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:
— Preservation of "network
benefits".
— "T-12" and advance
purchase fares.
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)
|
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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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