They have moved from being unprofitable in the early years to being profitable today, with plans for further expansion. Last year Grand Central was awarded rights to run an entirely new group of services from Blackpool into London using the West Coast route, bringing open competition to another of our main lines.
These open access operators have undoubtedly been successful. And by providing new destinations and enhanced services to others, they’ve introduced more choice and increased the attractiveness of rail services. Passengers like them - there are very high levels of satisfaction recorded by the independent monitor - and they have definitely driven fares lower in areas where they compete directly with the franchisee. So what’s not to like?
There are perhaps three problem areas. The first is that they are not competing on a level playing field. By only paying variable access charges and being able to undercut inter-available fares at key stations such as Doncaster and York, they are able to effectively cherry-pick profitable parts of the incumbent franchisee’s business.
Nothing wrong with this as such, if we believe in a free market, except that the franchisee’s business depends on the forward revenue projections made at the time of the bid and on which the premium line is based. So with some volume pinched and yields squeezed, the franchise can move downhill easily.
This problem could be fixed by restructuring the access charges regime, which is under review ahead of the next five-yearly Control Period starting in 2019, and by tweaking the regulatory regime for fares.
The second problem is the financial consequence to the Government. The last East Coast franchisee estimated that open access was costing something in the region of £30 million a year off the premium, money that is lost to government forever and recurs each year.
But the premia paid by those franchises where revenues exceed costs helps to cross-subsidise the bits of the network where the reverse applies. Thus a shortfall in receipts from East Coast can cause less funding to be available to support rural services in other parts of the country.
Worse than this - and the third problem area - is that when government wants to invest to improve the capability of the route (as it has done in the last Control Period and is continuing to do in the current one), it has no guarantee that the benefits of the additional capacity and capability it is buying will be captured by its franchisee, and thereby recovered to pay for the investment made. This makes it difficult for the Government to specify and fund infrastructure capability upgrades.
Retailing, fares and ticketing
The third topic in my ‘what hasn’t gone so well’ list is retailing, fares and ticketing. The 1994 organisational model essentially attempted to preserve the network benefits, which were seen at that time to be most important for consumer protection.
See panel (right) for the provisions set in this area. With the benefit of hindsight, we can now see that the collective impact has acted to inhibit modernisation, add complexity, and impede innovation in this whole area. In many ways it has led to ossification of how things are done, with a very 20th century feel about it. Let’s explore a few outcomes.
Fares regulation has acted as a sensible brake on free market exploitation of the captive passenger base. But freedom in the non-regulated part of the fares system, coupled with differing policies followed by different franchisees, has led progressively over 20 years to a number of undesirable outcomes.
Firstly, season tickets have become under-priced, compared with full fare tickets. Secondly, fares are inconsistent between different pairs of stations on the same route, due to differing fare setters involved (this particularly affects cross-country routes). Thirdly, this has led to a situation where split ticketing creates an opportunity to significantly undercut the intended fare for a journey.
Added to this, we have to layer on the impact of TOCs developing ever more sophisticated fares that are specific to their franchises. Advance fares had been successfully introduced by British Rail, based on simplified versions of airline ticketing demand management systems, but one of the big success stories of the past 20 years has been the development of revenue management technology to exploit the growth of internet retailing - something that could barely have been imagined when the current framework was being designed.
So we now have an unwieldy and over-complex fares system, so complicated that really only a handful of experts truly understand it properly and can spot potential pitfalls as further changes are introduced into the mix. Certainly today’s fares system is one that the wider public manifestly does not understand, and nor should it ever be expected to. This results in much negative media coverage, and a rise in consumer protection interest from forces as diverse as Which? and the Office of Rail and Road (ORR).
Perhaps the worst impact, however, is that this acts as a disincentive to rail travel at all, with many people giving up on rail when faced with the complexity of buying a ticket and the lack of flexibility provided by affordable fares. How much latent demand is there for a simple, turn up and go railway network at an affordable price?
Looking at ticketing next, we see an even bigger problem, as the national rail network has collectively failed to keep up with emerging technology in this area.
Transport for London has led the way in the capital, with the refinement of zonal pricing to keep things simple for customers to understand, and the widespread adoption of Pay As You Go smartcard technology (branded as Oyster). More recently it has moved aggressively into Contactless payments via bank card, providing even more accessible ticketing for casual users as well as regular travellers. And just before Christmas 2015 it achieved the ‘Holy Grail’ of ticketing - the closure of its very last ticket office, at Upton Park.
Frankly, it’s amazing to see the progress that TfL has made on its unified system compared with the lack of progress in this area on the national rail network, where the client role is split between a multiplicity of organisations but where (arguably) the DfT has failed in its primary role as the directing mind for the industry.
On the national rail network we have had a number of attempts at smart ticketing around the country, but with no clear vision of what the desired end-state situation looks like.
We have a selection of Print At Home and barcoding systems running. We have various back office systems driving demand management and smart ticketing, none of which sit as Primary Franchise Assets so are not automatically captured at franchise changeovers. We have no flexible season ticket products available, despite the enormous growth in less-than-five-day-a-week commuting. We have varied designs of ticket vending machines, all of which so far pretty much replicate the National Fares Manual in their presentation of fares to the customer, and thus are absolutely impenetrable to all but the most frequent user. And most astonishing of all, we still have almost complete dependence on the humble magnetic stripe ticket, which has reigned supreme as the default ticket format of preference for over 30 years.
Contrast this with the Netherlands, where the O-V Chipkaart has been established comprehensively for some time now as the preferred ticketing method for all long-distance and suburban rail, as well as all tram and bus journeys across the whole country.
What is it that makes this essential difference between progress and ossification? I think it boils down to one word… vision. Obviously you need drive and commitment as well, plus the necessary tools and levers to use to translate that vision into reality, but at the heart of the problem on the national rail system is a lack of clear vision. The reason for this difference is that TfL and Nederlandse Spoorwegen (NS) have acted sufficiently as an intelligent client to develop and realise that vision in exactly the same way that DfT hasn’t.
Stations
The final topic in my ‘what hasn’t gone so well’ list is stations. Looking around the national network there are now some very fine stations - Reading, Birmingham New Street, St Pancras and so on. You can argue that these tend to fit into the category of ‘shopping mall with station attached’, but let’s acknowledge that at these very large station developments the railway family has been successful in making stations much more attractive to users, even becoming destinations in their own right when at their best.
Looking more generally around the network, stations are better maintained today than they were 20 years ago and have markedly better facilities - better quality customer information, better retail outlets, better and cleaner toilets, more car parking, and friendlier staff providing more help when needed… so far so good.
But many stations remain under-utilised, pared down to the bone. Some have had many of the best bits sold off for third party usage, leaving rail as the poorer party on the site. Others have ticket offices ploughing on with ever fewer customers to serve, required to stay open forever, coated in aspic by the provisions of Schedule 17.
All too often these stations are letting their local communities down. They are also letting the railway down - stations with poor facilities and few people using them are negative places that can feel unsafe and unloved, yet these are often the first contact point any member of the public has with ‘mother railway’.
Why are so many of our stations like this? Partly it’s about footfall - the larger stations will always be able to take care of themselves, as there is money to be made from lots of well-heeled people changing between modes of travel, while smaller stations will struggle to develop standalone business cases for development.
It’s also partly about the contractual framework in which all but the very largest of our stations now sit. This is one where the asset is owned by Network Rail, but the maintenance, repair and renewal obligations are split between Network Rail and the lead TOC for each station. Because the TOC tends to have a relatively short-term interest in the station, and because so far there has been no effective residual value mechanism for stations in franchise agreements, the tenant is not incentivised to take a long-term view.
Equally, from Network Rail’s perspective there are an awful lot of stations, and the best return will always be found at the biggest ones. Recent attempts to change this relationship, with the concept of the 99-year lease, have still to show much sign of beneficial outcome, although perhaps it is too early to form a judgement on this?
However, I believe that the biggest reason why the vast bulk of our stations are not fulfilling their true potential is once again down to a paucity of vision at the top of our industry.
In my view, stations should try to operate as vibrant places, full of life and at the heart of their local community. The best way to do this is to bring ancillary businesses onto the site so that they are always staffed and there are reasons to linger. A good way of doing this at the bulk of smaller stations is to combine the role of ticket office and station staff with running a shop providing the basics - hot drinks, newspapers as a minimum, with a bigger grocery offer at stations with sufficient footfall to justify this.
When I was running South Eastern Trains we had two stations using this model, which I inherited from Connex. The flaw in their approach was the tie-up with CostCutter, whose core market demographics were not the same as rail users in the South Eastern commuter hinterland. Thus the product mix wasn’t right, and so sales penetration was not as it might have been. The other problem we had was that the staff were all railway employees rather than normal shop staff. This meant that they came with a railway (rather than retail) mindset, as well as a much higher cost base.
This concept of a grocery store that sells rail tickets is widely rolled out in the Netherlands, where it seems to be successful. In the NS model the shop is privately run as a concession, and acts a bit like a rail ticket agent. What makes it work effectively is the very simple mix of rail tickets needing to be sold, with the result that product knowledge is vastly simplified so that ordinary shop staff can manage the work without the huge amounts of specialist training required in Great Britain.
The only surviving exponent of this ‘grocery-cum-tickets’ concept in the UK is to be found on Merseyrail. Here you can find ‘M to go’, introduced by Serco/Abellio in its 20-year franchise with the active support of Merseytravel.
The big problem with this application is that Merseyrail is still required to act as a full service provider of rail tickets and information, so in theory it could need to be able to sell a through ticket from (say) Hooton to Horsley, including handling Advance ticket bookings, seat reservations and so on. Of course, in practice people wanting these sorts of tickets either buy online or go to a large station such as Lime Street to do this.
If only Merseyrail could be relieved of this obligation, and be required only to sell Merseyrail zonal tickets and travelcards, the amount of training and knowledge required could be cut by 95%. This would enable the staffing of these outlets to be de-skilled, so that in future staffing could be provided by the concession operator, like at petrol stations.
