After decades of recognising the need to reform fares and ticketing, but with little action, everyone in the rail industry must be in despair waiting for someone with the vision, wisdom and courage to cut the Gordian knot.
That someone has to be a politician, since the Government now controls the railways, and government policy determines the overall fares structure. The creation of Great British Railways (GBR) and the restoration of overall management of the railway creates the perfect opportunity for a ticketing revolution, now that the earlier window offered by the pandemic has been lost.
We already know that with inflation in double digits, the method of calculating the annual fare increase based on the RPI figure is fatally broken. Moreover, the Office for National Statistics gave up using RPI in 2013, because it is “a very poor measure of general inflation”.
The January fare increase has invariably been accompanied by a media storm that damages the rail industry and encourages even more people to think the railways are too expensive.
So, this is a moment when demands for root-and-branch reform of fares cannot be ignored. Something has to happen - not least because up to 35% of people for whom rail travel is an option are being put off by the complexity of fares.
Another factor impelling reform is the £360 million allocated in 2021 for contactless pay-as-you-go ticketing to be rolled out across the commuter networks of the Midlands and North over the next three years.
The cost to government has been cited as the greatest obstacle to reform, under the assumption that it would reduce revenue.
Ian Legg, of the Legg Consultancy, thinks change is deterred by uncertainty over the transition to a new system: “How do you move to an ‘ideal state’ from today? How do you keep £8 billion to £10bn coming in when reforming fares, and while waiting for demand elasticities to kick in? We don’t know enough about the impact of significantly raising or lowering fares.”
The answer, says Mark Smith (The Man in Seat 61), is “to reassure the risk-averse Treasury that prices within a new structure will not be difficult to adjust if calculations to achieve revenue neutrality are out by 2% or whatever”.
Smith explains: “The Passenger Demand Forecasting Handbook can accurately predict incremental changes to fares and pricing, but not changes to prices and structure of the magnitude proposed.
“But people forget the blindingly obvious: you’re not stuck with the prices you implement on Day 1. The industry revenue supporting tool LENNON stands for Latest Earnings Networked Nationally OverNight, and the clue is in the name - you can implement an entirely new fares structure with new pricing designed to be a best-shot at being a revenue-neutral change.
“It will inevitably miss - either under-shooting or over-shooting. But you’d know within a few days which it was, and by what order of magnitude. The whole structure can then be adjusted up or down by a uniform percentage to restore revenue neutrality.
“After a few weeks, passengers will adjust to the new prices (although there would be winners and losers in pricing reforms), and a second adjustment may be necessary. In other words, the Treasury needn’t worry - we can guarantee the whole thing will be revenue-neutral more or less by definition.
“Longer term, I’d expect the simplicity itself to drive a revenue increase through easier retailing and restored consumer confidence.”
Another impediment to reform is already on the way to being removed. The regulations and agreements with train operating companies (TOCs) no longer need unscrambling, thanks to the formation of GBR and the move from franchising to National Rail Contracts (NRCs). The end of franchising should also get rid of the need for impartial information under TOCs, which was a well-meaning attempt to ensure that passengers were given all the options for fares, but which in practice meant that they were bombarded with a plethora of often pointless ‘choices’.
Even though Network Rail Chairman Sir Peter Hendy has said that train operating businesses would be “incentivised to go for growth” under NRCs, those inducements need no longer affect fare and ticketing regulations when all revenue will be going to GBR.
Andy Wakeford, fares lead at the Rail Delivery Group, argues: “The current fare structure is inefficient in driving revenue maximisation and fails to meet the needs of today’s passengers. Changing the BR-derived fare structure is not going to upset the ley lines of the universe.”
The Treasury needs convincing not only of what the railway industry could do, but also of the need to include the industry in making the case for creating a 21st century fares structure. Currently the industry seems to be excluded from discussions between the DfT, Treasury and No.10.
At the outset, it is necessary to mention terminology. Fares, prices and tickets are sometimes used erroneously as interchangeable terms. The fare is the authority and conditions attached to travel on the railway, the price is the amount of money you pay for the fare, and the ticket is the evidence that you have paid a price for your fare.
A little history
Fares (and the data sets governing them) have always been complicated, from the opening of the Liverpool & Manchester Railway in 1830.
Today’s fares structure is largely inherited from British Rail and an analogue age. As Steer Davies Gleave pointed out in a research project as long ago as 2011: “The current set of fares has not been developed based on the passenger requirements of today, or even those of the recent past. They have been developed through a combination of historical, market and regulatory factors.”
Regulation began in 1844 with the requirement to run what became known as ‘Parliamentary Trains’ at a penny a mile. Per mile pricing was introduced nationally in 1928, and ordinary return tickets were generally sold at double the price of a single.
In 1968, market forces rather than mileage became the prime determinant of ticket prices, to try to even out loadings. This was followed by the introduction of Railcards in the 1970s to target savings more effectively to specific market types.
Market pricing to stimulate optional journeys created anomalies. There was no one-way Saver, and many Saver returns were cheaper than an anytime or open single, so people were sold a return when they wanted a single. This could cause a ten-minute conversation to explain why.
To avoid this, in the early 1990s BR introduced a feature whereby if a cheap return was offered, the system would generate an equivalent single that was just slightly less. The object was to discount the return, but not one-way trips.
This is the situation facing Eurostar today, Mark Smith points out, where a cheap return rate is needed to encourage Brits to go for the weekend, but Americans going one-way to the Continent are generally willing to pay more. Selling rail with that complexity through a self-service channel is a challenge (see panel, below right).
Assuming an average of five types of fare between the network’s 2,500+ stations, there are more than 30 million individual fares, presenting a huge task for pricing managers and database administrators to keep track of it all. The database structure largely derives from work carried out by BR in the 1980s to modernise and standardise fares for the introduction of APTIS (the Accountancy and Passenger Ticket Issuing System).
Formal regulation was abolished with the formation of the British Railways Board in 1962, but was revived at privatisation, with a schedule in each franchise agreement capping the prices of key fares on each route.
In addition, operators were required to participate in the Ticketing & Settlement Agreement (TSA) of 1995, which controlled the way fares were set, sold and honoured. It still does - the TSA has grown with each new franchise agreement, with very little discarded.
A landmark in the move towards smart ticketing was the establishment in 1998 of the Integrated Transport Smartcard Organisation (ITSO), with support from the DfT. It was created to “develop an open specification and standards so that smart ticketing could be used across different types of public transport and transport operators”. Smart technology has the potential to reduce transaction and administrative costs.
As originally envisaged within the TSA mechanism, TOCs would co-ordinate with each other on fares to ensure the maintenance of a rational national structure. However, the advent of the Competition Act in 1998 effectively outlawed this and resulted in ever greater anomalies and conflicts in fares.
A Strategic Rail Authority review in 2003 simplified the regulatory structure to some degree. However, it also enacted a change in policy whereby regulated fares moved from being adjusted on average by RPI -1% to RPI +1%.
The original regulation had been put in place as a public sweetener for privatisation, but the Treasury had grown alarmed at the increasing public subsidy that this required. The move to RPI+1% heralded a decade of above-inflation increases that became increasingly toxic and inhibited open debate about fares reform.
The case for fares reform
The railways (and the world) are in a very different place from 1993, when the Railways Act set out the considerations for the franchising authority to determine “rail fares are reasonable”. It upheld the ‘interests’ of rail users and protected them through ticketing, but it made no mention of any wider considerations such as growing rail’s modal share to reduce pollution or carbon.
It is therefore pertinent, in considering what a fares structure created on a blank sheet might look like, to ask such fundamental questions as:
■ What do we want the railways to do - for the economy, society, and the environment?
■ What are the strategic objectives? To maximise revenue or volume?
The answers to those questions will inform fares policy and influence judgements over the ratio of industry costs borne by passengers and taxpayers.
Since 2004, it has been government policy to make passengers pay a higher share of the costs of running the railways, while freezing fuel duty for motorists since March 2011 at an annual cost to the Treasury of about £9bn a year (according to the Institute for Fiscal Studies and amounting to over £100bn).
Assuming a usable timetable, the cost of fares is the most significant influence on the number of passengers and revenue. Railways have high fixed operating costs, and it is much easier to defray them by increasing revenue than by trimming costs, even though there is great scope for reducing maintenance and renewals costs.
The sources of frustration and confusion with fares are well known: the sheer number of options; anomalies such as two singles being cheaper than a return; the saving that can be achieved by split ticketing; regional discrepancies; varying peak hours; and conditions attached to tickets.
The degree of confusion and complexity is writ large in the cases cited by Barry Doe in RAIL, where passengers have been wrongly denied access to a particular train through platform staff’s ignorance of the regulations.
It was to address these shortcomings that the Rail Delivery Group worked with Transport Focus to produce Easier fares for all: The Rail Delivery Group’s proposal for a more transparent, simpler to use, modern system of tickets and fares. After consulting over 20,000 people and 60 groups representing nearly 300,000 organisations, 84% said the current system was not fit for purpose.
New ticket structure
Word has it that the DfT and Treasury are considering gradualist tinkering. But the RDG and others have advocated a more radical approach at this watershed moment in Britain’s railways.
“We need a new fares structure to make it understandable, and a new internally consistent pricing structure so that split ticketing opportunities are no longer endemic,” says Mark Smith.
“This should eliminate anomalies where A-B + B-C is cheaper than A-C for a given ticket type, although it will be hard to eliminate split ticketing entirely. You will still have situations where instead of a peak fare for the whole journey, you buy a peak ticket to the point when the train becomes off-peak and an off-peak ticket beyond.
“But by starting again with logical and consistent pricing, you can reduce the prevalence of split ticketing which is even being offered by retailers such as Trainline, and which undermines consumer trust.”
The RDG has set out five principles for ticket reform:
■ Value for money - and transparency over the fare and what it has bought.
■ Fair pricing - and certainty that they are not being overcharged.
■ Simplicity - making buying simple and easy to find the right fare while retaining choice.
■ Flexibility - the ability to tailor fares to meet individual needs.
■ Assurance - clear, effective, transparent regulation to protect rights.
These principles informed the RDG’s proposals and were intended “to create a system that reflects how commuters, business and leisure customers travel today. One which makes the most of technology while maintaining discounts, looking after all groups of society and preserving regulatory protections for customers.”
On one element, there seems to be general consensus: that single-leg ticketing should be the bedrock of a new pricing structure, along with “algorithmic rules underpinned by regulation to allow and encourage the best combinations of single-leg fares for return, through (allowing travel from any point on the network to another regardless of operator) and multi-journey tickets”, according to the RDG.
One caveat is the potential for some loss of flexibility. The outward leg of an open return ticket is valid on the day of issue only, but the return is valid for a month, so passengers will need reminding not to buy until the date of return is known.
An alternative is to create returns at twice the one-way rate, so that on longer distances people going both ways can come back on any day within a month, rather than sell two one-ways which are only valid on the day they’re booked for.
Although the quest for ‘simplification’ means different things to different people, Mark Smith says there is scope “to throw out routes that serve no purpose - redundant legacies of inter-operator ORCATS ‘raids’ by which fares were set by one operator solely to gain revenue from another operator without any obvious passenger benefit - but keep in desirable options such as London-Birmingham via High Wycombe, for example”.
Ian Legg cites Brighton fares and the shadow of three operators. He agrees that the obligation to show everything in the interests of impartiality and the multiplicity of offers and concessions have helped to drive perceptions of complexity.
However, he adds: “We have very limited restrictions in Britain. In Germany, for example, you cannot use inter-city trains with a local ticket, whereas Leeds commuters are free to use a London train as far as Doncaster, or wherever, perhaps occupying a seat instead of someone travelling to the capital.”
Prices based to varying degrees on distance have been a feature since the 1830s, but the rate varies according to the area. Mark Smith suggests basing peak and off-peak fares on distance to create an internally consistent structure, but using a different rate per mile for each service group to reflect current differences in average price levels - London commuter, Wales rural, inter-city, and so on.
“Where there are two routes to a destination and we want both to be valid, prices may need finessing to make sure that the penultimate stations on those routes don’t throw up anomalous fares. As always with fares, the devil is in the detail,” he says.
Even though 9-to-5 commuting, with its relatively inelastic demand, is largely a thing of the past, some form of yield management is still required to smooth the peaks, maximise use of capacity, and improve the passenger experience by reducing overcrowding. Current regulations and extreme variations in price can lead to peak-hour trains being lightly loaded while the following off-peak trains are overcrowded.
How will yield management to maximise revenue work under NRCs?
If the revenue does not flow to the operator, what incentive would there be to fill empty seats when we know that performance suffers with full trains? Will regional pricing managers have delegated authority to set fares, as now with prices based on the lead operator?
As Ian Legg argues, the best customer focus is when delivery is at a local level, using local knowledge to refine the price point for the area’s circumstances.
As the RDG puts it, the new structure will have to accommodate “discounted, premium, train-specific and personalised variations of these fares - for example, charging less at quieter periods, more for First Class, less for reduced flexibility, and so on”.
The RDG proposes replacing existing fares regulation with a new set of regulations covering such elements as price capping and reducing ‘price cliffs’ between peak and off-peak periods - recognising that modern digital technology can manage demand much better (as well as constructing itineraries far more complex) than a booking clerk with a manual and a piece of paper, especially for journeys that are A-B and B-C.
The structure must allow for the co-ordination of train fares with other public transport systems, to reflect the policies of devolved local and regional authorities (this is currently difficult because rail fares are set under different national rules from local travel schemes).
Besides encouraging multi-modal journeys, local authorities need to be involved with setting fares and deciding on the balance of transport funding between fare payers and local taxpayers, requiring a system that can accommodate plural funding.
Card or contactless ticketing is ideal for urban areas where the highest-capped fare is not going to break the bank. The same is not true for long-distance journeys, where passengers need to know exactly what they will be charged before swiping in.
To protect affordable access to long-distance fares, in particular, RDG proposes some regulation of the overall level of revenue that can be raised. Nor can contactless cards store such levels of information as seat reservations and First Class tickets. The process of buying tickets has to provide a clear set of options and information about restrictions applying to certain tickets.
The smart ticketing technology favoured by 90% of RDG respondents could incorporate discounts and entitlements - including railcards, loyalty rewards, and even personal preferences (window, table, forward-/backward-facing seat) - when making a reservation. It would provide assurance that passengers were being given the best value fare. The system also needs to accept late changes to travel plans (already possible with some operators up to 1800 on the day before travel).
Transport Focus Chief Executive Anthony Smith argues that a priority must be a multi-modal capped zonal system for all urban areas, for which funding has been earmarked.
“On longer-distance journeys, single-leg pricing will allow passengers to mix and match advance and flexible fares, as well as Standard and First Class - more choice should be possible,” he says.
“However, it is important to preserve a walk-up railway. Great frequencies should be matched by the ability to pretty much turn up and go.”
Mark Smith would go for all one-way, Anytime, Off-Peak and Advance, and sees no reason to change the terminology: “This enables open jaw and circular journeys without the current penalty. It also mirrors the pricing structure of the main competitor, car, and for that matter, air. A one-way structure is far, far easier to present and sell online and on ticket machines.”
He points to a need to stop the choice of fare on the return influencing the choice of outward train.
“You find an outward advance fare at 1800, but there are no advance fares left and you’re not sure when you’re coming back, so you choose an off-peak fare. You’re now paying only £1 less for the return than an off-peak return, so you may as well pay an extra £1 for an off-peak return, but then you can’t use the 1800.
“The choice of fare has changed your travel time, and you wonder why the 1800 goes out with empty seats and the next train is packed. It’s better to mix and match, so the new system needs to display them separately and allow a clear decision.”
Railcards have generally been considered ‘a good thing’. But Mark Smith questions the principle of a general railcard that gives a discount to regular users and denies a discount to the one-off user, when commercially one should do opposite.
“Why not just lower fares? In Germany and Austria, children under 16 travel free with an adult and the best fare is always shown upfront, like the airlines. Although a Family railcard can be paid for in one trip, a sale can be lost unless someone is aware of Family card.”
Creating the new structure is going to require specialised IT expertise, coupled with experience of fares and pricing. Three years ago, BR Fares Ltd warned that privatisation had led to a loss of corporate memory through the dispersal of this experience and knowledge, so the formation of a competent team to devise and manage change is essential.
Continental prices and initiatives
On the continent, there are two distinct pricing approaches. The French, Italians and Spanish price the train with compulsory seat reservation on inter-city trains, and fares are added so that a journey by TGV + TGV + regional train will be the sum of those trains. Changing trains often leads to a higher cost than a direct train.
The German, Swiss, Austrian, Benelux and British way is to price the journey, and not the train.
Mark Smith explains: “Paris-Munich starts at 39.90 euros [£34.50] on both systems using the once-daily direct train. On departures with a change at Stuttgart, the Germans can still sell a ticket at 39.90 euros, while the French sell you a ticket for the Paris-Stuttgart train (which also starts at 39.90 euros) plus a separate ticket for the onward train at extra cost. The French can’t access German fares, so they sell you a TGV ticket at about 50 euros for Stuttgart-Munich.
“This raises the question: should long-distance train reservation be obligatory?
At the moment, UK fares regulation preserves walk-on travel. Some say a compulsory seat reservation system gives everyone a seat, but it doesn’t. If 310 people want to travel on a train with only 300 seats, ten people get left behind.
The British system gives the certainty that you can get home, but then you risk complaints about overcrowding. And the operator can sell only a proportion of the train, to leave some capacity for those who turn up on the day.”
Anthony Smith sees the affordable walk-up railway as one of its key selling points, so argues strongly against a reservation-only system.
Post-pandemic, the greatest single challenge for railways across the world is increasing revenue, so it is instructive to look at what continental railways and governments are doing to increase ticket revenue and address wider societal challenges.
In Germany, a ‘9 for 90’ ticket was created for the three months from June to the end of August, allowing unlimited travel on buses, trams, U-Bahn and regional trains (only a few IC trains are permitted) across the whole country for 9 euros per month, budgeted at 2.5bn euros (£2.16bn).
Launched on June 1, the ticket racked up 6.5 million sales in the first week and 31 million by the end of the month. This had the effect of increasing demand, and 250 additional daily trains were introduced to meet that demand - a small increase to the 22,000 daily regional train journeys.
In June, journeys were 42% higher than in June 2019 (pre-pandemic), and one in five purchasers were not previously regular users of public transport. Road traffic congestion was down in 23 of the 26 cities studied, with congestion in Hamburg down by 20%.
However, the German government simultaneously spent 7.6bn euros (£6.6bn) reducing motoring fuel taxes - a counter-productive measure on several fronts and undermining DB’s ‘Strong Rail’ targets to reduce car trips by five million and domestic flights by 14,000 each day.
Some politicians called for the ‘9 for 90’ ticket to be extended until the end of the year, to be followed by a 365 euros (£315) annual public transport pass in 2023. Although this has been ruled out, the initiative has fuelled the debate over using fares to encourage sustainable travel choices.
Federal Transport Minister Volker Wissing said: “Many states didn’t want the ticket at all and now they don’t want to get rid of it.”
The Association of German Transport Companies (VDV) has proposed a 69 euros-a-month pass (£59.55), which it calculates would be financially sustainable. One proposal is to rename it the “climate ticket”.
The Irish government has implemented a 20% fares reduction across all public transport from May to the end of 2022, to help with the cost-of-living crisis and encourage more sustainable travel. Adults aged 19-24 receive a permanent 50% reduction. For various reasons, this age group is increasingly eschewing car ownership, so embedding public transport use is a long-term benefit.
In Spain, a 30% discount on national public transport was followed by a 50% discount on multi-trip tickets (not singles) from June on RENFE commuter and regional services of less than 300km (186 miles). The discount was raised to 100% until the end of the year, funded by a windfall tax on energy companies and banks.
Commentators observe that this is of use only if one’s local railway has a viable service. As in France, often local and regional lines in Spain have only three or four trains a day, in marked contrast to the countries’ high-speed lines.
In Austria, ÖBB and WESTbahn introduced summer tickets valid for 30 days for those aged under 20 and 20-26. Seat reservations were necessary for certain Friday-Sunday trains to avoid overcrowding.
Unlimited use cards
Best known is the Swiss General Abonnement (GA), which astonishingly dates back to 1898. It provides unlimited use of public transport over 99% of routes, at prices ranging from CHF 2,700-3,860 per annum (£2,383-£3,406). By 2019, half a million were in existence.
But the most radical is Austria’s KlimaTicket. Also known as the 1-2-3 ticket, it offers unlimited use of public transport across three areas: 1 euro per day in the state of residence; 2 euros a day for travel in two neighbouring states; or 3 euros per day - €1,095 (£945) for the year - to travel throughout Austria. For juniors and seniors, the annual pass is 821 euros (£708). A 110 euros family supplement allows up to four children between the ages of six and 15 to travel with you.
Federal funds make up the difference between cost and receipts from sale of the pass. The costs are based on data from transport companies which they are required to supply, with different rates of compensation for commercial services and those operated under public services obligation. Safeguards prevent over-compensation.
The plan anticipated sales of 110,000 in the first year. In fact, 180,000 have been sold and anecdotal evidence suggests modal switch to the extent that some trains have become overcrowded, although this is also due to late delivery of new trains. Passenger numbers in May 2022 were 15% higher than the all-time high in 2019.
The real value of unlimited travel cards is that it reduces the marginal cost of using public transport to zero, creating a huge advantage over the car.
As does entirely free public transport, although the only country to have taken that bold step is Luxembourg, and its wealth and limited geography have much to do with that.
So too does the fact that fares previously covered less than 10% of the operating costs, making the bill for free transport a modest 41 million euros (£35.4m). An unintended consequence is that people are less inclined to walk or cycle.
Time for action
All this will be academic unless the Government stops fiddling while the world burns and realises the multiple wins that fares reform would achieve.
Unless government stops seeing the railways as a cost, and instead properly recognises the potential for higher revenue and the varied benefits that follow from their greater use, fares reform that would increase use is unlikely to happen.
The Government says one thing but implements measures that take us in the opposite direction. Its Decarbonising Transport plan of 2021 says that public transport should be the cheapest and most attractive option and cheaper relative to car usage than it is now.
But while rail fares have constantly risen by more than the rate of inflation, freezes in fuel duty since 2011 have led to 5% more traffic, five million additional tonnes of CO2, a quarter of a billion fewer bus journeys, and 75 million fewer rail journeys, according to Greener Journeys CEO Claire Haigh.
The current structure, coupled with the perception of fares as expensive, fosters inefficiency. It cannot make sense that a ScotRail seat is unoccupied for 75% of the time.
Given elasticity of demand, there is a strong argument that filling the millions of empty seats through lower fares could actually increase revenue. Lower fares would also ease the cost-of-living crisis, help revive urban centres, and could be part of levelling up.
Silviya Barrett, Head of Policy and Research at the Campaign for Better Transport, argues: “A fare freeze next year could actually boost income by attracting more passengers, and could be paid for by a tax on domestic kerosene which would also help make inter-city train travel more comparable with domestic flights.”
Part of the problem in convincing the Treasury of the case for a new approach to fares and wider transport funding is that the benefits of modal shift to rail are often hard to quantify.
The Government’s own figures suggest that the annual cost of pollution to the NHS by 2035 could reach £18.6bn if current air pollution levels persist, but that figure will be dwarfed by the costs attached to climate change.
As Dr Fredi Otto of Imperial College London has said: “The impacts are so much more expensive than anything we would do to mitigate them.”
A visionary government would look at the other benefits of reduced traffic, such as reduced road expenditure, fewer deaths and injuries, more liveable and sociable urban areas, and improved mental and physical health through the active travel that usually accompanies use of public transport (the World Health Organisation warns that on current trends, the UK will have the worst rates of obesity in Europe by 2035).
A ruling by the High Court in July found that the Government’s climate change strategy lacked any explanation or quantification of how it would achieve the emissions target. It ordered the Department for Business, Energy and Industrial Strategy to present a report providing that clarification to Parliament by April 2023.
Fares reform could play a part in helping to achieve those legally binding targets.
■ The writer would like to thank Silviya Barrett, Ian Legg, Alice Ridley, Anthony Smith, Mark Smith and Andy Wakeford for their contributions to this article.
