Is something not right in the world of premium franchising?

[AlistairW]

Being a self confessed avid rail enthusiast I have followed the goings on of the railways pretty much since Privatisation and also being a Business student in his final year I feel as though I have a reasonable understanding of the railway from a business perspective.

But with the most recent round of franchising now over (EMT, LM & AXC) and NXEC soon to be finalised the mind has begun to wonder at the comparisons between TOC’s.

I’m sure many will agree that TOC’s such as Northern are very hard pressed for money and since they took over the North of England in December 2004 the biggest spend they have been able to afford is leasing 30 x 158’s and making them look nice, which is fair play in my book.

But it’s the comparisons between examples such as EMT & FGW and the proposed NXEC franchise that I wonder at. All 3 of these franchises are big money earners and everybody in the industry knows it, even the government agrees and as we are aware all 3 of these franchises will be paying thousands and thousands of pounds of passengers money for the privilege of playing trains. So in come the bean counters (financial department).

A railway will attract a relatively stable number of passengers over the next 7/8 years and all suggestions assume the number of passengers will grow.

So assuming passenger numbers will grow the bean counters can work out how much money the franchise can make and they will make suggestions to management about how they can squeeze even more money out of the system. Studying FGW we can see the following suggestions were made:
a) A vast amount of money is lost through fines imposed from running trains late. How do you combat this? Well remove a carriage from your HST’s, this will allow them to keep time much better.
b) The buffet car is a loss maker cut this out and save money on staff
c) Rural services loose money, cut these back
d) Cleaning trains and general maintenance costs money, this can be cut back on
e) Maintenance costs money as does the up keep of depots, best close one

These are but a few of FGW’s cut backs, not mentioning the year on year fare hikes above inflation to help generate First Group more money and to be able to afford the large premium payments. Sadly this method of ‘cut back and tighten the belt’ seems to be the method for many companies in Britain of generating more money.

Looking at EMT’s quiet plans some seem along the same lines as FGW, even the DfT has admitted EMT do not have enough stock, they are also removing ALL the buffets and Hot Breakfasts from all their trains and replacing them with an ‘at seat trolley service’. There are no promises of extra stock and there basically seems that there will be very few benefits brought to the East Midlands, except of course, faster journey times between London and Sheffield and an additional train between Kettering and London.

I worry that EMT will follow the same lines as FGW, although a little more carefully so as not to upset the media or passengers and probably not as drastically as company policy at Stagecoach comes across as better than Firsts. But I’d be expecting above inflation fare hikes and a few corners to be cut.

Now take a look at NXEC, again they need to pay a large premium, and like FGW and EMT run services on some very busy routes, but their approach to a large premium has been different.
a) Faster journey times between London and Leeds, York and Edinburgh
b) Additional 2 hourly service to Lincoln
c) Additional 2 hourly service to London with improved frequency at smaller stations
d) Improved onboard services (Free Wi-Fi, retention of restaurant cars and updated catering.)

I am yet to hear of any short cuts on the NXEC franchise, whilst Stagecoach and First have been quick to jump to the challenge of cutting costs and fare hikes although both on routes where extra trains and services would have easily created additional revenue. 9 Coach HST’s? 14 Spare Adelante’s? 24 spare Wessex Sets? Large numbers of spare MK3’s 67’s and DVT’s?

Maybe I’m being a bit grumpy old man on this but I don't believe some franchises aren't planned out well enough to exploit markets and assets to the full.

Just thought I’d share this with the forums to see if it got any reaction.

Cheers,
Ali

[mattvince]

Most decisions were made as part of the bidding process - Franchise Commitments - and are based around the Service Level Commitment ('SLC' - new name for the Passenger Service Requirement). The SLC is set by the Department for Transport, and is the 'base case' on which all bidders are compared. IThe SLC specifies how many services should operate on each line, how often each station should be served, and maximum journey times. DfT can procure more services (above the SLC) should it be willing, but otherwise the SLC is the timetable specification, and any operation above SLC is at the operator's risk. As there is no reward for innovation in franchise bidding (the winner is chosen on their SLC-compliant bid, not their best alternative offer), you will see even more services operated at the minimum level to be compliant.

The Premiums are based on calculations made by lots of people with computer models (of the spreadsheet-macro-algorithm kind - not the ones here at UKTS...), who take the costs (stock, staffing, etc) of meeting the SLC and model it against the computer-predicted revenue gained by the operator, then reiterate with various variables including pricing, above-SLC options, changes in the proposed plan (still SLC-compliant, but different), and finally you arrive at a profit figure over the life of the franchise - then you have to decide what proportion of that is worth keeping as profit (hence how large a premium you are prepared to offer DfT), as opposed to spending the next couple years doing something else with your money. The big criticism of it is that it assumes that all your estimates are correct - and DfT only share risk over revenue, so if the US-Iran War pushes diesel prices into orbit, then tough - costs are the bidder's risk.

The lack of stock is a truism - there may be 14 Adelantes coming off-lease (assuming FGW's HSTs are reliable enough), but they aren't suitable for everywhere (and ironically, some of the best places to put them are on FGW). Wessies - specialist unit, with limited route availability south of the river (and zero route availability north - slight lack of 750V DC), and a forty-year-old traction package - unlikely to operate on anything other than the Bournemouth and Brighton lines. And, believe it or not, there is not enough Mark 3 loco-hauled stock around (except buffets). Sure, there are unused 67s - but their usefulness is limited (as is their power and range at 125mph). At least one operator is looking at Mark IIs - and many of those will be less than fit-for-purpose. And if you want anything to work commuter lines - forget it, there are no 20m AC EMUs available until the LM '350s' and LOROL '378s' arrive, and the only DMUs are a few Pacers (ie those which are not fit for movement on the network). Expect a very uncomfortable ride for the next few years - there is nothing left in the cupboard.

The main point is that franchises are not designed to make major commercial decisions over the long term shape and nature of the network, whether that maximises commercial opportunities or not - the franchise is a management contract, designed to meet the service level specified by Government, at the lowest cost to Government. OPRAF is dead, Stalinism is alive, and it is worth wondering whether that is a good thing or not. Just be thankful you don't commute from Hastings or Shoreham into Brighton - Red Ken apparently wants to control your train service...

[AlistairW]

Many thanks for your informative reply Matt, I'd certainly missed off a few facts from the previous posting, still a shame to see the money leaving the railway (even if they do say it's reinvested) but of course this would be forgetting the huge sums of public money the railway swallowed in the late 90's.

[allypally]

The life expired Mk2 coaches would suggest themselves to be an easy short term fix to stock problems - as indeed operators like ATW when they inevitably have too many 175s or whatever fall over and FGW when they need shuttles etc seem to recognise.

While EWS can't promise 67 availability, for short term usage Riviera have a decent fleet of what would appear to be pretty reliable brush 4s, and Virgin have a pile of 57s that barely see use in a lot of cases.

I know these carriages are pretty ratty inside, but as far as providing an actual service rather than cancelling trains due to 'lack of carriages' and against a Pacer, they can't be that bad!

[ForburyLion]

I've often wondered why First Great Western don't replace the Slough to Windsor one stop return 165 with a Pacer as the journey time is only 6 minutes and it's the only service that uses the line, never venturing off it until it's time to return to the depot at the end of the night.

Sounds ideal for a Pacer and would free up another 165 for the other routes.

[mattvince]

The Mark IIs may require significant heavy cleaning, particularly if they've been in store for any length of time - which could get more expensive than the financial cost of not expanding the fleet until new stock becomes available. In the business-oriented world (particularly where the franchisee is taking the cost risks), the Mark IIs would have to pay the cost of any work done to them (through extra revenue), over a period of perhaps two years. That's on top of the increased running costs of LHCS - so the marginal operating profit has to meet the cleaning costs - on a commuter railway revenue is tied down by capped season ticket prices. Commuters don't take kindly to fares rises without evidence of money well spent - hiking fares to pay for rattly old trains is bad PR. On an intercity railway, upping fares to cover the cost of returning old stock to service merely hands the traffic over to competitors. This is not a defence of the TOC position, but the TOCs are held between a rock and a hard place on this - either introduce old stock at considerable cost and run the risk of hurting profits (which, if profits are wiped out, means either the parent company will pull out, or defaulting on Premiums - either way ends only in disaster for the TOC), or run the existing fleet and just accommodate what you can (with major overcrowding and consequential loss of revenue, but keep the franchise). No use turning to the DfT - funding for old stock is not their policy outside of that agreed in the franchise bid. Even though ultimately it is the DfT's problem - the DfT specify the numbers and types of stock for use by each franchise, and sign the leasing contracts with the ROSCOs.

Now if you were to order some APTs, sorry, IEPs...

[AlistairW]

Some very valid points guys, I found this last night:

http://news.bbc.co.uk/1/hi/england/nott ... 109627.stm

Cheers,
Ali

[enotayokel]

There were similar stories when SWT announced they were swapping 170s for ex-TPX 158s, strangely all went quiet when the first refurbished 159/1 was shown off

There were always going to be winners and losers when the Central stock was split, EMT have ended up with the short straw, but if the overhaul to the same level as the SWT 158s and 159s then Pax may not notice.

There will be further stock reductions when the EMT 158s loose their centre cars to northern to compensate for them now not getting the 158s from FGW

[MoonKid47]

There will be further stock reductions when the EMT 158s loose their centre cars to northern to compensate for them now not getting the 158s from FGW

Thats a bit of another short straw there, as Northern should be able to use Pacers before they lease other trains off operators that need them for vital services. Either that or lease the Pacers to those operators.

[enotayokel]

Well the current rumour is that the FGW 158s are going to Scotland for Paisley services, with the Northern 142s to FGW move off.

If true that would leave FGW 12 units short...

Am so glad I don't have to take the train anymore

[Pompeyfan]

whats the silverlink 150's being used on? are they not being used on the devon and cornwall branches?

[mattvince]

Perhaps we're missing the wider issues by focusing on rolling stock allocation (as much as we all like to talk about it). There are bigger issues - is the Service Level Commitment correct? Is the network of train service appropriate? And what of journey times? What about growth by exploiting untapped markets? All these things are specified by DfT, but is their data and their assumptions better than those of the managers running the railway? Ultimately we seem to be heading towards a 2014 railway that we can fairly accurately predict - but will that prediction be appropriate to the market conditions in 2014?

What of Network Rail, and their expensively-won assets? There is a conflict there, between the level of service specified by the DfT, and the need to maximise the use of the infrastructure to get the best possible return on investment. True, those new assets may improve service reliability, but improved punctuality doesn't really improve the revenue stream when you get above 90% PPM. In any case, PPM is a 'dumb' statistic, only interesting to politicians and journalists. Running more trains, carrying more passengers, may hammer the infrastructure in the short term, but the long term effect will be to make revenue more able to cover the cost of maintaining and renewing that infrastructure. But without the industry structure in place to encourage that, then operators will be forced into the hole of operating at the SLC and little more, and being premium-heavy with high fares (high fare/low volume approach). Admittedly some places cannot fit more trains without major work, but do you invest and then only increase the service by one train an hour, or invest and run ten extra each hour - if market conditions demand it? And running more trains, carrying more passengers, has a subtle political shift together with the modal shift - If the 10% market share were to double or treble, then rail users become a very large constituency, whose needs Government has to listen to.

And what of research and innovation? Perhaps the present system is not suited to developing the kind of technologies and techniques appropriate to a 21st Century railway. Unless your innovation is included in the Railway Technical Strategy (published with the White Paper earlier this year), then DfT will probably not be interested. RSSB is doing some research work, but how far that can go is limited by funding and remit.

[bgstrowger]

whats the silverlink 150's being used on? are they not being used on the devon and cornwall branches?

They, along with the London Midland 150s are apparently going to Northern once the 172s come into service. This is apparently to cope with anticipated passenger growth in the Northern franchise area.

Nothing to do with the fact that there's quite a lot of Labour constituencies in said area...

[hertford]

Hell yes something is wrong with premium franchising, the problem is, it's all based on profits and debt, which doesn't give the individual companies much of a chance of defending their franchises. Take GNER as an example, they had to surrender their franchise to National Express due to having a large debt and financial difficulties, if I were in charge of all this, I would only change operating companies if their customer service was poor, which would probabaly encourage them to give a good service.

[buffy500]

whats the silverlink 150's being used on? are they not being used on the devon and cornwall branches?

I've seen one on Bristol - Portsmouth as part of a four car train.