Friday, 17 August 2012

The Government Giveth and the Government Taketh Away: the Mysteries of Rail Franchising

On Wednesday the government announced that the inter-city services on the West Coast Main Line (WCML) will no longer be operated by Virgin Trains; from December 9th, First Group - the largest transport company in Britain, who already run the Great Western, Transpennine Express, Scotrail and Thameslink (FCC) franchises - will take over running the long-distance services between London, Birmingham, Manchester, Liverpool and Glasgow.

Let's clear up what that actually means. Put simply, here's a list of things visible to the public that will happen on December 9th:

  1. The Pendolinos and Voyagers run by Virgin Trains will start to be painted in the colours of First group, and the staff of Virgin Trains will start wearing new First uniforms.

  2. Er, that's it.

The timetable will remain broadly the same, at least for now; the services will be run with the same trains; the same staff — except for the highest echelons of management — will drive the trains and staff the stations; the tickets will cost the same and be valid on the same trains; and so on.

One confusion is that people think that Virgin Trains owns the Pendolinos and the Voyagers. They don't. They are owned by Angel Trains, one of three rolling stock holding companies (ROSCOs), who lease them to Virgin Trains (at a suitably extortionate rate). Come December, they will simply be leased to First instead.

This enables the franchise renewal process to be relatively smooth: first companies register their interest; then a shortlist of suitable companies is drawn up, and those shortlisted are invited to tender for the franchise. Tendering for the franchise involves drawing up a detailed plan of what trains would be run and what level of service would be provided.

Crucially, it also involves agreeing the level of premium (or subsidy) with the DfT: in other words, how much money the DfT will get from (or pay to) the operator. Long-distance intercity routes are probably the only passenger services that make significant profits. As such, with the West Coast franchise — the Premier Line on the network — it was always going to be about who could pay the DfT the most money.

In that respect, First won hands-down: they have promised to pay the DfT £5.5 billion in premiums over the 13 years and 4 months life of the franchise. That's a lot: it will require passenger revenue to grow by 10% per annum for each of the next 13 years, and some analysts have questioned whether that's possible. It is definitely a very ambitious target; in fairness, though, Virgin weren't outbid by much: they promised to pay £4.8 billion, assuming 8.5% growth per annum.

In theory franchising shouldn't be about it always going to the highest bidder, but pressure from the Treasury inevitably means it is. Once First's plans were deemed achievable by the DfT analysts, it was always going to be First. If they fail to keep up with the payments, First could have all their rail franchises (not just West Coast) taken away from them.

Do I think it was the right decision? My instinct is to say no; but without full details of what Virgin planned to do, it's impossible to make an accurate judgment.

What I do know is this: by removing the West Coast franchise from Virgin Trains, we have lost one of the genuinely recognisable brands on the railway network that isn't simply another bus company running trains, and that in and of itself is a crying shame. Through clever marketing they attracted lots of new business to the railways, not just because of the huge upgrade that the WCML has seen in the last decade.

Virgin Trains came into the market at privatisation promising a whole new experience of riding trains. For better or worse, they have done that: I will miss the futuristic red-and-silver livery, replaced with yet another blue train company. Where they fell down was the trains themselves: they replaced old trains with new ones that were shorter, whose windows are tiny, and whose only significant advantage is a better top speed.

What does First West Coast mean for us?

So what will happen when First West Coast take over from Virgin Trains? Nothing fundamental will change: Birmingham and Manchester will still get three trains an hour to London, and they'll still be as quick as they are now. But there will be some changes:

  • Eleven new 6-car electric trains — most probably baby Pendolinos — will be ordered to take over the Birmingham–Scotland services from the diesel Voyagers. This is good news: it will end the insanity of having an entirely electrified route served by diesel trains. (If only some of the route were electrified, I could excuse it, but not this.)

  • From 2016, direct services to and from London will be restored to Telford, Shrewsbury, Blackpool and Bolton. Blackpool is not a surprise, but Telford and Shrewsbury are: until a year ago they were served by the open-access operator Wrexham & Shropshire, but there just weren't enough passengers and they went bust. Bolton is even more of a surprise, but as a simple extension of a London–Manchester service it should work reasonably well.

  • Anytime fares will be reduced by up to 15% over the first two years of the franchise. This is to counteract the incredible inflation in fares in recent years which has seen an anytime return from Manchester to London climb to £296. While it is good news, it will be largely counteracted by the inflation-based fare rises anyway; I'll return to this later.

  • Ticket barriers will be installed at all 21 major stations on the WCML, including London Euston, Manchester Piccadilly, Liverpool Lime Street and Glasgow Central. This is bad news: barriers make sense for commuter stations, where there isn't time to check tickets on the train; but when stations are mainly served by intercity services where people often have lots of luggage it's simply a giant inconvenience.

  • The trains will be thoroughly refurbished, and the on-board catering will be revised to include an at-seat service. That means a trolley; whether it's in addition to, or instead of, the shop isn't clear. For this one it has to be watch this space: until details of exactly what's going to happen it's fairly worthless trying to speculate.

Most of that will be complete by 2016. The franchise, however, runs until 2026, so most of the franchise will be spent just raking in the money. That, however, can be done better: fares on the WCML are, frankly, insane. So insane, in fact, that it is possible to lower the fares on some trains, but increase overall revenue.

The off-peak fares are reasonably priced but unreasonably restricted so that you can't arrive in London until after 11:30 and you can't leave London between 15:00 and 18:45. The anytime fares are unrestricted on which train you can get, but insanely expensive: on Coventry to London, an off-peak return is £43.60, but an anytime return is £138. That cliff-edge means that the 18:43 train to Coventry is usually empty (at least north of Milton Keynes), but the 19:03 is rammed.

On every other major intercity line, there are not two but three tiers of fares: anytime, off-peak and super off-peak. Virgin's off-peak fares are, in fact, pretty much in line with every other operator's super off-peak fares. What is needed is a third tier of fares which is, say, 25% more expensive than the current off-peak fare, but which permits arrival into London after 10:00, and only forbids departure between 16:30 and 18:15, say. That would manage the demand, and probably result in a net increase in revenue.

Furthermore, there are currently relatively few advance fares available at peak times: by increasing the incentive for people to book in advance by offering more such fares, they will get more bums on seats in the peak — and, of course, all advance fares go straight to the operator and don't have to be shared out among the other operators on the line. The net effect of both such changes is an increase in revenue but cheaper fares for the passenger.

Does franchising actually make sense?

But this much "yield management" can only go so far, and it is difficult to see how First can deliver the 10% year-on-year growth required to pay the DfT what they've promised. What happens if they default? Fortunately First are spared from the spectre of going bankrupt, but they will lose all their train franchises — not just West Coast — if they fail to keep up with the premium payments.

Is this a realistic possibility? Yes. Twice in three years the East Coast franchise — first under GNER, then under National Express — was handed back to the DfT. The first time was due to the collapse of GNER's parent company, Sea Containers. But the second time was simply because National Express could not meet the steep demands for premiums that they signed up to in the franchise agreement.

That should have triggered a wide-ranging debate about whether franchising actually makes sense as a model, but it didn't. Frankly, the current model of franchising is terrible, and is one of the fundamental reasons our railways are so expensive.

The two extremes of franchising are to specify everything — London buses are franchised out but even the font on the destination blinds is specified by Transport for London — or to give the operator free reign. What we actually have is a horrible compromise where minimum service levels are specified but there's enough play that First can claim to actually be "running" the WCML rather than just operating trains.

Now, I'm not necessarily advocating renationalisation, but more centralised control and specification — such as there is at Transport for London — might be better in the long run. In particular, it would probably avoid some of the passenger confusion that seems to be the main product of this franchise handover: the same trains will run at the same times, but they'll be announced as a "First West Coast" service instead of a "Virgin Trains" service.

How will First West Coast actually perform?

It remains to be seen how First perform. They will doubtless try and improve punctuality: Virgin's punctuality statistics languish stone dead last by the "public performance measure", with just 85.9% of trains arriving within 10 minutes of time in the year ending 31st March 2012.

There will probably be a very subtle shift in emphasis as a result: Virgin cared more about passengers getting a good service, while First care more about their shareholders. When things go wrong, Virgin are relatively happy to just let everything run half an hour late, if it means people get home; First may well cancel more services to try and get the ones that are running back on time.

But many people are already berating First before they've even taken over. People like the Virgin brand: to see them lose the West Coast is indeed a shame and, unless they succeed in bidding for another franchise, they will probably bow out of running trains altogether.

For all that I like Virgin Trains, however, I don't think we can judge First just yet. Their record is a little patchy, but when you're running the Great Western Main Line or the Thameslink route while both are in the process of major upgrades it's always going to be tricky.

I think we should all give First West Coast a chance: I look forward to seeing what innovations they bring to the WCML. Nonetheless, I must bid a fond farewell to Virgin Trains: even if their trains are too short and have tiny windows, they are the fastest in the country (except for the Eurostar), and day in, day out, they have run an incredible service of up to fourteen trains an hour into London.

Rest in peace, Virgin Trains; long live First West Coast (hopefully).

1 comment:

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