Springtime for the railways, winter for the economy?
June 2005
There has undoubtedly been a change of atmosphere in the rail industry in recent weeks, as a series of good news stories about finances, continuing market growth and improved performance has hit both the trade and the national press. Indeed, when Network Rail hits the headlines for under spending, you know things have changed!
On the financial front, the new 2005 edition of the Rail Industry Monitor report highlighted the improvement in train operating company finances during the 2003/04 year, whilst annual results from National Express, Arriva and FirstGroup have all shown further growth in rail profitability in the subsequent period. A trading update from Stagecoach at its year end in April pointed to a similar outcome.
Network Rail’s figures also offer clear evidence of the infrastructure giant getting its finances in order. This came on top of its well-received business plan for 2005/06 earlier in the spring. Many observers, including some well-seasoned rail professionals, praised the plan’s practicality and tight focus. Others will rightly point out that there is a world of difference between writing a plan and actually delivering it – but the evidence of performance improvements, falling failure rates and efficiency savings argues strongly in the company’s favour.
Suddenly, the City has become interested again. Having decided that the major groups’ rail businesses were not really worth anything in the chaotic couple of years after Hatfield, analysts are once more taking this element of their portfolios seriously. A significant factor seems to have been Sea Containers’ stunning victory in the InterCity East Coast franchise race on the back of a bullish revenue forecast: the thought that similar sorts of revenue growth might be achievable elsewhere on the network seems to have excited a good deal of interest.
With more winners and losers to be announced this year on some major chunks of the network, such as the South Eastern, Greater Western and Thameslink franchises, there will certainly be plenty to think about. With the quoted groups featuring heavily in all three competitions, the analysts’ spreadsheets will have a busy autumn, one suspects.
Underpinning all this good news has been the continuing growth in demand for rail services, and in passenger revenue. Statistics for calendar year 2004 show the number of passenger journeys rising by almost 2.9% overall, reaching 1.03 billion. In the sectors, InterCity saw the strongest growth at 5%, taking the total to 84m – a rise of 20% in five years. Next came the regional networks, with a 4.7% increase. This took the total to 246m. However, strikes and other problems since 1999 have restricted growth in the five year period to around 9%. In London and the South East, patronage was 2.3% up on the year, taking the total to 701m. This is almost 12% higher than five years ago.
Passenger kilometres for the year grew by 3.2%, bringing the total to another post-1946 record of 41.7 billion. London and the south east saw the highest growth of 3.6% (total: 20.2bn); regional came next on 2.6% (total: 7.9bn) and finally Inter City (up 2.3%, total 13.3bn).
In cash terms, revenue was 7.2% higher at £4,090m. InterCity topped the growth league at 7.7%, earning £1,443m. Next came the London commuter routes on 7.6% (total £2,017m) and lastly regional services on 4% (total £628m). In real terms, passenger revenue has grown by 12.0% over the last five years – but this growth has been driven by InterCity (up 15.2%) with some help from London (12.8% ahead), but some hindrance from regional services (up just 3%). In terms of yield per passenger kilometre, both regional and London services show real-term falls over the last five years (4.5% and 3.5% respectively), whilst InterCity operators have grown theirs by 12.6%.
This disparity is at least in part related to the RPI-x fares capping formula that applied until 2002, but there are other factors as well, such as the PTE influence on regional fares: this tends to have more to do with social engineering than real-world finances, and explains why the Government is trying to reduce their direct influence over fares whilst giving them more responsibility for finding the subsidy. It also tends to reinforce the view that regional services in particular have a revenue problem as opposed to a cost problem.
Overall, then, the news on the market for rail services remains overwhelmingly positive. Unfashionable as it might be to say so, this is much to the credit of the private sector train operators: such levels of growth would almost certainly not have been achieved by a nationalised railway.
The question now facing everybody is whether the growth will be maintained. This seems unlikely in the face of the economic slowdown which seems to have started during the spring. As yet, though, this seems to have affected retail spending rather than employment numbers, but fewer shoppers on the high street will tend to mean fewer off-peak leisure passengers on the railway. Given the need for all TOCs to target the leisure traveller to get growth outside the crowded peak hours, this must be a short term worry.
However, let us not rush to see the next cloud on the horizon, but enjoy the good news whilst we can. And in any case, a retail downturn will surely not last long: as our favourite playwright Alan Bennett once remarked, “Nowadays, we live to shop.”