Wednesday, 9 October 2013

Rail Fare Cap

One of the myths about the Conservatives is that they are the party of the free market, and here's more evidence against them:-

The rail industry's power to increase fares in England is to be curbed as part of a government drive to overhaul the rail fare system.

Until now, some regulated fares could potentially have gone up by 9.1% next January.

They will now be capped at 6.1%.

But campaigners say it is not enough, and point out that commuters will still have to pay an above- inflation increase next year.

Regulated fares are those which the government controls, and include season tickets, "anytime" single tickets around major cities, and off-peak inter-city return tickets.

They will go up in 2014 by an average of 4.1%, a number calculated using an average of inflation - as measured by the retail prices index (RPI) for July - plus 1%.

Rail fares are already as high as they are because they can't put everyone on a train that wants to travel, so, you have to ration supply, and the best way to ration supply is on price. Halve fares at peak time to London and you'll create chaos.

I may have criticisms of rail companies, but one observation I have made is that they know their rail fares. The fare from Swindon to Bristol is much lower than the fare from Swindon to Reading, despite being around the same difference, because the Swindon to Bristol train is about half as full. Trains after 11 are much cheaper, because they're much emptier. So, I think that we can assume that if they want to raise prices by 9.1% on some fares, it's because they know it will raise income, rather than driving people away.

And with that extra income, it makes the rail franchises more valuable, so companies that want to run the rails can pay more (or receive a lower subsify) for it. In other words, most of the extra money comes back to the landlord (the government) that does all the rail improvements.

22 comments:

Dinero said...

Why fares go up. Over time they should be getting better at the job and so doing it more cheaply !

fraggle said...

I don't know about peak time, but I have no reason to think they understand off-peak.

Trains into Kings Cross from Peterborough are usually deserted. At £26 return I'm not surprised.

john b said...

Stigler:
Yup, exactly. The current GB rail scheme is a jolly sensible one: the government sets macro inputs (net subsidy) and macro outputs (high level output plans), then lets its contractors set prices rather than trying to impose Soviet price planning. Which is unpopular among people whose long commutes from large houses outside London to well-paid jobs inside it are becoming decreasingly subsidised over time, for much the same reason Christmas is unpopular among turkeys.

Dinero:
Two reasons. First is government policy: the % of subsidy as total rail cost has been deliberately cut year-on-year since 2003, as a matter of both Labour and Coalition policy, for the reason I've stated above.

Second is down to Professor Baumol: the cost of mass production falls as incomes rise, while the cost of one person's labour for a certain amount of time doesn't.

We've made cost savings since the 1960s by single-manning freight trains and some passenger trains (the continued existence of guards on commuter services where they're completely unnecessary is one of the few areas where blaming the unions is correct), and Network Rail is getting better at things like prefab station buildings, points sections and signals, but maintaining a 180-year-old network is never going to be as automatable as an electronics factory.

(this is also why HS2 is a good idea: forget the speed, building a new line using off-the-shelf technology is substantially better value than devising new bespoke ways of shoehorn extra capacity into the old system...)

The Stigler said...

fraggle,

£26 to do a 90 mile journey that would cost more than that in petrol, let alone congestion charge and parking? Sounds like a bargain to me.

I might suggest that the demand for it isn't there, that the rail companies have perhaps found the sweet spot in maximising revenue.

john b said...

A 180 mile journey - and yes, absolutely. 45 quid at HMRC lower-rate mileage (ie all the fixed costs that usually get thrown around in these arguments have already been amortised), before parking or CC.

Bayard said...

"this is also why HS2 is a good idea: forget the speed"

Yes, but HS2 is all about speed. If it wasn't, it would be a fraction of the cost: there would be considerably less in the way of earthworks and many more miles of existing closed railway line could be reused. All the cases for HS2 are for a new line between London and the north. Almost none of them are for a new 200mph (or whatever it is) line between London and the north. AFAICS, HS2 is mainly about having a faster train service than the Germans.

fraggle said...

"£26 to do a 90 mile journey that would cost more than that in petrol, let alone congestion charge and parking?"

What are you driving? A Tank?

"I might suggest that the demand for it isn't there, that the rail companies have perhaps found the sweet spot in maximising revenue."

Yes, apparently it's zero...

fraggle said...

Although I should say that I completely mangled my example, while the train *originates* in Peterborough, I get on at Sandy (50/100 mile journey, cost £19 return, £26 *with a zone 1-6 travelcard*), but then, there's still no-one on it.

Anonyman said...

You guys are forgetting that the railways near enough pay for themselves through the economic activity and (more specifically) land rent uplift they create. Therefore if fairs are only being increased because the "subsidy" is being reduced then they shouldn't be. This is especially as it's not really a subsidy, if anything it's infrastructure maintenance. And of course if the railways got their fair share then there is no reason why fairs can't be decreased.

Having said that I do agree that busy routes should be rationed and that high fairs are the best way to do this. But then the busy routes wouldn't need to be rationed if the railways were given enough to invest in enhancing capacity where it is needed instead of where it is political possible to provide it (crossrail, HS2 etc).

Dinero said...

It would help if they could work out a way to charge for journeys "as the crow flies"
as it is, to travel a short distance parallel to London, you have to pay the full fare to travel into London and out of London again.

Mark Wadsworth said...

Din, it's got little to do with "costs" railway fares are like rental income. It is demand which dictates price and not costs.

F, 100 miles @ 40 mpg = 2.5 gall = 11 litres @ £1.35 = £15. Add on a fiver for parking. So which is "better" depends entirely on how many people would be in the car, how far out of town your end destinations are - if you have to travel for a dozen miles to get to and from the end stations, that favours car, centre to centre favours rail. And how much advance notice you have of when you want to travel etc. And whether you even have a car.

Anonyman, yes of course, and if subsidised out of LVT there is a virtuous circle.

fraggle said...

MW, we've kind of deviated from the point I was trying to make. It's not about whether taking the train is marginally better than driving for any given journey, it's whether I make the journey at all. There have been plenty of times that I hear of something in London, think about going, but then remember that it'll cost me £20+ to get there, which is often a lot more costly than the price of the thing I was originally thinking about, so *I don't go*, but when I do, there's virtually no-one else on the train, so it's not like there's anything that needs rationing.

Now, admittedly, it may be that I'm just a freak of nature, but I struggle to believe that I'm the only one who would be much more willing to travel into London on a whim if it was significantly cheaper. It's not like First Capital have ever really tried experimenting with the price; when was the last time a rail operator had a sale (1/2 price off-peak tickets this weekend. BUY NOW!!)?

Mark Wadsworth said...

F, that is a perfectly reasonable point, but that is the problem with monopoly pricing. The monopolist chooses the revenue maximising price and not the output maximising price.

(With completely free and fair competition, we tend to end up with prices which maximise revenues AND output).

So the train company prefers to sell ten tickets @ £26 each than to sell twenty tickets @ £10 each.

Kj said...

Fraggle, MW: Ideally, a public operator or a private monopolist on a type of contract that would reward this, would maximise output when there´s no rationing needed, and ration by price in the opposite case. I just don´t have a good example of this every happening in practice, and have a hard time believing this could be accomplished.

fraggle said...

MW: "So the train company prefers to sell ten tickets @ £26 each than to sell twenty tickets @ £10 each."

Until they actually try selling them at £10, how are they going to know how many people are going to buy?

KJ: "I just don´t have a good example of this every happening in practice"

Me neither, but I live in hope!

john b said...

"HS2 is all about speed. If it wasn't, it would be a fraction of the cost"

Nah, this is a myth.

Planning/land acquisition/etc costs are the same either way (there are just as many NIMBYs with houses 100m from old railway lines as with houses 100m from planned new ones, and rebuilding a railway isn't grandfathered).

Earthworks are less on HSR than on traditional lines because the trains can cope with steeper gradients (4% compared with 1-2%), which more than outweighs the lack of bends.

The only real cost difference is buying better trains, rails and wires (even the signalling systems are effectively the same for a new-build line), and that's partly offset for HSR by the fact we can use off-the-shelf equipment rather than the custom-built stuff required for UK classic lines because of 180 years of standards evolution.

HS2 is for capacity. Always was. Speed adds less than 20% to the cost, and is an easy way to sell it to politicians.

john b said...

UK railways sell super-cheap tickets for offpeak journeys *loads*.

When I was over there last month I went first class from Bristol to London for gbp25, I went on Virgin from London to Birmingham on a Sunday afternoon for gbp10... and I paid gbp100 to go from Birmingham to Leeds and back in the middle of the day.

The Bristol-London train was empty (in FC at least); the London-Brum train was half-full (in standard), the Brum-Leeds and Leeds-Brum trains were rammed.

Overall, the trip suggested that the TOCs are doing a better job at yield maximisation than you might expect...

Mark Wadsworth said...

JB, we have to assume that TOCs operate a revenue maximising policy.

But that is different to output maximising price policy, and how do we factor in the money which e.g. London concert promoters are losing because Fraggles doesn't turn up?

Hence and why subsidising public transport out of LVT revenues is the least-bad option.

john b said...

Mark: yup, agree. Various people upthread seemed to think the TOCs weren't even trying to do either.

The Stigler said...

Fraggle/MW

Regarding lowering fares to maximise revenue, I have inside knowledge as to why they don't go too cheap from a friend who works for a TOC.

A few years ago, the rail companies tried doing an offer in conjunction with a shop (I think it was WH Smith or Boots) where they sold tickets from a fiver.

Downside? You now got chavscum riding on trains who thought it would be entertaining to do some damage to the trains, like cutting seats etc. The damage was so expensive that repairing it outweighed the extra revenue.

Personally, I think a lot of off-peak rail is pretty reasonable, which is why my family run one car now. I'm planning a trip to Cardiff in a few weeks and it's £20 for me and the kids with a railcard. The petrol and bridge toll would cost me the same. But also, it's just nice to sit at a table and play cards with the kids.

fraggle said...

"Downside? You now got chavscum riding on trains who thought it would be entertaining to do some damage to the trains, like cutting seats etc. The damage was so expensive that repairing it outweighed the extra revenue."

Yeah, I can see how that would work (or not, rather). Depressing, no?

Bayard said...

TS, I remember when Network South-East offered "go anywhere for £1" on one or two Saturdays. The trains were crammed and the TOC, reputedly, made a profit. I didn't notice any chavscum on any of the trains I took. Sounds like a good story to me.

JB, NIMBYs have a lot less case for objecting to the re-use of an existing line - the line was there when they bought their houses, after all and re-using existing trackbed has got to be significantly cheaper than building new, especially if the railways still own the permanent way. As far as I can see, speed is the main reason for not re-using the old Great Central main line, hence speed is responsible for a large proportion of the costs. If HS2 was all about capacity, there would be no need for new trains as existing ones could be redeployed. Yes, more trains would be needed, but not new designs.