Select Committee on Transport Minutes of Evidence


Memorandum by the Department for Transport

1.  INTRODUCTION

  1.1  The UK has the fastest-growing rail network in Europe in terms of passenger-kilometres, with passenger numbers higher now than at any time since the end of the Second World War. This has been achieved in part thanks to the development of effective fares and ticketing. Some perceived complexity arises from a more sophisticated approach to revenue maximisation originally adopted by British Rail and developed by the train operators, when compared with some other European countries. Within this framework, train operators have been able to manage fares allowing, for example, reduced fares to be offered in the off-peak to encourage travel. However, the DfT considers that the UKs market-based approach has led to increased revenue, lower subsidy, and in many cases higher passenger volumes, whilst allowing supply and demand to be balanced where capacity is constrained.

  1.2  This paper sets out DfT Rail's written evidence under the following headings:

    —    Maximising revenue.

    —    Preservation of "network benefits".

    —    Fares levels.

    —    Fares structure.

    —    "T-12" and advance purchase fares.

    —    Future developments.

    —    Conclusions.

2.  MAXIMISING REVENUE

  2.1  Most European railways, including those in the UK, started out with a simple fares structure based on a fare per mile or per kilometre. With very few exceptions (in the UK, for example, workmen's tickets for early morning travel and special fares for excursion trains), the same fare was charged for a given journey whether the traveller was a business traveller or a student, travelling at busy times or quiet periods.

  2.2  Although easy for passengers to understand, a simple fare-per-mile system does not maximise revenue. Under pressure to reduce subsidy in the 1960s, BR abandoned a distance-based tariff in favour of a market-based approach. This involved segmenting the market and charging whatever was appropriate for each segment. Higher fares were charged to less price-sensitive passengers such as business travellers, lower fares to more price-sensitive passengers such as those travelling for leisure purposes. BR segmented the market by time of travel with peak and off-peak fares for both short- and long-distance journeys, also by type of traveller using railcards to give a discount to groups of passengers which were typically more price-sensitive, such as young people and seniors. Later, BR used airline-style "apex" fares on longer distance routes to separate business travellers who typically need greater flexibility, from leisure passengers who are prepared to commit to a specific train in advance. In addition, BR lowered fares on routes where competition with other modes was strongest, and raised fares where investment in high quality train services put rail in a good competitive position.

  2.3  Since the mid 1990s, BRs market-based approach to pricing has been further developed by train operators, who offer a range of fares to cater for different types of passenger with different requirements. The market-based approach aims to maximise revenue, which ultimately reduces the need for subsidy through the franchising process. It is also likely to increase passenger numbers as lower fares will be offered where there is spare capacity. It allows overcrowding to be controlled through charging higher fares (where fares regulation allows) when capacity is limited. Other European railways generally have a less sophisticated fares structure than the UK. They usually receive more subsidy, often funded by higher levels of general taxation, and have generally been under less pressure to maximise their revenue by adopting market pricing—although particularly in western Europe, this is changing and they are slowly following the UKs lead, as evidenced by the fares structures being adopted by the consortia recently formed to run international services such as Thalys (high speed trains Paris-Brussels-Amsterdam/Cologne), Elipsos (high quality sleeper trains Paris-Spain), Artesia (sleeper and high speed trains Paris-Italy) and CityNightLine (high quality sleeper trains Berlin-Zurich, Amsterdam-Zurich, Cologne-Vienna, Amsterdam-Munich).

3.  PRESERVATION OF "NETWORK BENEFITS"

  3.1  In the mid 1990s, a framework of regulation was put in place to preserve the benefits of a co-ordinated national network. The "network benefits" condition of each train operator's passenger licence requires it to be a party to, and comply with, approved arrangements for through tickets, conditions of carriage and telephone enquiries. The arrangements approved for the purposes of this condition are the Ticketing and Settlement Agreement (TSA), National Rail Conditions of Carriage and National Rail Enquiry Scheme (NRES).

  3.2  The Ticketing and Settlement Agreement provides the framework within which operators must create, retail, honour and settle fares. It preserves a range of important network benefits, including:

    —    through fares remain available between almost all UK rail stations;

    —    all but the cheapest operator-specific fares are inter-available, in other words they are valid on the trains of any operator which serves any part of the relevant route;

    —    ticket offices, telesales offices and internet sites must sell all operators' tickets, not just the fares set by the operator which runs that outlet, and must sell them accurately and impartially;

    —    each ticket office must sell fares for a very wide range of journeys across the national network (although the TSA does not require every ticket office to sell every fare for every possible journey, as BR itself did not find this cost-effective and did not have this capability);

    —    there is a national fares database and a set of National Fares Manuals is produced and distributed. Operators cannot charge more than the fare shown in the national database, and no booking fee or further cost may be added, whether the ticket is sold through a ticket office, a telesales outlet or an internet site. In other words, with the exception of a few temporary promotional fares, passengers are presented with exactly the same fare range whichever operator sells them their ticket, and whether they book in person, by phone or on the internet.

  In addition, national railcards for young people, seniors and disabled people have been protected through a requirement in each operator's franchise agreement.

  3.3  The Ticketing and Settlement Agreement permits a degree of competition between operators in the interests of giving passengers greater choice. For example, the TSA requires one operator to be nominated as the "Lead Operator" for each Flow (a Flow is a specific origin, destination and route). This is usually the Train Operating Company (TOC) with the greatest commercial interest in the Flow. The Lead Operator is required to set the fares for that Flow, and all other operators serving any part of that route are required to honour those fares. However, once the Lead Operator has set the inter-available fares valid on all operators' trains, other TOCs serving that route are allowed to set cheaper non-inter-available fares valid only on their own services. The Lead Operator is also allowed to set such fares in certain prescribed circumstances. For example, GNER sets fares on the Flow "London to Peterborough route any permitted" and these fares are valid on any operator's train, including WAGN, Hull Trains and GNER, and on any route shown as permitted in a document called the National Routeing Guide. WAGN have exercised their right to set additional fares routed "WAGN only" which are cheaper than the inter-available fares, but only valid on WAGNs own trains, which are slower than GNERs.

  3.4  Competition can also arise where there are two or more possible routeings. For example, Virgin Trains sets fares for "London to Birmingham route any permitted". These fares can be used on any operator's trains on any permitted route, including both the fastest route operated by Virgin Trains and the slower route via High Wycombe operated by Chiltern Railways. But there are also fares for "London to Birmingham route High Wycombe", a Flow for which Chiltern Railways is Lead Operator and sets the fares. "Route High Wycombe" fares can be used on any operator's trains, but only via High Wycombe. Naturally, they are cheaper than the more flexible "any permitted" fares which allow travel on the faster trains on the West Coast Main Line. This competition is good for passengers, although the downside of wider choice may be perceived complexity.

  3.5  These competing fares can create a problem for the rail industry's journey planning systems. These systems were originally designed by BR to avoid complaints by not offering slower journeys on trains which were overtaken by faster services. Now, these systems can generate complaints because they don't always show these overtaken services, in cases where the operator of the overtaken train offers cheaper fares. Operators have developed their journey planning systems and are improving their staff training to alleviate this problem, and progress continues to be made.

4.  FARES LEVELS

  4.1  The Secretary of State (previously the SRA) has an obligation under section 28 of the Railways Act 1993 (as amended) to ensure that where it appears necessary, fares or certain classes of fare are "reasonable" in all circumstances of the case. Although the Railways Act does not define "reasonable", the principal market in which such regulation appears necessary is the commuter market around London and certain other cities, where commuters have few practical alternatives to rail. Fares regulation has therefore been applied through franchise agreements to limit increases in these fares. Fares regulation has also been applied outside urban areas, to weekly seasons, long-distance "Saver" fares and shorter distance standard return fares, although on much weaker grounds as train operators generally face competition in these markets. The SRAs Fares Review in 2003 (Annex A) proposed that Saver regulation would be further reviewed and replaced with a more suitable regime by 2006. Work on this is continuing.

  4.2  Regulated fares were subject to a maximum increase equal to that of the Retail Price Index (RPI) from 1995 to 1998, then 1% less than RPI (RPI-1%) from 1999 to 2003. This reduced these fares in real terms. The majority of rail industry stakeholders who responded to the Strategic Rail Authority's 2003 Fares Review Consultation (Annex A) agreed that RPI-1% was unsustainable. The general rail industry cost savings on which the RPI-1% policy was originally predicated have not materialised. In 2004, the policy changed to, RPI+1% as set out in the SRA's 2003 Fares Review (Annex A).

  4.3  Unregulated fares can be set on a commercial basis entirely at the discretion of the operator concerned, within the industry ticketing framework provided by the TSA. On longer distance routes the range of prices charged has generally widened over the last decade, as operators practise more vigorous yield management to maximise revenue. Some fully-flexible "Open" fares typically used by business travellers have increased significantly in real terms, with much publicity. At the other end of the scale the cheapest advance purchase fares used by leisure travellers have reduced in real or even absolute terms. In the middle of the price range, Saver fares, being regulated, have reduced slightly in real terms, although most long-distance operators have chosen to withdraw their unregulated "supersaver" fares which were more restrictive, but slightly cheaper, than Savers. On shorter distance routes, unregulated off-peak fares have more or less tracked inflation, as operators have used them to fill spare capacity outside the peaks.

  4.4  In comparing the broad range of UK fares with the much narrower range of fares in many European countries, it can be misleading to compare only the most expensive fully-flexible UK fares with European standard fares. The majority of UK travellers use discounted fares such as Savers, advance purchase fares or Cheap Day Returns which are often similar to or less than European fares. The table below shows some examples.
London-York (303 km) £144 fully-flexible return (Open)
£69 semi-flexible return (Saver)
£50 advance purchase return (Superadvance)
£30 advance purchase return (Standard Class off-peak 1)
£19 advance purchase return (Standard Class off-peak 2)
London-Manchester (296 km)£187 fully-flexible return (Open)
£55 semi-flexible return (Saver)
£44 advance purchase return (Virgin Advance 3-day)
£34 advance purchase return (Virgin Advance 7-day)
£24 advance purchase return (Virgin Advance 14-day)
Germany:
Munich-Wurzburg (304 km)
104 euros (£74) fully-flexible standard return fare.
78 euros (£55) advance purchase return (lowest available).
Switzerland:
Geneva Airport-Zurich (285 km)
162 Swiss Francs (£74) fully-flexible standard return fare.
No regular discounted fares on this route, all passengers without railcards pay the standard fare.
France:
Paris-Angers (299 km)
110 euros (£79) fully-flexible standard return fare.
66 euros (£47) advance purchase return ("prems" fare)
60 euros (£43) advance purchase return ("prems" fare)
50 euros (£36) advance purchase return ("prems" fare)

Source: UK National Fares Manuals, http://bahn.hafas.de, www.sbb.ch, www.voyages-sncf.com. For simplicity, the discounts possible with railcards (both in the UK and abroad) have not been considered.

  4.5  There is no evidence that high fares are deterring rail travel in the UK whilst lower fares in Europe are encouraging growth. On the contrary, the UK has the fastest-growing rail patronage in Europe. TOCs have a direct incentive to increase rail travel and their marketing and pricing policies are generally designed to do this without abstracting from existing revenue or causing overcrowding. On long-distance routes, Virgin Trains, GNER and Midland Mainline are all developing advance purchase fares based on successful budget airline practice, with cheap fares used to fill spare capacity. Although the principle of booking in advance, readily accepted by most airline passengers, is a relatively new concept for trains, this new style of ticketing makes cheaper travel possible without creating overcrowding or increasing subsidy. Further discussion of fares regulation and fares policy can be found in the SRAs document "Fares Review Conclusions 2003" dated 19 July 2003 (Annex A).

5.  FARES STRUCTURE

  5.1  Train operators are free to set their own fares and prices within the framework created by the TSA, as long as they continue to offer the regulated fares at no more than the regulated price level. With a number of different operators running train services, it is to some extent inevitable that different operators will take different approaches to pricing.

  5.2  However, on long distance routes, most fares fall into three simple categories:

    —    Fully-flexible "Open" fares, valid on any train at any time;

    —    Semi-flexible "Saver" fares, valid any train at any time except defined restricted periods;

    —    Inflexible "Advance" fares, valid only on the specific train booked, must be bought in advance.

  5.3  This underlying simplicity is often masked by a multiplicity of ticket names and slightly different terms and conditions. "Open" is the term inherited from BR and still used for all long-distance full-flexible tickets, and "Saver" has been preserved by regulation as the term for the main semi-flexible fares on each route. But many long-distance TOCs have developed their "Advance" fares quite considerably, and there are now a wide range of price levels and different ticket names on different TOCs for this type of fare. In some cases different ticket names are used for different price levels of advance-purchase fare by the same TOC. Several TOCs have developed one or two less-restrictive Saver-type fares in addition to the Saver, but have not always used "saver" in the product name. One option for consideration is to standardise ticket naming both between TOCs and within each TOCs product range, to make the "Open—Saver—Advance" choice more transparent. However, the benefits must be set against the burden of increased regulation, and the constraint this might place on innovation.

  5.4  The way online journey planning systems present the fares range may also make the fares range look more complicated. Budget airlines often have more possible fares than train operators for a given journey, covering an even broader range of prices, but they are generally presented in a simpler way. Air fares do not necessarily have a product name at all, and in most cases airline websites simply present passengers with the cheapest fare available for the specific flight requested. Airline systems don't show fares which are cheaper but unavailable on that flight, or fares which are available, but more expensive. The passenger understands that air fares vary, but is presented with one advance-purchase price for that particular journey booked at that particular time. Rail systems such as www.thetrainline.com and www.nationalrail.co.uk show a matrix of possible fares, with the various product names and the availability or non-availability of each fare shown. Operators might consider altering retailing systems to present only the cheapest advance-purchase fare available for the passenger's required journey.

  5.5  The Department (and previously the SRA) has been using its influence to encourage TOCs to adopt the standard term "Advance" for advance-purchase fares, in conjunction with the already-standard terms "Open" and "Saver" for fully-flexible and semi-flexible fares. A number of TOCs have realised the potential benefits of a simpler presentation of their fares structure. Virgin Trains has introduced a simple range of advance purchase fares using the word "Advance" as part of the ticket name, at three different price levels. Midland Mainline has just abolished its wide range of variously-named advance purchase fares, and replaced them with one ticket type called "Advance" at a number of price levels with availability controlled by quota. GNER has also now streamlined its advance purchase fares and has also adopted the term "Advance".

  5.6   On short distance routes, the fares structure is usually fairly standard across TOCs, with Standard Day Singles and Standard Day Returns that can be used at any time, Cheap Day Returns and in some cases Cheap Day Singles that can be used at any time except the Monday-Friday peak hours. Fares to London can be issued with and without bus and tube travel.

6.  "T-12" AND ADVANCE PURCHASE FARES

  6.1  Network Rail's network licence requires it to plan its engineering work in such a way that timetables can be published at least 12 weeks in advance. This is often referred to as "T-12". TOCs' passenger licences require them to support Network Rail in achieving T-12. If timetables are entered into the national Train Service Database (TSDB) 12 weeks in advance, TOCs can load timetables and seat inventory into the national reservation system so that reservation can be opened eight to nine weeks before departure. Most of the cheap advance purchase fares rely on the reservation system to control availability of each price level on each train, as well as providing a free seat reservation with each ticket. Until reservations open, these cheap tickets can't be sold.

  6.2  The amount of engineering work immediately after Hatfield meant that Network Rail failed to achieve the T-12 requirement by a considerable margin. This in turn affected TOCs' ability to load timetables and seat inventory into the national reservation system, which in turn affected their ability to sell cheap "advance purchase" fares. If no advance purchase fares can be sold, the cheapest fare becomes the semi-flexible Saver fare (or on certain routes, the supersaver fare). Given the disruption following the Hatfield accident, this effective increase in fare added to passenger problems. It may also have led to even more lost passengers and revenue for train operators. In addition, T-12 has been the biggest single problem for National Rail Enquiries, as their journey planning systems depend on what Network Rail and the TOCs have loaded into the TSDB. They have tackled this by adding a "bulletin" feature to their journey planning system to warn when engineering work has not be properly loaded into the TSDB.

  6.3  The Office of Rail Regulation has taken up the issue of Network Rail's non-compliance with T-12. Network Rail's performance has much improved now that the major engineering works after the Hatfield accident have been completed, and T-12 is now being achieved under normal circumstances on all routes.

7.  FUTURE DEVELOPMENTS

  7.1  The old ticketing systems inherited from British Rail had very limited functionality and are now being replaced on most parts of the network. The new generation of ticket machines used by ticket office staff integrate ticket issuing with timetable and fare enquiries, which makes handling passenger enquiries and bookings much easier and quicker. Modern self-service ticket machines have much greater capability than the heritage machines, accepting credit and debit cards as well as cash and issuing tickets to most destinations.

  7.2  On long distance routes, TOCs are keen to introduce better yield management systems to increase revenue along the lines successfully used by budget airlines. The new National Reservation System (NRS) introduced in December 2004 has far greater capacity than the system it replaced. It is capable of working in conjunction with yield management systems, which several long-distance TOCs have now bought. Until now, quota management for these advance purchase fares has not been particularly scientific, with quotas adjusted manually and only a limited amount of adjustment being possible. When this process is automated, a much more sophisticated process of matching quotas to demand will be possible. This may see quotas increased for a given price level where the system sees available capacity. It may also enable more advance purchase seats to be made available in "shoulder peak" periods because the system will automatically manage available capacity to avoid overcrowding. Under current manual arrangements, TOCs are less likely to risk making cheaper advance purchase tickets available where capacity might not be available.

  7.3  If Saver regulation is removed, the Department believes that TOCs are unlikely to withdraw a semi-flexible product like the Saver. However, it may be re-positioned as more of a premium product. A wider range of "Advance" category fares is likely to be introduced in its place. This may allow greater control of overcrowding as well as higher revenue from the more sophisticated yield management described in 7.2 above. For the passenger, it could mean cheaper fares overall, and a guaranteed seat with each ticket, though if the passenger needs to retain the flexibility to travel on any train or at short notice the cost may be higher than at present.

  7.4  In the London area, the recent Rail Review announced an intention to simplify fares within London, and give the Mayor more control of rail fares in this area. Work is progressing on how simple, standardised zonal fares might be introduced for train journeys within the Travelcard area, and how Transport for London's Oyster smartcards might be extended to include rail services.

8.  CONCLUSIONS

  8.1  The UK rail system's fares and ticketing arrangements are more sophisticated than those on most other railways in Europe, because of the need to maximise revenue and minimise subsidy through market-based pricing. Simplification could be achieved through significant increases in subsidy or by eliminating the many cheaper fares to leave only a simple structure of more expensive fares, which would reduce passenger numbers. Both options would increase the burden of regulation by central government when fares on competing modes such as coach and air are not regulated at all.

  8.2  However, operators are already being encouraged to make improvements. These include:

    —    Adoption by train companies of a consistent product naming protocol, to make the "open/saver/advance" choice for long distance journeys more transparent. The DfT has encouraged this, whilst avoiding increases in formal regulation;

    —    Continuing replacement of heritage ticket issuing systems with more powerful new systems, making it easier for staff to advise passengers and sell tickets. The DfT has encouraged this through the franchise replacement process;

    —    Continued expansion and improvement in online systems such as www.nationalrail.co.uk (operated by NRES) and www.thetrainline.com designed to provide information to potential passengers on train times and fares;

    —    Simplifying the fares structure in London through introduction of zonal fares. This was proposed in the Rail Review and is being progressed by DfT with ATOC and TfL.





 
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