Rail fares - the perpetual search for perfection

I first wrote this blog in 2018 when Rail Delivery Group (RDG) announced?a consultation ?into making fares simpler, integrated and personalised. Very little has changed to the rail fares structure since then, but the market context and industry structure has changed significantly, so I’ve done a 2022 update.

I’ve been selling train tickets for most of the last 20 years, and had a lot of first-hand customer feedback in that time. I’ve also worked with operators and local authorities on fares policy. So, it’s a topic I feel compelled to opine upon, despite knowing it’s a can of worms that’s best kept quiet about!

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, and the trade-offs and compromises often poorly understood.

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 pursued just one objective: it tied this year’s fares to last. This helps ensure that those that could afford to travel last year, can still afford to travel this year.?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 could use fares to stimulate economic growth; address social (im)mobility; drive behavioural change and modal mix; whilst being simple and fair for end users.

How does it work today?

At present rail fares broadly fall into 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+1%.?Unregulated fares can be priced commercially by the train company. The nature of franchises incentivised operators to maximise their own revenue, which meant in practice unregulated fares were priced to achieve that objective.?

This encouraged some behaviour that benefited customers (e.g. offering discounted fares to fill empty seats), but may also have encouraged less beneficial behaviour such as pricing-up inelastic markets.?As train operators were specifically incentivised to maximise their own income (as opposed to that of the rail network as a whole), it also encouraged operators to 'poach' customers from other operators by creating products that were only valid on their own trains.

Combine that with outdated regulation, and you get a complex mess of different products and restrictions.?For 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 talk of a desire to simplify fares.

I’ve facetiously suggested that objective is very simple to achieve: a flat ￡10 fare regardless of journey type or length would be about as simple as it could get.

However, it would obviously create all sorts of new problems: overcrowding, under-utilisation, price short journeys off the railways, and no-doubt create an even bigger 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 taxpayer/fare payer balance

The capacity conundrum

Whilst simplicity is talked about a lot, the capacity conundrum is often hastily parked in the too difficult bucket.

A fundamental question is whether high prices should be used as a tool to constrain demand to match available capacity? If not, is there a commitment to invest in providing whatever capacity is required? Or a tolerance of whatever overcrowding results?

Many peak-time trains, particularly long-distance, feel uncomfortably expensive, and the preserve of those able to claim expenses or command high salaries. Nonetheless, these services were generally full prior to Covid. It’s unavoidable that reducing fares would increase demand, and the calls to reduce peak-time fares are rarely accompanied by any explanation of how to square this conundrum.

Many of the railway’s costs are driven by peak demand. This determines the size of fleets, the length and number of platforms, and the investment in infrastructure capacity schemes. Therefore, a railway that spreads its demand as evenly as possible over the day is more cost effective than one with significant peaks and troughs.

That’s little comfort, however, for the passenger that needs to travel from Manchester to London at peak time for a hospital appointment. But perhaps addressing such needs by exception could be more deliverable than removing the price premium for peak-time travel altogether.

Price each journey according to demand?

Some people advocate a structure where every journey is priced dynamically 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 how many airlines work and how many longer distance rail fares are already priced.

A key problem though, is that whilst many people have flexibility regarding time of travel, for some needs and vocations, this isn’t an option. Also, if prices are changed frequently based on latest demand, then some 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.

Pre-booking required?

During Covid some operators made it a requirement to pre-book for specific trains to avoid overcrowding. This was met by a huge campaign from some parts of the industry to ensure this did not persist after Covid, and to preserve the walk-up railway.

I think this binary thinking may be somewhat misguided. Clearly for large parts of the rail network, ‘turn up and go’ is absolutely the right model, but in other parts it can be deeply unpleasant. The battle of who is quickest to run to the platform, and who has strongest elbows to force their way onto the train isn’t the right way to allocate finite capacity either. We need to evolve expectations so that a family of four doesn’t turn up at Kings Cross without reservations expecting to sit together (or to sit at all) for a trip to Edinburgh in August.

The pre-booking requirements of the Covid era seem to have softened opinions in many areas, with many people admitting to preferring the inflexibility of pre-booking activities and venues, to the stress and uncertainty of not knowing if there will be space on the day.

Economic and social considerations

Fares policy can have large economic and social impacts.

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 places to do business. Whilst projects such as 'Northern Powerhouse' rail talk about the need for faster, more frequent services, inappropriate fares structures could hinder the potential benefits of these schemes.

Fares can be a big driver for the leisure economy too, encouraging people to make discretionary day trips and short breaks. But seemingly benign fares features can have undesirable impacts. For example, return fares that allow an overnight stay are usually more expensive than ‘day returns’. People staying overnight are likely to contribute more to the economy through restaurants and hotels, but the fares structure encourages them to go straight back home.

These examples barely scratch the surface of the plethora of economic and social considerations which are largely overlooked by current fares regulation. As GBR starts to outline its case for fares reform, it may well benefit by painting a full economic picture, not just looking at the finances of the railway itself. ?

Fairness – back to pence per mile pricing?

Until the 1960s fares were based on distance. Focus groups often like the perceived ‘fairness’ of the concept.

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. Is Reading to London really comparable with Middlesbrough to Whitby? (the former having as many as 15 trains per hour with journey times from 25 minutes, the latter having 5 trains per day, each taking an hour and a half, with each having very different economic contexts).

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

And what about slower indirect routes? These would carry a premium due to having more track miles.

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

Abolish ‘Advance’ fares?

Advance fares are often the target of criticism. Few find it fair to pay ￡300 to sit next to someone who paid just ￡20.

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. These discretionary journeys have a wider economic impact as outlined above.

Contrary to the views of some, in my experience customers generally understand the value proposition of premium ‘Anytime’ tickets, and restricted ‘Advance’ tickets quite well. 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.

Season tickets, flexi-seasons and loyalty

Annual season tickets reward those with stable employment and upfront cash flow with cheaper fares. This cannot be the right way to incentivise and reward regular travel more generally. The "flexi-season" tickets introduced in response to Covid created yet another choice for customers, who need to decide up-front if they will travel on average less than twice a week (and buy day tickets), two or three days per week (flexi-season ticket) or four or more days per weeks (traditional season ticket). Neither concept addresses those that travel regularly, but to different places. The high uptake of digital tickets, should enable new ways to reward regular use for all.

However, Covid has highlighted a fear with such flexibility: A concern that flexible commuter products will further incentivise people to work in offices less, and hence harm city centre economies that rely on workers being in the office.

Affordability, taxpayer vs fare payer

The taxpayer vs fare payer debate is often presented as if the taxpayer gets nothing back in return for investing in public transport.

This goes right to the key political issue of what are railways for. Are they just a business providing a service that should aim to be profitable like any other business, or are they a service for public benefit? This is an area where I think the rail industry could do more to understand, quantify and articulate to others the wider benefits services bring. This should help mature the taxpayer vs fare payer debate beyond just one of political ideology. (It was nice to see Northern recently publishing their findings on this ).

The time is now

Fares reform has been something that the rail industry, politicians and passengers have wanted for years.

However, in addition to the complexities outlined here, it was further constrained by an industry structure where franchisees took the revenue through long-term contracts. Even relatively small changes, such as changing regulated fares increase from RPI+1% to RPI, would result in months of negotiated changes to franchise agreements. (Often impacting not just revenue, but second order impacts such as additional rolling stock to address the demand impact of the change).

Significant reform was virtually impossible to introduce quickly in the franchised structure. Now the revenue risk and opportunity sits with Government it finally makes this feasible to introduce.

And the need is more urgent than ever. All the pre-existing needs to reform fares still exist, but are now joined by the additional burning platform of attracting new patronage to replace those cohorts that have been permanently lost following Covid. Being perceived as complex, expensive and unfair cannot help attract new journeys.

The key risk as I see it now is the perpetual search for perfection. There is no perfect fares strategy, and there will be winners and losers. We need to understand the trade-offs and compromises, and make informed decisions on where the balance should be.

Some change will have undesired effects, but trying to address 100% of issues and address every niche will create complexity.

The time has come to get beyond soundbites and to get into mature debate about how to balance the competing objectives, and get a new fit for purpose fares strategy.

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About the author:

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