What the Privatised Railway Got Right: Fares
Never again will we see this sight! Not because train fares won't go up: the Evening Standard published its final print edition last week
It’s now fashionable to criticise everything about the privatised railway; often with good reason.
But, as we drain the bathwater, let’s see what babies are sitting in the suds.
This series looks at things the privatised railway got right.
And now I’ve made the decision that I’m going to promote my wares as a consultant using blog posts, I’m doing the classic media thing of taking a contrarian position to the consensus.
Hear me out…
FARES
Fares are tricky things.
At root, they have two contradictory purposes.
The reason we levy them at all is to raise revenue. The cash is used to fund the service and invest in the future. Without this cash, the service wouldn’t exist.
But fares are also an obstacle to travel. And because public transport is carbon and space-efficient, we want more people to use it. The more you charge them, the less likely they will.
That creates a tension.
If you’re a commercial business, this issue does not apply. Pricing policy is simply a question of discovering the profit-maximising charge. This isn’t easy, as there are endless substitutes and feedback loops, but the question is at least easy. If Tesco charge £5 for a chicken, it’s because they believe they’ll make most money doing so.
In our world, things become much trickier.
How do you balance the desire to attract extra demand with the need to extract as much money as possible?
The privatised railway
The principle of the rules created for railway privatisation was rather sensible.
It created a distinction between “regulated” and “unregulated” fares. Regulated fares were:
· Season tickets,
· short distance Anytime fares and
· long distance “Saver” (now Off Peak) fares
The reason for this choice is that:
· The flood of commuters into and out of city centres are essential to make urban areas work. However, they are a big driver of cost. A profit-maximising railway would raise Season ticket prices to reduce the need for an intensive peak service. This would harm the vitality of cities on which the economy depends.
· Short journeys are typically monopolies and they’re socially necessary. People buying these tickets may be visiting hospitals, going to a workplace or doing some other economically and socially valuable work. They have less choice and many will have low incomes. A profit maximiser would probably charge higher fares to fewer people (as occurred on local buses), but this would fly in the face of wider social goals.
However, for longer-distance journeys, a different approach was taken.
The Anytime fare was left unregulated, and – as you might expect – rocketed in price. However, the long-distance journey market is not a monopoly. Some routes have flights. Most have coaches. So there is a benefit to price competition on these routes. Hence while some fares rocketed, others plummeted. Operators introduced new advance purchase tickets that meant British long-distance rail fares became, for a while, both the most expensive and cheapest in Europe, depending on your definition.
In some ways, this suggests that no regulation was needed. But regulating the Saver ticket was wise. Even though cheaper and more expensive options existed, the Saver created a price anchor. If an off-peak return journey could be made for £90, it calibrated that it wouldn’t be wise to create an Anytime fare of £1,000. It also meant that the railway fulfilled a socially-necessary purpose: because the Saver was not an advance purchase ticket, it meant that people (like me) who don’t drive knew that for an affordable-in-an-emergency price, we could always travel anywhere else the same day. I doubt it was the intention in the 1990s, but this is an essential enabler to give people confidence to live car-free.
(To get a sense of this, imagine living car-free in London with elderly relatives in Liverpool. Like we do. The regulated fare is £75. That’s a lot. But it’s affordable if a relative needs help. An Uber would cost more than £400. That is not affordable).
Rules and rigidity
Unregulated fares were a total free-for all. This wasn’t a bad thing. It gave operators the flexibility to try things. And charging lots of money to business travellers isn’t necessarily a bad thing: the railway has to be paid for, either by taxpayers or farepayers.
But regulated fares were more controlled. This was good. Regulated fares would go up each year by a set percentage linked to RPI. After the decade in politics we’ve just had, I think we can all see the benefit of certain decisions being taken up front and then being implemented in a predictable and reliable way. Politicians would change the RPI-based formula (=RPI, RPI+1%, RPI-1%) but the approach was reliable.
For anyone frustrated by it, go and chat with someone in a hospital trust and see how much they’d like one of their main income sources to be set using a predictable formula.
Baskets and flex
While the rules were rigid, there was sensible flexibility. Initially, at least, the increase applied not to individual fares but to an overall basket of fares. As long as a train company hit the overall percentage increase that regulation permitted, they were allowed to put some fares up a little bit less and other fares up a little bit more.
This was sensible as it enabled a response to specific market conditions.
So, for example, at Chiltern Railways, we were lucky enough to have the Bicester Village shopping outlet on our route. This was a fast-growing destination. The average Bicester Village “guest” (as the team there calls them) spends more than £1,000 on clothes. So they weren’t going to mind an extra quid on the train fare. It made sense to increase these fares by more than the average, enabling us to hold down fares in more price-elastic markets elsewhere.
A world without rules
Pricing doesn’t normally have rules.
Tesco can charge whatever it likes. So can Amazon. So can Odeon. So can almost everyone. So, indeed, can the Mayor of London for TfL and - until recently - most private bus companies.
Given both the private sector and much of the public sector live in a world without rules, why have the constraints?
Well, because transport isn’t like other sectors. Food is essential for life but competition is plentiful, so prices are held down by the market. And, conveniently, even at a price low enough to be affordable for people on low incomes, selling food is still profitable for retailers. So regulating food prices would be a solution to no obvious problem.
But transport tends towards monopolies. An absence of pricing rules in commercial transport systems would tend to mean higher prices. That is what happened with deregulated buses, where operators discovered fewer passengers paying higher fares was the profit-maximising model. As a result, bus fares (outside London) rose steadily from 1986 to 2022 when the Government, suddenly, went to the opposite extreme, creating a rigid £2 cap.
Politically-led transport systems, however, have the opposite problem. Raising fares is not popular. Sadiq Khan has held TfL fares down throughout his term (other than when forced), which has starved TfL of long-term investment capital. TfL needs to spend around £1 billion a year just renewing its asset base. It isn’t doing it. There are few votes in raising fares on today’s voters in order to deliver a more reliable service to tomorrow’s.
Indeed, TfL would be in a far worse financial position than it already is if it were not for national fares regulation. TfL’s fares are intertwined with national fares. While regulated fares were intended as a limit, they’ve also become a floor. Because rail fares have had to go up each year, so any TfL fare linked to national rail (including the travelcard and the Oyster price cap) has had to go up as well. This has enabled hundreds of millions of pounds of annual investment that would probably not have happened if the Mayor had been able to have his own way.
It's not perfect
My Lord, you don’t need to tell me that!
Before everyone writes in at once to complain that praising the privatised system of fares is like talking up Henry VIII’s calmness and moderation, I’m fully aware of the flaws. I wrote about them here. And here.
The fact that regulation applied to long-distance off-peak fares but not peak fares created a “cliff edge” when two consecutive trains would have prices often three figures apart. As a result, the more expensive would run half empty while the cheaper would fill to burst.
The abolition of fares flex eliminated the possibility for train operators to deal with the irritating anomalies that undermine customer trust.
By using a rule set based on inflating British Rail’s pricing, it meant that fares were, forever, priced around British Rail’s 1990s product offer.
None of this makes sense.
A future regulatory model would do well to try to deal with these challenges. Solutions to all feel possible. But it’s also worth celebrating that one of the reasons for the staggering growth in rail demand during the privatised era was the “Goldilocks” model of enough rigidity to prevent commuters being priced off with enough flexibility to enable leisure growth.
Goldilocks
A world without rules leads to politicians holding fares down (resulting in insufficient investment and future unreliability) and to commercial businesses putting fares up (undermining growth).
But excessive fare controls results in an insensitivity towards the market. It used to be the case that fares were a simple pence per mile. In some countries it still is. But this tends to result in quite high long distance leisure fares, as a journey of 200 miles must be 200 times the price of a journey of 1 mile. (It costs me £1.65 to make an off-peak journey of one mile from my local station: so a 200 mile off-peak journey to Manchester would be… 😱 £330 single).
Moreover, there are all kinds of reasons why different markets deserve different prices. Urban areas should have their rail fares integrated with the local bus and metro routes. Routes from cities to attractive countryside or seaside locations benefit from different contrapeak fares. Routes with air competition need low fares. Routes with comically expensive shopping outlets need higher ones.
So what you need is a goldilocks model: something that creates enough constraint that stops private sector accountants and public sector politicians from raising/lowering fares too much, while giving operators the ability to intelligently price for the markets they serve.
It wasn’t perfectly elegant but the privatisation pricing model was a pretty good way of achieving this.
Lots of bathwater to be reformed away and the actual rules need to change. Where we’ve ended up is where no-one wished to be. But even as we throw away the bathwater of the current rules, let’s remember that the principle of the Goldilocks model is a baby worth saving.
