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Open access can replace long-distance franchises

31 Oct 2015 | by Nick Brooks

Earlier this year the UK’s Competition & Markets Authority launched a consultation looking at how greater competition might be introduced on the British network. Nick Brooks responds by arguing for a licensing approach that would allow the open access model to replace franchising on inter-city routes.

On July 17 2015, Britain’s Competition & Markets Authority issued a policy statement arguing that on-rail competition between rail operators ‘would result in benefits for passengers and taxpayers, including a downward pressure to fares and enhanced service quality’. CMA began an industry consultation on four possible options to increase such competition for the British long-distance passenger market, with feedback having been due by October 16.

The four options are:

  • maintain the existing market structure but with increased open access operations;
  • introduce two franchisees for each franchise;
  • introduce more overlapping franchises;
  • license multiple open-access operators.

In my opinion, any such market intervention should aspire to meet three key goals: first, get travellers off the roads; second, to provide attractive and affordable services; and third, to reduce the burden on the taxpayer.

Of the four options outlined by CMA, my preference is certainly for the fourth. But the licensing of multiple open-access operators is only likely to be viable if it were introduced in combination with innovations in retail, ticket types and fares.

Over the past decade, British open access operators have demonstrated that they can operate long-distance passenger services more efficiently than franchised operators. CMA’s econometric analysis concluded that there is ‘lower overall cost if services are switched to open access from the (franchised) incumbent, even though the incumbent loses scale and density benefits from becoming smaller’.

This calls into question the need for the franchised model in the long-distance sector. Instead, multiple open access operators should be able to compete on the same tracks under licences allocated fairly by a neutral body. This would ensure at least two licences for each inter-city flow. Popular routes, such as the East Coast Main Line between London and Edinburgh, could have multiple operators, each with a smaller bundle of services, around the size of the present open-access operators, Grand Central and First Hull Trains.

Licensing and subsidy

Operators would then receive licences to run services, paying track access charges that reflect the fixed and variable costs of the infrastructure. With every licence, the operator would also commit to run a number of unprofitable, subsidised services. The general idea is that profitable services help to cross-finance the loss-making ones.

Some licensed service groups would still need a subsidy. The biggest change is that there should be on-rail competition on all routes, including those that lose money. Not all of these can be cross-subsidised by profitable services; some licences would still need help from the taxpayer. However, evidence suggests that competition could bring down prices, increase passenger volumes and then reduce the level of that subsidy over time.

If a non-subsidised service does not perform, the operator should have the flexibility to withdraw it, giving a notice period similar to that seen in the long-distance bus and airline sectors. If a route performs well, then a neutral track access mechanism could allocate more paths, within the given infrastructure constraints.

Any ‘multi-licence’ reform would need to be accompanied by quite substantial innovation in the rail retail environment, which after all is the bedrock to attract passengers to the railway.

For a start, there should be no upper or lower limit on prices. Passengers should pay more for travelling during very busy periods, thereby addressing overcrowding problems (and generating more profit to cross-subsidise weaker services). During off-peak hours, discounted prices would lure budget travellers off the roads. On subsidised services, the aim should be to fill every seat (without overcrowding).

Split ticketing of advance, train-specific fares across different operators should be welcomed. If a connecting service is missed (due to a delay with the first operator), passengers should be able to travel on the following service. This way, the network can benefit all travellers, not merely those holding the most flexible ‘anytime’ tickets.

Such dedicated fares should be available until departure. While some passengers value the flexibility to change their plans, the railway industry should move away from the mindset that last-minute tickets must always be expensive. In off-peak hours, cheaper last-minute fares could lure people that use road transport or do not travel at all.

Passengers that want to ‘turn up and go’ should be able to purchase dedicated fares until shortly before the time of departure, either at stations or with contactless payment tools. To allocate revenue correctly, contactless validators could be located onboard trains.

Later this year, CMA will make a recommendation on which of its four options it thinks should be pursued. I am convinced that licensing multiple operators would offer the most potential for truly transformative change.

  • Based in Hannover, Nick Brooks is a passenger rail consultant and an advocate of more on-rail competition. He was Head of Sales at German long-distance passenger operator HKX from 2011 to 2014.