Rail fares – superficial debate and soundbite solutions Blog

Published on May 8, 2018

Rail fares are in the news again as Rail Delivery Group (RDG) announce their consultation into making fares simpler, integrated and personalised.

I’ve been selling train tickets for most of the last 20 years, and lost count of the amount of first hand customer feedback I’ve had in that time. I’ve also undertaken consultancy work looking at alternative ways of pricing train travel – so it’s a topic I feel compelled to opine upon.

Many people from inside and outside the industry have strong views on both the problems and how to fix them. Most debate, however, only looks at a subset of the issues, and many of the ‘solutions’ are superficial. No solution meets all objectives, therefore the debate should be one about the relative importance of different factors and which compromises to make.

Fares policy could be a powerful tool

Fares policy has the ability to have a profound effect on how people use the railways, and in-turn on wider issues such as the economy, social mobility, congestion and the environment.

However, since privatisation, fares regulation has pursued just one objective – it has tied this year’s fares to last – ensuring those that could afford to travel last year, can still afford to travel this year (probably). Given that people make significant decisions on where they live and work based on the cost of travel, this isn’t an unreasonable objective – but it shouldn’t be the only objective.

A more holistic strategy would actively use fares to stimulate economic growth; address social (im)mobility; drive behavioural change and modal mix amongst; whilst being simple and fair for end users.

How does it work today?

At present fares broadly fall into one of two categories – ‘regulated’, or ‘unregulated’.

Most season tickets and shorter distance singles/returns are regulated – as are longer distance ‘off-peak returns’. Longer distance ‘anytime’ tickets, ‘Advance’ fares and First-Class fares are usually unregulated.

Regulated fares can only be increased in-line with Government policy – which at present is RPI. Unregulated fares can be priced commercially by the train company. The nature of franchise bidding incentivises operators to maximise their own revenue – which means in practice unregulated fares will be priced to achieve that objective. 

This encourages some behaviour that probably benefits consumers (e.g. seeking to fill empty seats with discounted fares) – but may also encourage less beneficial behaviour such as pricing-up inelastic markets. As train operators are specifically incentivised to maximise their own income (not that of the rail network as a whole), it also encourages operators to poach customers from other operators by creating products that are only valid on their own trains.

This combined with outdated rules about what types of fares operators are allowed to set creates a mess of different products and restrictions – creating complexing and eroding the passenger benefit of a ‘walk-up railway’. As an example, a passenger travelling between Durham and York has a choice of 11 different products with subtle differences around the times and operators for which they are valid (and that’s ignoring ‘Advance’ and First-Class fares).

The pursuit of simplicity

Many industry leaders and politicians will talk of their desire to simplify fares.

I’ve facetiously suggested that as an objective on its own, it’s very simple to achieve – a flat £10 fare regardless of journey type or length would be about as simple as it could get.

However, as many clamber to point out, it would create all sorts of new problems – overcrowding, under-utilisation, price short journeys off the railways, and no-doubt create a big hole in the railway finances.

Simplicity therefore isn’t an exclusive aim, it is one of several objectives that need to be balanced. These objectives are numerous, but I think the big six are:

  • Simplicity
  • Making efficient use of capacity
  • Economic and social objectives
  • Fairness
  • Affordability
  • Achieving the target tax payer/fare payer balance

There are clearly conflicts between these objectives to be balanced, which can be illustrated by considering several touted solutions:

Pence per mile pricing

Until the 1960s fares were based on distance, so why not revert to this approach? Focus groups tend to like the perceived ‘fairness’ of the concept – after all, it works for taxis.

Whilst it’s not intrinsically simple, (as each journey would still have a unique fare), if universally adopted it would eliminate some of the complexities of today’s system such as ‘split ticketing.’ 

A key problem, however, is that it ignores the type of service, the market, and economic and social objectives. Could you really justify Stevenage to London being cheaper than Whitby to Middlesbrough? (the former having as many as 8 trains per hour with journey times from 22 minutes, the latter having 4 trains per day, each taking an hour and a half).

Rural communities tend to have lower incomes, have to travel further to access work and amenities, and already have some of the worst levels of social mobility – distance-based charging would hit these areas hard.

Some suggest mitigating these issues with ‘correction factors’ – weighting the ‘pence per mile’ based on service frequency or local average incomes – but these create new anomalies – for example when travelling a bit further along a route the service frequency reduces and incomes are lower, therefore a ticket to/from a rural village may cost less than to/from the affluent suburb the journey passes through later in the journey.

Conceptually the perceived simplicity also breaks down – would slower indirect routes attract a premium to reflect the increased track miles?

The concept also conflicts with the ‘day pass’ model in many urban areas, which seek to encourage additional discretionary journeys by having fixed daily/weekly zonal fares for unlimited distance.

Price each train according to demand

At the other end of the spectrum, some advocate a structure based upon dynamically pricing each train according to demand – busy trains would cost more, and therefore passengers would migrate to quieter trains. This would make more efficient use of the network, and reduce the need to invest in expensive additional infrastructure. This is the airline model and how many longer distance fares are priced – so why not extend it universally?

One problem is that whilst many professional and white-collar workers can work flexible hours to benefit from cheaper commuting – for some vocations, and indeed demographics, this isn’t an option. This probably includes many of those least able to afford a fares increase. If prices are changed frequently based on latest demand, then passengers may find themselves suddenly unable to afford their commute, and need to changes jobs or move home.

Such an approach is also inherently complex – in addition to each train being uniquely priced, congestion levels often vary along a line of route, so alighting the train one or two stops early and completing the journey by bus/taxi, could become the new form of split-ticketing.

Why not abolish ‘Advance’ fares?

Advance fares are often the target of criticism – no one likes to pay £300 to find they are standing up, whilst someone is sitting down enjoying their £20 'Advance' fare.

However, the underlying concept of a unique price for each journey based upon demand can help fill empty seats, which in turn allows operators to continue to run off-peak services which might otherwise be unviable, or indeed to add new services.

Contrary to the views of some - in my experience customers actually find the concept of lower cost train specific tickets relatively simple. Customers generally understand the value proposition of premium ‘Anytime’ tickets, and restricted ‘Advance’ – it is the plethora of semi-restricted ‘this operator, that route, these off-peak times only’ products that confuse.

Perhaps an alternative solution is to scrap the plethora of semi-flexible tickets, instead only selling either fully flexible or train-specific discounted tickets. For this to work, it would be essential to allow passengers to change their plans and swap to a different train by simply paying the difference in fares.

Economic and social considerations

What do I mean by economic and social considerations? It’s probably best explained by a few examples.

First, let’s consider ‘agglomeration’ and ‘workforce mobility’ – or in plain English, making it easy for workers to get to jobs, employers to recruit the right workforce, and for businesses to work together.

Employers will choose to locate in areas where they can access a skilled workforce. Better transport and suitable fares makes catchment areas larger, and therefore more attractive.

A business might reasonably want an IT expert or HR manager to cover offices in Leeds, Manchester and York. Perfectly commutable by train – but there is no season ticket for such nomadic workers, as current season tickets only cover specific journeys from A to B. New forms of commuter products could transform how people work, as well as better addressing existing needs such as part-time working.

As another example, consider a sales manager. In the South East they probably have an ‘All zones travelcard’ and can travel between clients and prospects at no marginal cost. Elsewhere in the country, the cost of a plethora of point-to-point rail fares mean that the regional sales managers probably have company cars instead, and doing business around the regions is harder.

There is subtle impact upon behaviour throughout the fares structure – for example fares that include an overnight stay are usually more expensive than ‘day returns’ – but those people staying overnight are likely to contribute more to the local economy through restaurants and hotels. Perversely the fares structure encourages them to go straight back home. Considering the wider economic context, it would make more sense to offer discounts to people that stay longer.

These types of opportunities are overlooked by current fares regulation, and appear to be out of scope of the current RDG consultation too.

RPI vs CPI distraction

The cost of fares and fares increases are inevitably an emotive topic – perhaps overly so? There is a lobby to move to CPI instead of RPI as the basis of regulation. Given there is about £10bn fare income, a 1% reduction takes £100m per annum out of the system, compounded year upon year. Over 5 years, that’s over £1bn less income … without doubt, if you are going to take a £1bn hit on fare income there are better and more strategic changes to make to fares than simply moving from one form of indexation to another.

Change will be disruptive

Change is undoubtedly needed, but will be disruptive. Demand will change in response to fares changes, this in turn will need changes to timetables, rolling stock, and even things such as where car-parking is located. Tempting as it is to quickly fix the problem – there’s probably an optimal rate of change, that allows people and the network to adjust to the impact.

Some change will probably have undesired effects. Whilst it is difficult to defend 'split ticketing' (where a combination of tickets from A to B, and B to C are cheaper than one from A to C), I suspect a byproduct of eliminating split-ticketing will be the withdrawal of some of the existing good value fares on shorter journeys, rather than a reduction of the long distance fares.

Industry structure impact

For all its faults, one redeeming feature of the blunt nature of current fares regulation is that it allows private franchisees to ‘set’ fares within contractual constraints. 

If we are to move away from simply indexing to last year’s fares and consider a more strategic approach against a broader set of objectives, it is difficult to see how this could be written into franchise agreements. It’s also difficult to see how operators could keep revenue risk, and therefore it would require a more fundamental reshaping of the nature of franchises (perhaps something more akin to the ‘concession’ model of Merseyrail or London Overground?).

Establishing a less opaque link between politicians and rail fares might be uncomfortable for those that currently enjoy the ability to blame ‘greedy train operators’ for fares increases and complexity.

In summary

The impact of rail fares on people’s lives, the economy, and many other issues can be huge – unfortunately much of the debate is superficial, chasing soundbites, and lacks detailed understanding.  There is no perfect solution that achieves all the different objectives, and politicians needs to choose the relative importance of the different factors. Change is necessary, but needs to be phased in as people and the network adapt.

About the author:

Richard Rowson is a freelance consultant at f17.co.uk focused on public transport ticketing, information and fares.