Fares and Fares Regulation on Britain's Railways

Feature Railway Fare System (part 2)

Fares and Fares Regulation on Britain’s Railways Mark Smith

Passenger services on Britain’s railway, licensee to be a party to, and to comply once run by a single nationalized In the Beginning with, arrangements approved by the SRA organization, are now provided by a for a telephone enquiry service; through combination of 26 privatized passenger The arrangements for maintaining these ticketing; settlement of revenue received train operating companies (TOCs) owned network benefits, and in particular the from the sale of through tickets; and by almost a dozen different parent arrangements for the setting, settling and conditions of carriage. From this one companies. But in spite of the number of regulating fares are complex, and as with paragraph flow the major industry individual companies involved, the British most complicated things, it’s best to start arrangements for fares, tickets, settlement railway system remains an effective, at the beginning. And in the beginning and passenger information. It’s important coherent, national network. Prospective was the Act; the Railways Act 1993, to to remember that even ‘open access’ passengers can pick up the phone and dial give it its full name, set up the framework operators (operators who operate a purely a single, memorable 24-hour number to for privatizing the national rail network. commercial service with no franchise find out about train times and fares for any It created the Rail Regulator to issue agreement or government subsidy— journey in the UK. You can turn up at licences and regulate the monopoly currently just Hull Trains, but other open any station and buy a through ticket to infrastructure provider, then called access operators may follow) require a just about any other station on the Railtrack, and it created the Franchising passenger licence and so are bound into network, even if that journey involves Director to let and manage franchises for the resulting national arrangements as several changes of train and several running passenger services over the much as any franchised operator. different operators. Tickets can normally infrastructure. Some things have changed be used on trains run by any operator over since then. The Transport Act 2000 National Rail Enquiry the route for which it is valid, even on created the SRA, combining the Scheme (NRES) trains run by ‘open access’ operators such Franchising Director’s franchising as Hull Trains who have no franchise functions and the Rail Regulator’s To fulfill the licence requirement for agreement with the government’s Strategic consumer protection functions. Privately- arrangements for a telephone enquiry Rail Authority (SRA). And national owned Railtrack has been replaced with service, the SRA has approved the railcards for young people, older people not-for-profit Network Rail. But one thing National Rail Enquiry Scheme (NRES) and people with disabilities continue to which hasn’t changed is that the Railways agreement. This is an agreement between exist and are accepted by all train Act makes it a criminal offence to operate all train operators to operate a national operators. These ‘network benefits’ are a railway asset—a train, station or enquiry service jointly. The agreement no accident, but the result of a regulatory network—without a licence. For the sets out how the scheme will be managed framework that was put in place at purposes of this article, the most important and paid for, the type of information that privatization. This article outlines this type of licence is the Passenger Licence, the service will provide to callers, and the framework. the licence needed by anyone who wants quantitative and qualitative call-handling Responsibility for setting fares and to operate a passenger train over any part standards that the scheme will have to marketing services has been transferred of the national network. meet. NRES Ltd—now a limited company to the private sector, but there are wholly-owned by the train operators—has inevitably some circumstances—for a small full-time management staff, and example, commuter services to London Passenger Licence major issues are considered by a and other big cities—where rail’s high management group and council on which market share makes it desirable to A typical passenger licence is a relatively train operators are represented. A regular retain some control over operators’ short document. It contains a requirement survey determines the proportion of pricing. To protect consumers, the SRA to have adequate third party insurance, enquiries that relate to each operator’s therefore regulates certain fares. This to be party to approved arrangements for trains, and NRES costs are distributed article also explains how that fares claims handling, to comply with Network amongst the train operators on this basis. regulation works, and how it will Rail’s Railway Group Standards, and so NRES has been one of the great successes change from next year following a on. And most importantly, it contains a of privatization; it inherited 40+ small ex- complete review of fares policy short but crucial paragraph entitled British Rail call centres, each of which had undertaken by the SRA in 2002–03. ‘Through Tickets & Network Benefits.’ Put its own public telephone number and very simply, this paragraph requires the opening times. Demand exceeded supply

at almost all centres. NRES soon approved the National Rail Conditions of is produced by ATOC on behalf of all introduced a single 24-hour nationwide Carriage (NRCofC), drawn up on each operators, and like the NRES agreement, number, allowing calls to be switched to operator’s behalf by the industry’s trade it is not an agreement with the SRA, but make best use of the available capacity, association, the Association of Train an agreement between operators, which and progressively outsourced call Operating Companies (ATOC). The the SRA has approved. In most cases, handling. Calls are now handled by just NRCofC set out the basic terms for the changes to the TSA must also be approved three private suppliers at four large contract between the train operators by the SRA. The TSA fulfills the settlement modern call centres, over 93% of all calls collectively and the passenger whenever condition in Passenger Licences by are answered and complaints about a passenger buys a ticket to travel. They specifying the arrangement for settlement access to train information have almost set out the train operators’ obligations, of revenue between operators using disappeared. NRES handles almost 60 including minimum compensation in the industry-wide systems. This is done by million calls each year, compared with event of a delay, although an operator’s an organization called Rail Settlement about 40 million at privatization, but own Passenger’s Charter may provide Plan Ltd, wholly-owned by all the rail outsourcing has contained costs. It has greater levels of compensation. operators who are a party to the TSA. also expanded to offer train information on the internet (www.nationalrail.co.uk) Ticketing & Settlement Who Sets Fares? although there is no regulatory Agreement (TSA) requirement to do so. To fulfill the through tickets condition in The TSA defines a flow as a combination National Rail Conditions of each operator’s Passenger Licence, the of origin, destination and route—for Carriage SRA has approved the Ticketing & example, London to Birmingham route Settlement Agreement (TSA). The TSA is any permitted. There are hundreds of For 26 operators to act together as a an extensive document that defines the thousands of flows in the fares system, and network, it is important to have common way train operators will set, sell, and each flow is assigned a Lead Operator— conditions of carriage. To fulfill the honour fares across the network, broadly the operator who has the right and licence requirement for arrangements for based on British Rail practice and obligation to set fares for that flow. The conditions of carriage, the SRA has capability before privatization. The TSA Lead Operator is normally the train operator with the greatest commercial interest in the flow—for example, the Lead Operator for London to Birmingham is Virgin Trains, which runs half-hourly fast services, although other operators also run slower and less frequent trains over the same route. There is a procedure for changing Lead Operator should another TOC challenge the existing Lead Operator, or if operators agree that the Lead Operator should be changed. After a Lead Operator has set fares for a flow, the TSA obliges all other operators running trains serving all or part of that route to accept those fares for travel on their services. Consequently, after Virgin Trains has set a fare for London to Birmingham route any permitted, Silverlink and Chiltern railways are both obliged to accept these tickets on their own London to Birmingham trains as are other operators serving any part of Passengers watching display board at Paddington Station (T. Suga) the route. The TSA also ensures that route

42 Japan Railway & Transport Review 38 • March 2004 Copyright © 2004 EJRCF. All rights reserved. any permitted fares like these continue to ticket office on the rail network and the to control demand, or take advantage of be valid on a variety of reasonable range of fares that must be sold, ensuring differences in markets. alternative routes. The permitted routes that inter-available and through fares not for any given journey are defined in a only exist but are available to passengers. schedule to the TSA called the National In fact, British Rail did not sell every fare Protected Fares Routeing Guide. at every station because its capability at The Lead Operator arrangement applies each station was constrained by the type The following fares are designated as equally to through fares. For example, of ticket issuing system installed, whether Protected Fares: Virgin Trains is the Lead Operator for the or not the office had a reservations system, • Saver returns (an off-peak walk-up London to Walsall flow and sets fares for and whether it held a full range of fares leisure fare available for most long- the whole journey although it only manuals or just a sub-set. The TSA defines distance journeys) for all journeys operates from London to Birmingham and the product range to be sold at each where a saver existed in February 2003 passengers must use Central Trains from station in these terms, based on what was • Standard returns (full-fare return ticket Birmingham to Walsall. The initial range sold under British Rail, although there are valid at both peak and off-peak times) of flows in the fares system was inherited procedures in the TSA to change this when for journeys where a saver did not from British Rail and flows cannot be necessary. Each ticket office is allocated exist in 2003 (typically journeys deleted (or created) without SRA to a particular operator, but the TSA under 50 miles or wholly within the permission. In this way, the existence of requires that operator to sell fares old Network SouthEast area, other inter-available through tickets is assured accurately and impartially. Operators are than those included in a Commuter between every pair of stations for which required to carry out an annual survey to Fares basket) British Rail offered a through ticket in monitor accuracy and impartiality and • Weekly season tickets wherever a 1995. In practice, this means there are ATOC carries out an ‘undercover’ survey weekly season ticket existed in 2003, through fares between just about every on behalf of all operators to fulfill this other than those included in a station on the network. obligation. However, despite early Commuter Fares basket Under the terms of the TSA, a Lead concerns over operators’ impartiality, Operator cannot set dedicated fares on that accuracy rather than impartiality has Each operator has one Protected Fares flow (fares that are only valid on its own proved the bigger problem as the range basket, containing (before simplification) services). There are some exceptions, such and type of tickets has continued to grow. every Protected Fare set by that operator. as where the fare is a prebooked train- Each fare in a Protected Fares basket is specific Apex-type fare, a temporary Regulating fares weighted by the revenue received by that promotion, or a special first class inclusive At privatization, it was recognized that operator from the sale of that fare in the offer. This prevents a Lead Operator raising some sort of price control would be financial year to 31 March 2003. The the inter-available fare to unreasonable necessary in certain areas, especially total value of the fares basket is the sum levels so that passengers buy the operator’s where rail enjoys a large market share, of each fare multiplied by the weighting own fares instead. However, once the Lead such as commuting into London and other for that fare. Operator has set its inter-available fares cities. Therefore, each train operator’s To simplify the basket, fares with the (fares that are valid on any operator’s trains), franchise agreement with the SRA lowest revenue weighting are excluded Secondary Operators (other operators provides for regulation of certain fares. from the fares basket, up to the value of serving the same route) are free to set The SRA has been operating two types of 5% of the gross value of the fares basket. competing fares of any type that are only fares regulation, called Protected Fares The basket therefore includes at least 95% valid on their services. In this way, as well and Commuter Fares since 1 January of the revenue received from Protected as assuring the existence of flexible inter- 2004. Both types employ a mechanism Fares. However, all Protected Fares must available tickets that are valid on any called a fares basket where a limit or cap continue to be made available for sale, operator, the TSA allows the benefits of is placed on the weighted total of a basket whether or not they are in the Protected competition to be enjoyed wherever there of fares. This controls overall fares levels Fares basket. is more than one operator. while allowing operators some degree of The train operator must make sure that freedom to adjust individual fares within the total value of its fares basket does not Selling fares the overall basket in order to resolve fares exceed the cap on that basket. The cap is The TSA defines the opening hours at each anomalies, adjust fares on different routes equal to the total value of the fares basket

calculated using fares at February 2003, company sets the fare, but the operator in include through travel to destinations increased by the retail price index (RPI) question receives a share of the revenue. served by buses, light rail, or London plus 1% on 1 January 2004 and each year Each fare within the basket is weighted Underground after that. There is also a limit on by the revenue received by that operator • Tickets that include a non-rail element individual fares within fares baskets. from the sale of that fare in the financial such as entrance to a museum, theme These may not go up more than 5% above year to 31 March 2003. The total value park or other attraction the basic policy (in other words, RPI + 1% of the fares basket is the sum of all the • Saver tickets for journeys where there + 5% = RPI + 6%) in any 1 year. weighted fares that it contains. was no Saver fare in 2003 Fares regulation also protects certain To simplify the basket, fares with very low • From 1 January 2006, any Saver fare conditions attached to these fares. In the revenue are excluded. The basket is set by Great North Eastern Railway case of savers, these must be valid for no constructed so that it includes 95% of the (GNER), Virgin West Coast, Virgin less than 1 month, and all day Saturday revenue received from Commuter Fares, CrossCountry, First Great Western, and Sunday, and from no later than 10:30 with no more than 5% of the gross value Midland Mainline on any other day. They need not be valid of the basket excluded. However, all • Weekly season tickets for journeys for any journey beginning between 15:00 Commuter Fares must continue to be where there was no weekly season and 19:00 on Mondays to Fridays from made available for sale, whether or not fare in 2003 London-area stations or (when travelling they are in the Commuter Fares basket. away from London) stations between Each year, the train operator must ensure Although a particular fare may be London and Reading, Watford, Luton or that the total value of its fares basket does unregulated, in certain cases a regulated Stevenage, inclusive. However, the SRA not exceed the cap on the basket. The fare may act as a ceiling. For example, will consider applications from operators cap is equal to the total value of the basket an unregulated Supersaver fare cannot to apply a greater restriction to savers in February 2003 increased by RPI +1% logically exceed the price of the regulated where it can be shown that this is on 1 January 2004 and each year and less-restrictive Saver fare. necessary to reduce overcrowding. afterwards until further notice. As with the Protected Fares basket, individual fares Fares Regulation in Passenger within fares baskets may not rise by more Transport Executive Areas Commuter Fares than 5% above the basic policy (RPI + 1% + 5% = RPI + 6%) in any 1 year. Rail services in seven regional Commuter Fare regulation applies to the Commuter Fares around Cardiff and conurbations are sponsored by Passenger following fares used by commuters in the Edinburgh are also subject to regulation Transport Authorities, through their London area: by fares basket. These baskets contain the executive arms, the Passenger Transport • Season tickets (weekly, quarterly, standard singles, standard returns, and Executives (PTEs). In five PTE areas (West annual) to, from, and within the season tickets for journeys wholly within Midlands, Strathclyde, Tyne & Wear, London Travelcard zones the defined commuter area. The Merseyside and South Yorkshire) fares are • Standard singles and returns for weighting and annual cap increase currently specified directly by the PTE so journeys wholly within the London operate in the same way as for London- there is no need for fares regulation Travelcard zones area Commuter Fares baskets. (although this may change when • Standard singles and standard returns franchises are replaced). In two PTE areas to any station in the Travelcard zones (Greater Manchester and West Yorkshire), from a defined London suburban area Unregulated Fares fares are set by the relevant train operator roughly 35 to 50 miles from London in the normal way and commuter fares Fares, which are neither Protected Fares are regulated by a version of the fares Each train operator serving London has nor Commuter Fares are unregulated, and basket mechanism. All standard singles one Commuter Fares basket containing train operators are free to determine these and returns for journeys wholly within the every regulated commuter fare from fares according to market forces. Greater Manchester and West Yorkshire which that operator takes any share of the Unregulated fares include: PTE area are included in a fares basket revenue. This includes both fares for • All first class fares that is capped in a similar way to the fares which the operator is Lead Operator and • All advance purchase Apex-type fares baskets described earlier. sets the fare, and fares where another train • Tickets (other than Travelcards) that

44 Japan Railway & Transport Review 38 • March 2004 Copyright © 2004 EJRCF. All rights reserved. SRA’s Review of operators want less regulation and more urban areas as well, but using a more Fares Regulation freedom. The SRA’s own view is that fares flexible fares basket mechanism. regulation is justified only where it is The SRA considered whether regulation Fares regulation has been in place since necessary to prevent or correct market should be extended to cover long-distance the first franchises were let in 1995. failure. In the railway industry, this full-fare tickets (standard open singles and However, the above-described fares generally means one of two situations: returns), some of which have risen regulation is the result of an extensive • Where operators may abuse a significantly since privatization. However, review of fares regulation carried out by dominant position while there is a clear argument for the SRA in 2002–03. The new policy has • Where there are significant regulating commuter fares because of the been designed with four aims in mind: externalities not fully reflected in the lack of practical alternatives to rail, this is • To protect passengers in markets cost of production or the price, such not the case for long-distance fares where where train operators have a as reductions in congestion, pollution, there are generally alternatives, such as significant degree of market power, for energy consumption or accidents car, long-distance bus, or air. For example on urban commuter routes relative to other forms of transport example, an estimated 58% of journeys • To redress the balance between from London to Manchester are made by taxpayer and passenger because Commuter train operators around London car and only 33% by rail, while 41% of increasing industry costs have been in particular, but also other urban areas, journeys from London to Glasgow are borne almost entirely by taxpayers possess a significant level of market power made by air and only 14% by rail. so far because there are few practical In the case of standard open fares, price • To allow more scope for innovation alternatives to trains for most journeys to would be expected to reflect the flexibility in fares and ticket types, allowing train and from work. Table 1 shows the that these fares provide and the type of operators to make better use of dominance of national rail and London passenger at which they are targeted. available capacity Underground travel for commuters in the Standard open returns are typically used • To minimize the administrative burden Greater London area in Autumn 2000. by business travellers—consultation on train operators by simplifying the The SRA concluded that although some responses from train operators suggest that processes and mechanisms used to aspects of the Commuter Fares regulation 60%–65% of Midland Mainline and regulate fares could be simplified, the scope of regulation GNER passengers using this type of ticket applied to most commuter fares should be are travelling on business. Equivalent The review looked at each of the following maintained because of rail’s position in the fares on competing modes, such as fully- key aspects of regulation: market for commuting in urban areas. flexible domestic airfares, are priced at • The fares that should be regulated Away from the big cities, there are generally similar or higher levels. (scope of regulation) more alternatives to rail and the case for The SRA also has to consider affordability • The price at which those fares should regulating commuter travel becomes less and value for money, and regulating be regulated (level of regulation) compelling. Nevertheless, there are still standard open fares at a much lower level • Whether or not there should be a link many journeys where people do not have than current prices could only be done at between fares and performance an alternative means of travelling to work, considerable cost. Regulating the • The mechanisms that should be used and on balance it was decided to continue maximum price of standard open tickets to regulate fares regulating weekly season tickets outside as well as saver fares would result in • Other fares issues, including fares structure, zoned fares, smartcards and railcards Table 1 Travel to Work in Greater London Work location Railway Private London Local and Other vehicle Underground long-distance bus Scope of Regulation Central London 39% 13% 31% 9% 7%

Not surprisingly, the SRA’s consultation Inner London 12% 41% 17% 12% 17% showed that passenger groups, individual Outer London 4% 68% 4% 10% 13% passengers and PTEs generally want the Source: Transport for London (TfL) same or more regulation, while train

regulation of 64% of total rail industry while offering the lowest possible fare to Consultation responses showed that train revenue when competing modes are each passenger. operators feel regulation has kept fares too largely unregulated. Regulating standard However, some people still rely on saver low in real terms, stifling investment and open fares would limit all other fares, tickets, and most rail passengers are not creating overcrowding. On the other stifling innovation and leading to yet used to booking rail journeys in hand, passengers, passenger groups, local overcrowding on some trains. For all advance as they do with airlines. A new authorities and PTEs do not believe that these reasons, the SRA decided that it was reservation system allowing dynamic fares regulation should be used to price undesirable to extend regulation to this airline-style pricing is not yet available, passengers off railways to reduce type of fare. so it has been decided to continue overcrowding, suggesting instead that The SRA considered the advantages and regulation of saver fares until late 2005, capacity should be increased. However, disadvantages of continuing to regulate but with some changes. Since 1995, each despite a general feeling that fares are too saver fares; research suggests that saver fare has been regulated individually, high, PTEs, passenger representatives and regulation of saver fares has led to but a fares basket mechanism was many local authorities said that a move overcrowding on some trains and may introduced in January 2004, giving from the RPI –1% model to a more have prevented operators from managing operators a degree of flexibility to vary the sustainable annual fares increase of RPI their capacity effectively. It may also have price of individual fares within the basket. would be acceptable. constrained development of other more The SRA will also allow changes to the The SRA considered the need to recover innovative types of ticket, possibly maximum restriction that can be placed rail industry costs and how the balance preventing operators from introducing the on saver fares on a case-by-case basis of cost recovery should be set between sort of pricing used so successfully by where an operator can show that the fares paid by passengers and subsidy budget airlines. Leisure passengers are current maximum restriction needs to be provided by taxpayers. At privatization, generally very price sensitive and if saver relaxed to prevent overcrowding. The it was assumed that more efficient private- fares were deregulated, operators would SRA will further review saver regulations sector management would drive costs still need to offer competitively-priced with a view to replacing the current down. The gains were to be shared tickets to avoid losing these passengers regime by 2006. Changes may be made between taxpayers and passengers with and revenue. Research suggests that most earlier if train operators put forward government subsidies expected to fall over passengers are willing and able to transfer proposals showing clear benefits to both time, and regulated fares reducing by 1% to different types of ticket and can use taxpayers and passengers. a year in real terms after 1999. In the alternative forms of transport such as car, Table 2 shows the percentage of farebox event, efficiency gains did not materialize bus or aeroplane. The leisure market for revenue that would be subject to and rail industry costs have actually gone long-distance rail travel is already moving regulation if saver fares were deregulated up rather than down. away from the traditional approach or if standard open fares were regulated. Between 1999–2000 and 2002–03, the represented by saver tickets towards total cost of providing the national rail airline-style ticketing where price is the network increased from £6.1 billion to an main attraction for passengers and a seat Level of Regulated Fares estimated £9 billion. However, this rise reservation is included with the ticket. in costs was not matched by growth in Yield-management schemes are being The SRA considered a range of options passenger and freight revenue, which only improved and a new reservation system for regulation levels, ranging from increased from £4.4 billion to £4.8 billion, that can work in conjunction with them continuing the policy of reducing as regulated fares have continued to is due to be introduced in late December regulated fares in real terms by RPI –1% decline in real terms (by an average of 2004. This would allow operators to each year (used since 1999) to allowing 6.6% between 1995 and January 2003). maximize both ridership and revenue various increases above inflation. As a result, the taxpayer has borne most of the increase in costs. SRA research also Table 2 Impact of Changing Scope of Regulation suggested that regulated fares may be significantly below their economically Proportion of revenue Current Saver fares Standard open Standard open fares regulated efficient level, or long-run marginal cost. from regulated fares proportion deregulated fares regulated and saver fares deregulated The result is overcrowding on both Total rail industry 46% 32% 64% 50% commuter services and long-distance trains, and lack of investment incentive.

46 Japan Railway & Transport Review 38 • March 2004 Copyright © 2004 EJRCF. All rights reserved. The SRA concluded that an increase in fares increases above inflation could be in some cases) in the non-Travelcard fares regulated fares may be justified on both justified to fund investment as long as the which they set in order to keep the total cost-recovery and efficient-pricing increases were applied after the value of their fares basket within the grounds to redress the balance between improvements were delivered to regulatory cap. This meant that taxpayer and passenger and more passengers. To help fund specific passengers using Travelcards saw little or accurately reflect the long-run marginal investment, the SRA will continue to allow no benefit from the FIAP fares adjustment costs of providing rail services. It decided increases over and above the basic policy while passengers using non-Travelcard to change the annual permitted increase where agreed with operators. rail-only tickets enjoyed a in regulated fares from RPI –1% to RPI disproportionately large effect. +1% from January 2004 for the next 3 Link between Fares and The SRA has decided to eliminate FIAP years. In the London area, the RPI +1% Performance and rely on the compensation increase will partially reverse some of the arrangements set out in each operator’s reductions in regulated fares over the past Since 1995–96, fares regulation has Passengers Charter to compensate few years, improving the consistency included an automatic link between passengers directly for poor performance. between SRA fares policy and the RPI London commuter fares and train service policy of Transport for London (TfL). performance generally known as the Fares Some consideration was given to applying Incentive Adjustment Payment (FIAP) How Fares Are Regulated different increases in caps to different regime. Under FIAP, a small adjustment operators to reflect slightly different levels of up to ±2% was made to the basic RPI - Fares baskets provide much greater of investment or service quality, etc. 1% annual increase in the fares basket cap flexibility compared to regulating fares However, the extent of interaction for each of the ten London commuter individually but still control the level of the between fares set by different operators TOCs, depending on whether a TOC’s fares concerned. This flexibility can be made this impractical, particularly in the performance had improved or worsened used by operators to reflect market London and South East area. Each in the preceding 12 months relative to the conditions in the fares structure— operator’s fares basket contains fares that previous 12 months. FIAP involved a long promoting growth or managing capacity— it sets and controls itself, and fares that time lag between the fares change and the and to correct anomalies or control are set by other operators. If one operator related performance, and since it was overcrowding. Individually regulating is permitted a large increase in its fares based on relative performance, a some fares generated significant work for basket and so increases its own fares performance improvement from bad to both train operators and the SRA, because significantly, other operators whose fares merely poor permitted a fares increase, approval was needed each time an operator baskets contain these fares would be whereas a worsening from excellent to wanted to adjust an individual fare although forced to reduce their own fares to offset merely good performance required a fares the effect may be very small. Commuter the increase, unless they are allowed a decrease. Almost all consultation fares in urban areas have always been similar increase. In addition, commuter responses from both train operators and regulated by fares baskets, and each fares baskets include Travelcard fares passenger groups said that the FIAP operator’s Protected Fares are now (London-wide multi-modal rail/bus/ automatic link between London regulated in this way since January 2004. London Underground fares) that are set commuter fares and performance has not However, fares baskets can be extremely for the whole of London by agreement worked well and should be abolished. complex, especially in the London area. between all operators and TfL. If different In addition, a performance-related fares To resolve this, since January 2004 fares permitted increases were applied to each adjustment will create inconsistency baskets have been simplified to reduce the operator’s fares basket, there would be a between SRA and TfL fares policies. FIAP cost and effort required to manage fares disproportionate effect on each operator’s has sometimes required fares baskets to regulation. In many cases, 98%–99% of own non-Travelcard fares because these be reduced by RPI –3%, when London an operator's revenue comes from just were adjusted to keep the total fares basket Travelcard fares (which rise in line with 10% of regulated fares, and there is a long within the cap. Ultimately, the SRA inflation unless otherwise agreed with TfL) tail of low-revenue fares in each fares concluded it was more appropriate to have been increased by RPI. Travelcards basket that could be eliminated without apply a consistent increase to all make up 70% of some operators’ fares materially affecting the extent to which operators. baskets, and these operators have had to that operator’s revenue is regulated. As Many consultation responses said that make large reductions (over 20% in 1 year an example, Table 3 shows a typical fares

However, some complexity arises because Table 3 Analysis of Flows and Revenue in Typical Fares Basket different train operators target the same Flows in existing Basket revenue Number of flows Revenue of market segments with similar products fares basket covered by flows smallest flow with different product names and (in some 1% 67.00% 80 £124,000 cases) slightly different terms and 2% 81.00% 164 £49,000 conditions. Passenger choice is not 5% 94.00% 417 £9,000 10% 98.00% 837 £1,700 enhanced if a brand-A fare is only 25% 99.70% 2,099 £146 available on routes served by operator A, 50% 99.94% 4,201 £20 and a brand-B fare is only available on 75% 99.99% 6,303 £5 routes served by operator B. ATOC has Source: Study on fares regulation for the SRA by AEA Technology, 2003 already done some work on ticket categorization and more can be done to basket. The most important 10% of flows that travel patterns have changed and make different categories of fare much in the basket produce 98% of regulated actual revenue is now significantly easier to communicate to both passengers revenue and the most important 25% different in many cases from the 1995 and sales staff. The SRA intends to work produce 99.7% of regulated revenue. revenue levels used to weight fares in the with train operators and ATOC to ensure Fares on less popular flows would in effect original baskets. that the terminology used to describe remain regulated through a requirement particular categories of tickets and (where for that fare to continue to exist, and appropriate) the terms and conditions for through the limiting effect of fares from Fares Structure similar products, are properly coordinated adjacent stations being regulated. In some between operators. cases, this simplification could reduce the The complexity of the fares structure number of separate fares within an emerged as a common theme in responses operator’s fares basket from over 20,000 from passengers, passenger groups, PTEs Zoned Fares for London to just 1000, significantly reducing the and local authorities. On the other hand, burden of regulation and allowing much train operators believe that the advantages TfL has suggested that national rail fares simpler processes to be used to maintain of offering a broad range of fares generally within the London Travelcard zones could and manage fares regulation. outweigh the disadvantages and they are be replaced by an integrated structure of The SRA considered whether operators’ clear that they want to retain control over zoned fares, consistent with London fares baskets could be simplified further their product range. Underground fares. There may be by removing Travelcard fares and those Each train operator is free to offer a range significant advantages of simplifying fares fares that are set by other operators. of different fares, designed to appeal to in this way, and integrating them with fares Although there would be advantages in different types of passenger. There are for other modes. On the other hand, this, it might undermine the effect of many benefits to this market creation of standardized zoned fares will regulating these fares. However, the segmentation—passengers are more likely remove a train operator’s ability to price proposed change in the annual increase to find a ticket that suits their particular fares up or down on specific routes to from RPI –1% to RPI +1% and elimination needs—and the operator can maximize control overcrowding or reflect better or of the FIAP fares adjustment will make revenue and manage capacity by offering worse service quality on different routes. inclusion of Travelcard fares within fares cheaper tickets at off-peak times, and The SRA will develop this proposal further baskets less problematic. The more expensive tickets when capacity is with TfL and the train operators over the simplification of fares baskets caused by at a premium. If operators were required next 2 years, allowing the likely impacts a reduction in the number of flows will to reduce the number of ticket types this on fares, revenue and passenger journeys also make baskets more manageable, would reduce both the passengers’ choice to be properly quantified. even though they will continue to contain and the train operators’ commercial fares set by other operators. freedom. It would disadvantage those In January 2004, the SRA re-weighted fares passengers who used fares that Railcards within fares baskets according to the disappeared and would almost certainly revenue received by operators from sale reduce revenue, in turn requiring greater Currently, there are nationwide railcards of fares in 2002–03, because it is clear government subsidy. for young people, senior citizens, families

48 Japan Railway & Transport Review 38 • March 2004 Copyright © 2004 EJRCF. All rights reserved. and people with disabilities, all of whom together by car due to the cost saving over typically have lower incomes and for rail. The SRA intends to develop proposals Implementing Fares Review whom a discounted fare is likely to for a national railcard in conjunction with generate both more travel and more ATOC and the train operators. If a viable Each operator’s franchise agreement revenue. These railcards are protected by proposal can be produced, a national includes provision for the SRA to review the SRA which requires TOCs to railcard could be introduced as early as and alter fares regulation. The SRA is participate in these railcard schemes 2005. permitted to change fares regulation at any through their franchise agreements. time after January 2003 as long as However, the idea of a national railcard franchise payments are adjusted so that available to everyone was widely Smartcards the operator makes no net gain or loss supported in responses to the SRA’s from the change. The new fares policy is consultation on fares policy. Fares regulation will probably need to be expected to generate a net increase in Unfortunately, a railcard that gives a altered at some point to accommodate revenue, reducing subsidy payments from discount to individual passengers is likely changes resulting from the introduction the SRA. In cases where an operator pays to be an expensive way of generating extra of smartcard ticketing both in London and a premium, increased payment to the SRA passengers, and the extra subsidy required around the UK. However, smartcard will be required. The amount of the to support a national railcard may not be schemes are insufficiently developed at adjusted franchise payments was good value for money. There are two present to make specific changes to fares evaluated and discussed with operators major concerns. First, that the effect of a regulation necessary. This is not to say in time for the new fares policy to be card would be to give a discount to that future changes will not be needed. implemented in January 2004. I existing regular rail users and not to For example, if smartcard ticketing current non-users, the very people that allowed the traditional pattern of weekly, Further Reading need to be attracted to rail. For example, monthly and annual season tickets to be Update report on Virgin Trains market share prepared if a national railcard were introduced, a changed. Another possibility is that by Steer Davis Gleave, 2002. car user considering one rail trip would smartcard ticketing might allow more Fares Review Conclusions 2003, SRA, http:// still face paying the full fare, while only effective peak and shoulder-peak pricing, www.sra.gov.uk/publications/index.tt2. regular rail users benefit from the discount. where passengers can save money by Second, if a national railcard was travelling on less-crowded trains at the available to everyone including higher- shoulder of the peak. If this spread income groups, it could not be targeted commuting more evenly over a slightly at the most price-sensitive groups likely longer period, it might bring lower to switch to rail if offered lower fares. In overcrowding levels, more efficient use of effect, taxpayers would be paying for rolling stock, and lower costs. The SRA cheaper tickets for higher earners. A intends to research this possibility and national railcard giving discounts to carry out a trial on part of the London rail individual passengers is quite likely to lose network if appropriate. more money from giving existing passengers a discount than would be gained from new passengers paying the reduced fare. Nevertheless, the SRA is keen to see whether it is possible to develop a national Mark Smith railcard that is well targeted, encourages road users to switch to trains, avoids Mr Smith is Manager of Information & Ticketing Team at the SRA. After graduating from the University adding to overcrowding, and does not of Oxford in 1987, he joined British Rail as a management trainee and has held several station manager posts as well as other positions in customer relations at Connex and in the Office of the Rail Regulator. reduce operators’ revenue or require extra subsidy. For example, a railcard for small groups might make rail travel more attractive for people who currently travel