just that. If they arrive at the station minutes just before departure, they can look up the price of a train and then redeem by swiping their card on a reader.

It may well sound like a revolutionary ticket retailing and validation system is needed. However, while intense discussions would likely take place (between industry stakeholders), the technology already exists.

For example, the reservation software provider Sqills could do it (in conjunction with Cubic Transportation Systems). Indeed, Sqills and Cubic are currently working together to introduce a new smartcard retailing and validation system for Irish Rail (Iarnród Éireann), which will include demand driven pricing. Others providers, such as Navitaire or Amadeus, could likely offer such a combined software/hardware IT solution too.

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The advantages of “Pure Market Pricing (PMP)”:

Popular trains will earn a lot of money, cross-subsiding off-peak counterparts

Overcrowding could be eliminated

Empty trains would not be rattling through the countryside

Cost conscious travellers could get lower fares, assuming that they are a little flexible.

There would be higher total profits for the industry.

Passengers would be won over from coaches & cars.

There would be better use made of existing infrastructure, i.e. before new lines (e.g. HS2) are finished.

Additional transport planning bonus:

Trains with higher revenue will indicate where new infrastructure is needed.

Trains with lower revenue will indicate where the problems are.

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CONCLUSION:

Long distance passenger rail does not need same level of fare regulation as

urban counterpart, because it has a lower percentage of daily commuter traffic.

All other modes of UK long distance passenger transport experience “intra-

modal” competition, and they are all less regulated –

There is not only one car manufacturer.

There is not only one coach firm.

There is not only one airline.

If other transport modes are under competitive pressure and innovate better, then

my worry is that they will gradually win over Rail passengers too.

E.g. Megabus has introduced sleeper coaches (“Megabus Gold”).

The 1st change should be overlapping long distance franchises, to institutionalise

and drive competitiveness among “like-for-like” products.

The 2nd change is to mandate that yield management is used to sell the very last

seat on each service minutes before departure – 100% occupancy is the goal

Critics may argue that this is a high level of government interference, but if

the taxpayer pays for all rolling stock, it’s not an unreasonable demand.

(Besides, the present franchising system also sees a great deal of government interference!)

Through both of these changes, operators should become more innovative &

efficient – benefiting consumers, taxpayers, profitability, modal share & the

environment.

These changes may sound radical. However, the final result is not unlike

markets faced by profitable low-cost airlines. Despite using some secondary

airports18, it is rare that Ryanair & Co. actually have a monopoly on any route.

Furthermore, their pricing is aimed at filling every last seat on every flight.

Radical, disruptive change is something the UK can do very well, much better

than other EU member states (or even the USA). Assuming this proposal

succeeds, UK long distance rail could become a role model for the rest of the

world.

18 In the case of Ryanair, some secondary airports are still used. Indeed, Easyjet claims to only use the same airports as

the “legacy” airline carriers. For example, the Bristol to Amsterdam flight route is served by both Easyjet and KLM.

Reforming UK long distance passenger rail April 2015

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