INTRO: Carrying commuters and inter-city passengers as a profitable venture looked all but impossible 30 years ago, but several companies are committed to achieving it in this decade. Chris Green spelled out to Richard Hope the conditions for success
BACK IN THE 1960s, when motorway construction was at full throttle throughout the developed world, it was widely believed that the passenger train was destined to follow the stagecoach into oblivion. When this did not happen, governments became resigned to the idea that they would only survive with a drip-feed of subsidy. This revenue shortfall certainly applied to renewal of infrastructure, if not to day-to-day operations, except for odd exceptions like the Tokaido shinkansen opened in 1964.
As we enter a new millennium, this doctrine is being seriously challenged - and not just in Japan where rail’s market share is over 30% and many private companies already operate profitably. No fewer than 10 of the 25 franchises to operate former British Rail services require subsidy to be eliminated in the final years, with most of those paying a premium back to government. The 10 are equally split between BR’s former InterCity and Network SouthEast business sectors.
As Fig 1 shows, by far the largest premium was offered by Virgin for West Coast Trains, which operates all inter-city trains out of London Euston. Virgin also secured CrossCountry, which is due to pay a small premium. Both franchises are for 15 years, with the entire fleet of trains due to be replaced over the next three years. Responsibility for managing both franchises was assumed on February 22 1999 by Chris Green, Chief Executive of Virgin Trains.
Does this prove that both inter-city and commuter routes elsewhere can be profitable, given that UK franchisees must meet in full the cost of maintaining and renewing the Railtrack infrastructure?
’It looks as though it is only possible in certain circumstances’, Green cautions. ’There has to be a strong political will that passenger services should be profitable, and that the user should pay 100% of infrastructure costs - which he wouldn’t be doing on the roads.
’Being realistic, we are talking about busy routes between cities about 2 to 3hours apart, which probably limits it to a small number of routes in the world. One of them is Paris - Lyon, which is probably covering its full infrastructure costs now. Eurostar is nowhere near yet, and none of Britain’s three principal InterCity routes - Great Western, East Coast and West Coast - covers its full costs today, although West Coast should do so in 2003.’
Challenged on the 3h ceiling, he admits ’we were debating within Virgin the other day whether it is becoming 4h. In the early 1980s the ceiling was perhaps 21/2 h, but as we turn the century it does look as though it is moving above 3h, as motorway congestion worsens.’
BR claimed that InterCity was profitable in the late 1980s, so what has changed? ’I think the user wasn’t paying to replace the assets, so at the end of the day the government did come in with the occasional capital windfall, such as the 1984-91 East Coast modernisation. Virgin has had to raise £4bn from the private market. This replaces all our trains as well as funding [through higher access charges paid to Railtrack] a huge infrastructure upgrade on West Coast routes and, to a smaller extent, for CrossCountry.
’Remember, Virgin has to get its money back by 2012 while paying premiums back to government totalling £1·6bn between 2003 and the end of the two franchises.’ And is Virgin on course to achieve that? ’Almost exactly’ is the confident reply.
Can commuters pay in full?
Between 1986 and 1992 Chris Green ran Network SouthEast, one of the world’s largest commuter operations covering a radius of approximately 130 km from London. Aided by a booming economy, he saw traffic hit a 30 year peak in 1988-89. But was NSE profitable then?
’There was a time when we thought we might get NSE out of subsidy, at least to break-even on the current rules of the game which probably didn’t cover the full costs of renewing assets over time. Then the economy turned down. My guess is that in very big cities like London and Paris you might just break even on the good cycle; at the bottom you have no hope because you can’t carry commuters if they haven’t got jobs. With inter-city you can encourage people with low fares; on a commuter route you’ve really had it if the economy drops.’
So what about the five former NSE franchises which are committed to eliminating subsidy? ’If London really has some commuter routes that break even through good times and bad, I would have thought we’ve got a world first on our hands. If we look at CityRail’s 1000 km commuter network around Sydney in Australia, with which I am familiar, very good use is being made of the service and there is a good level of investment, but there is absolutely no question of doing without subsidy.
’The attempt to drive commuter routes into profit is a political decision, at the end of the day. Some cities have gone too far the other way with only 25% of costs covered by fares. Most countries seem to have settled around 50% for urban routes.’
Yet the Thameslink franchise running north - south through London must pay a premium exceeding £16m this year, rising to £30m in 2003-04, and most of the £800m project to expand capacity by 2007 would be privately funded out of franchisees’ future profits. How is this possible if commuter trains are unprofitable?
’If you were planning the ideal commuter route you would have a large city like London in the middle, and large towns like Bedford and Brighton at opposite ends. It is a mini inter-city line with three nodal points and two airports at Gatwick and Luton, where a new station opened on November 21. It is also exceptionally fast north of London where 160 km/h running is normal. Thameslink seems to be telling us that users will pay the full cost in circumstances where rail has a large advantage in journey time, or the roads are spectacularly congested.’
Presumably, similar principles apply to potentially profitable inter-city routes? ’It’s all about having large cities around 2h apart at the ends of lines to generate two-way peak flows. Washington - New York comes to mind, and certainly London - Manchester where Virgin still has a third of the market despite the motorway and infrastructure that is over 30 years old.
’But trains have got to be fast, and you must have modern infrastructure to be able to move fast. The Germans say the train must be twice as fast as the car to compete, and there is some truth in that. I do worry about Boston - New York, where the speed may not be high enough.’
Get the structure right
With Gatwick Express and Thameslink paying the government £26m this year for the privilege of carrying passengers profitably, does this mean the British got it right after all? There is great interest in what has happened in the UK.
’They don’t actually copy it, mind you! I think the UK experience shows we have fragmented far too much. Railways are natural units. I’m not saying BR was a natural unit, but I think you do have to discover what they are. The 750V third-rail network south of the Thames that we once called the Southern Railway is a natural unit. And it’s much easier to manage and market something if you have a command structure, which can still be privately owned.
’The InterCity routes individually no doubt would be fine and could have been privatised separately, with their track. Having over 110 companies formerly within BR and now held together by contracts has not proved to be a manageable framework, and we are beginning to pay the price now in fragmented performance.
’Take Leeds, for example, one of the few places where Railtrack is providing more capacity. There is still no agreement on who is going to pay for it, and we’re going to get more cases where it may be sense in total for investment to be made, but every single party has got to agree to play.
’CrossCountry’s major timetable changes, which cover the whole country and come into effect in May 2001, involved us in negotiation with 17 other train companies, six Railtrack zones, and over 100 local authorities. Virgin spent 18 months negotiating. Any one of the train operators could have said "no, we are going to stand by our contracted rights".
’In a command structure railway, these long-distance trains would have been treated as Class 1 and given more priority. It is not by chance that CrossCountry is bottom of the punctuality league table. In other people’s territory, CrossCountry tends to get second best at every junction and every station. What we learn from that is it’s very hard to run national services if the railway is fragmented.’
Surely it isn’t all bad news? ’Whatever anyone says about the British model and its weaknesses and fragmentation, it has been a roaring success in delivering private funding. There is no way I would have got £4bn out of the Treasury for a nationalised industry to replace every train Virgin possesses, and upgrade the track for 225 km/h. Thameslink’s £800m upgrade looks like happening in the private sector when it didn’t in the nationalised mould. BAA paid for Heathrow Express.
’So from the private funding point of view I think we shall come to look at the British privatisation as a financial success, and that would include freight.’
Franchise or contract?
In North America, commuter services are frequently provided by an operator such as Amtrak under a contract which defines in detail the timetable and fares to be charged. Investment is funded directly by the regional passenger transport authority. Might this work better than franchising?
’My preference would be for franchised services. It starts with healthy competitive bidding, it can be of variable length, and it allows the franchisee to be creative. With franchising, you simply say what outputs you want. A contractor by contrast has to deliver precisely to the specification, which is hands-on, painting by numbers. I don’t think many lively managers would want to work in that atmosphere for long.
’Franchising in Britain has been a success, I would suggest. The length of the franchise is still an issue; it does seem that if you want more private investment they should run for 15 to 20 years. But if you have a franchise where no investment is needed, you might as well have a short one and encourage competition when it is rebid.
’The only downside, which applies to contracts as well, is the problem of why anybody should make the effort to improve in the last two or three years. Sir Alastair Morton and his Strategic Rail Authority are wrestling with that problem (RG 12.99 p791). His option is to say "don’t sit and sulk, come and renegotiate early", which I think is excellent.’
Walk-on or yield management?
The government’s stated objective is to get people out of their cars and on to trains, yet subsidy is declining and walk-on standard fares are rising fast - up 45% in three years on some Virgin routes. How can these conflicting objectives be reconciled?
’In Britain, the Treasury got in first, so privatisation was driven by who would bid for the lowest subsidy. It is quite clear that the passenger is going to have to pay more, it is arithmetically inevitable.
’The good news is that we also have the cheapest fares since the Second World War which are aimed at filling spare seats, so we can have it both ways. If people are willing to be patient and book in advance, there are some amazing bargains.’
Well and good, but is it prudent to sacrifice the freedom to walk on to trains on the altar of yield management? ’I think walk-on has got to stay because it is such a natural advantage of the train. It is the one form of public transport where you can board at the last moment and still be conveyed safely, albeit standing up as one does on the Underground every day.
’I almost never booked a seat, so I represent walk-on. My father wouldn’t dream of travelling without reserving. So we’re trying to get into two different markets at the same time. But you can’t have spare £11m trains on tap for walk-on passengers, those days have gone. You’ll see us increasingly encouraging people to book in advance and take the cash benefit, while walk-on becomes a more expensive option with the risk that there won’t be a seat.’
Originally, open access and on-rail competition between rival train operators lay at the heart of the previous government’s plans for the privatised railway. By definition, these were to be unsubsidised operations. Has that influenced the commercial policies of franchisees?
’I think opportunities for open access are limited - we can’t pretend railways and motorways are the same. We’ve got a very congested network where capacity is at a premium. It’s most unlikely that there are going to be a lot of spare paths where people want them, or a lot of big markets that haven’t been tapped. The only big market that comes to mind is London’s Heathrow airport. There is scope to exploit that with direct inter-city services, but the need to construct links north and south makes it very expensive.
’We do face competition at the margin, especially on price. There are two routes from London to Birmingham, cities which are 180 km apart. Virgin dominates this market, but two commuter operators, Silverlink and Chiltern, have stretched tentacles north and offer slower services at lower prices. Chiltern is on a different secondary route tapping a different market, and has been quite successful.’
Japan’s shinkansen and Spain’s AVE, both isolated by track gauge from contamination by national networks, achieve average delays measured in a few seconds. Only 85% of Virgin’s West Coast trains reached their destinations less than 10min late in the year to October 1999.
’West Coast is going to achieve segregation - isn’t it?’, Green asks, as if seeking reassurance. ’We achieve it by limiting the Fast lines to 225 km/h tilting trains.’ Well, not exactly, given that further down the route Virgin’s services will have to mix in with local trains and freight on significant lengths of double track, as well as sharing congested stations like Birmingham New Street.
The alternative is to strive for Japanese standards. ’Our Operations Director, Chris Tibbetts, is in Japan as we talk. His mission is to find out how we can bring ourselves close to Japanese reliability on the West Coast Main Line. They have invested a lot more money in reliable trains; signalling is duplicated with more redundancy, and they have a lot of staff available to deal quickly with points, signalling and traction failures.
’We shall have to match that culture on the WCML. If we are going to have 225 km/h trains running at 4min intervals for 16hours a day, we can’t afford disruption. Our train contractors and Railtrack’s track, signalling and overhead line contractors all need to be in that culture before it will work. Virgin is planning to do 225 km/h all the way to Glasgow, and you will see the East Coast and Great Western go the same way.
’My long-term vision is to go further. I still believe there is a place for a new railway down the spine of Britain. There will not ultimately be enough room on the existing railway for passengers and freight to expand in the way we and the government want them to.’
As Chief Executive of Virgin Trains, Chris Green assumed responsibility last February for Britain’s West Coast and CrossCountry franchises carrying 35 million passengers a year with a combined turnover of £450m. He gained worldwide experience as Director of Gibb Rail after 30 years with British Rail during which he headed up in succession the Network SouthEast and InterCity businesses
CAPTION: Fig 1. Virgin Trains is committed to pay over £1bn in premiums to the British government as investment in new rolling stock and route upgrading pushes its two franchises into profit
CAPTION: Passenger traffic can be profitable where large cities around 2h apart generate two-way peak flows, such as Amtrak’s Northeast Corridor between Washington DC, Philadelphia, New York and Boston
CAPTION: SNCF’s original Paris - Lyon TGV route was Europe’s first modern railway to cover its full infrastructure costs and move into profitable operation
CAPTION: Operating standards on the Japanese shinkansen are second to none. ’Our Operations Director, Chris Tibbetts, is in Japan as we talk. His mission is to find out how we can bring ourselves close to Japanese reliability on the West Coast Main Line’
[summaries in French, German & Spanish]
Passenger trains can be a profitable business
Prospects for carrying commuters and inter-city passengers as a privately-funded profitable business venture looked all but impossible 30 years ago. With increasing road congestion, running passenger trains for profit after covering the full cost of investment in upgrading infrastructure is once again considered possible. Several companies holding franchises in Britain are committed to achieving that objective in this decade. Chris Green, Chief Executive of Virgin Trains, spelled out to Richard Hope the conditions for success.
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