The facts about rail fares
Rail fare rises are one of the most emotive transport issues for passengers and customers rightly want to feel they get value for money. The spotlight in the media regularly falls on train companies as campaigners call for “fairer fares”. But what are the facts and what is the real story behind the headlines?
For many years, the policy of various Government administrations has focused on shifting the funding of the UK railways from the taxpayer to the passenger. Government support for the industry has dropped sharply over the past five years, falling from £6.31bn in 2006-07 to 5.2bn in 2008-09 and £3.96bn in 2010-11, according to figures from the Office for Rail Regulation.
Throughout this period, the average operating margin of train operators in the UK – that is profit as a percentage of the revenue it collects – has remained fairly constant at around 3p to 4p in every £1 of the cost of a rail ticket. The rest goes towards the significant cost of running train services. This 3% to 4% margin is far less than companies in many other sectors, from high street retailers and banks to energy companies and even media companies that report on the news. Indeed, two major media groups, both of which publish amongst the biggest-selling national daily newspapers in the UK, reported operating margins of 16% for 2010*.
The direct result of lower taxpayer support for UK railways is that passengers are paying more of the annual cost of running the network, which now stands at around £10.5bn. Some £6.5bn comes from passenger fares, and £4bn from the taxpayer.
Most recently, the media focus has been on the Government’s plans for regulated rail fares from January 2012 and beyond. Regulated fares, which account for almost half of all rail journeys, include season tickets and most Off Peak return tickets on longer distance trips. Since 2004, regulated fares have risen according to a Government-set formula of the Retail Price Index (RPI) + 1%. Every year, the RPI figure calculated for the month of July is used as a basis to set the following January’s rise in regulated fares. In July 2011, the RPI figures was 5.0%
The Government announced earlier this year that it was intending to change the formula for regulated fares increases to RPI + 3% for 2012, 2013 and 2014. All of the extra revenue generated would have gone into the public purse to help the Government pay for more trains, better stations and faster services across the UK. This includes more carriages to deal with overcrowding and major capital projects such as electrification and Crossrail.
In November 2011, the Chancellor of the Exchequer confirmed in the Autumn Statement that the Government had decided in light of the economic climate that regulated fares would rise by an average of RPI +1% in January 2012. The Chancellor’s positive decision means lower than expected fare rises for many passengers in January, with regulated fares rising by an average of 6% rather than 8% as previously expected.
Other non-regulated fares are set by train operators, who need to take into account a range of factors affecting pricing decisions. Firstly, they need to make sure they meet the train service levels and other strict requirements set by the Government. Train operators also must cover all the costs involved in running the railway, including ongoing investment. Rail companies face competition for travel from other modes of transport, such as buses, coaches and airlines, and also need to provide a high-quality and affordable alternative to the car if they are to attract more people to the railway.
However, it is often overlooked that, in addition to setting regulated rail fares, inflation (RPI) also determines some of the biggest costs facing train companies: charges levied by Network Rail for accessing the track, payments for leasing trains, and energy bills. Even the substantial payments many train companies make to honour financial commitments set out in franchise agreements signed with the Government are directly linked to the RPI formula. This puts further upward pressure on all fares, not just those set directly by the Government.
In December 2011, the Association of Train Operating Companies announced that UK rail fares would rise in January 2012 by an average of 5.9%. Rail fares on Stagecoach Group's rail networks are, on average, rising by slightly less. Ticket prices at East Midlands Trains are rising by an average of 5.7%, while those at South West Trains are increasing by an average of 5.8%. On average, passengers at South West Trains, which is mainly a commuter franchise, will pay an extra 21p for their ticket. On East Midlands Trains, which offers longer-distance journeys, the average increase is 72p.
Figures show that the cost of an average single journey on the UK rail network after the January 2012 increases will be £5.30. Broken down by sector, this equates to £3.85 in London and the South East, £21.18 on long-distance routes and £3.48 on regional routes.
Large public transport operators such as Stagecoach make a valuable contribution to the economy and the UK taxpayer makes money out of the success of its rail franchises. In 2010-11, for example, rail franchises Stagecoach Group is involved in operating - East Midlands Trains, South West Trains and the Virgin Trains joint venture - made a net contribution of more than £300 million to the taxpayer. That is even after taking account of contractual support payments received from the Government.
In addition, Stagecoach Group invests more than £150 million a year to improve its transport services for bus and rail passengers, recognising the vital role that better trains and other modes play in passenger satisfaction and attracting new passengers to public transport.
Demand for rail travel has risen by 60% since privatisation and is expected to double in the next 20 to 30 years. It is important that this growth continues as it helps to underpin wider economic growth. At the same time, the cost of running the railways has fallen in recent years, meaning that the industry unit cost of an average journey has fallen year on year – by 20% since 2006/7. Following the McNulty report on rail value for money, the industry is working hard to find ways of reducing that cost even further.
Stagecoach Group has been leading the way in offering good value travel for many years and recognises that flexible pricing can attract new users of public transport and encourage people to switch from the car. It launched the pioneering budget rail website, megatrain.com, which now offers fares from £1 (plus 50p booking fee) to around 30 locations across the UK.
Along with other train companies in the UK, Stagecoach rail companies East Midlands Trains and South West Trains have increased the number of Advance purchase tickets available. These advance tickets help to provide a cheaper alternative for travellers who can be more flexible about their travel times. An increased focus has been put on raising consumer awareness of the deals available, with East Midlands Trains using celebrity twins Jedward and Stacey Solomon to promote its online Best Fare Finder, which helps passengers to find the cheapest available fare in seconds.
While fares on the UK rail network have increased, as the table below shows it is important to set these rises in the context of what is happening to the cost of many other key consumer products and services in the current challenging economic climate.
HOW RAIL FARES COMPARE WITH OTHER KEY CONSUMER COST INCREASES
| Product/service |
Annual % increase |
| Energy bills1 |
21% |
| Car commuting costs2 |
21% |
| Global food prices3 |
19% |
| Car insurance costs4 |
14.4% |
| Owning and running a car5 |
14% |
| Fuel costs6 |
12.4% |
| UK rail fares7 |
5.9% |
| Rents – London8 |
5.7% |
| Rents – England and Wales9 |
4.1% |
|
Notes:
1 Comparison website uSwitch.com reported in September 2011 that UK energy bills had risen by 21% on average in the past year, an increase of £224, with the biggest utility companies raising their prices more than once in the previous 12 months.
2 A survey by Green Flag published in November 2011 found that the cost of driving to work has increased by 21% (£229) over the past 12 months. UK motorists spend £243 million every week on driving to and from the office. Overall, the cost of commuting to and from work for motorists has increased by £1.9 billion over the past 12 months.
3 The World Bank Global Food Price Index in September 2011 was 19% higher than in September 2010. It said prices of grains rose 30% in 12 months, with maize increasing by 43%, rice by 26% and wheat 16%.
4 The RAC's Annual Cost of Motoring Index, published in November 2011, found insurance costs rose 14.4% compared to the previous year, up to an average of £551. The cost of car insurance was 35% higher on average than in 2009.
5 According to the RAC's Annual Cost of Motoring Index, published in November 2011, the average annual cost of owning and running a car soared by 14.0% (£819) to £6,689 per annum over the previous 12 months. The increase was almost three times the prevailing inflation rate of 5.0%.
6 The RAC's Annual Cost of Motoring Index, published in November 2011, stated that the largest single increase in car running costs in the previous year was fuel, which had increased by 12.4% or £160 (£3.07/week) since 2010.
7 The Association of Train Operating Companies announced in December 2011 that UK rail fares would rise by an average of 5.9% in January 2012.
8 According to the October 2011 buy-to-let index from LSL Property Services, average rental costs for tenants in London were 5.7% higher than the previous year.
9 The October 2011 buy-to-let index from LSL Property Services found that average rents in England and Wales were 4.1% higher than in October 2010. |
The myths corrected
Myth: It’s now more expensive than ever to travel by rail
Fact: In real terms, travelling by season ticket is cheaper now than it was 15 years ago. Additionally, fares have risen at a significantly slower rate since privatisation than during the last 15 years of British Rail.
Myth: Rail companies are making huge profits on the back of eye-watering fares increases
Fact: The fact is that around 97p in every pound goes towards the costs of running the railway and train operators only make a small return from running a highly complex operation that involves significant investment and risk. All the additional money made through the Government’s change of RPI formula goes back to the Government.
Myth: Rail companies are abusing the flexibility they have to vary regulated fares
Fact: The Government has for many years allowed train companies to vary individual regulated fares by up to 5% above or by any amount below the average price change set by the Government. It does not allow operators to put up fares by the maximum amount on busy routes and lower them on quiet routes. Increases above the average must be balanced, on a weighted basis, by increases (or decreases) below the average. This weighting ensures that all regulated fares across an operator must balance out at the average. Each operator’s use of this flexibility is scrutinised very closely by the Department for Transport to make sure that it has complied with the rules.
Myth: People are choosing not to travel by rail because of the high costs of a ticket
Fact: Demand for rail travel has actually risen by 60% since privatisation and is expected to double in the next 20 to 30 years.
Myth: Taxpayers are having to fund the costs of train travel
Fact: By increasing the money raised through fares, taxpayers will pay a smaller share of the overall cost of running the railways. Taxpayer contribution to the railways has already fallen by 37% over the last four years.
* Trinity Mirror plc, publisher of the Daily Mirror, reported a 16.2% operating margin in 2010. Daily Mail and Trust Group, parent company of the Daily Mail newspaper, had an operating margin of 16% in 2010.
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Where every £1 of your rail fare goes |
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Source: Association of Train Operating Companies, 2011 |