Over the course of two articles, Ivan Viehoff looks at British rail fares. Part one asks: why are British rail fares so very complicated?

Few other countries do rail fares quite like Britain. Our innovations such as cheap advance fares and yield management methods are increasingly being taken on board in other countries. But still no one seems to come near the complexity of British fares methods. How then, can we increase passenger’s satisfaction with our rail fare methods?

It is unlikely that every rail passenger will ever be entirely content with every fare they are asked to pay. It is really nice to pay a bargain super advance fare, but mainly because you know it is so much cheaper than what other people are paying. Meanwhile fares on average have been going up persistently over time, which is doubtless a component of the dissatisfaction. Those super-bargain fares can only be a relatively small part of what we pay, even if they play an important role on some parts of our railway, notably intercity.

On other transport modes – air, private car, minicabs – cost has generally been falling, and people wonder why this isn’t happening in rail.

But we have to remember that the British railway loses a lot of money. There is a social decision to be made over what proportion of costs passengers should contribute. Despite a substantial increase in ridership, costs have risen faster, and this has driven various governments to allow fares to rise.

Opinion polls suggest a large majority would choose to complete the renationalisation of the railway. Benchmarking studies routinely find that railway infrastructure maintenance and construction are much costlier to deliver in Britain than on the continent. Both these things have their consequences for fares. But these are much wider issues, and it would require deep change to the railway to alter them.

In part one of this article, we consider the two principle ‘troubles’ as:

  • Why are some unrestricted (walk-up, anytime) fares so expensive, especially for longer distance trips?
  • Why are British rail fares so very complicated?

Figure 1: Mainline rail fares revenue in Great Britain per kilometre and per journey for franchised operators, inflation adjusted, 1994/95=100. The franchised railway excludes Eurostar, Heathrow Express, Northern Ireland, local authority metros such as London Underground, heritage railways and trams. Open access operators, also excluded, have a share of about one per cent of this market by passenger-kilometres.
Source: Author calculation on ORR data. Fares revenue includes all journey-related charges but excludes ancillary revenues such as catering. Inflation adjustment performed at source using the GDP deflator.

The different kinds of rail fares in Britain
Notoriously, there are numerous different kinds of rail fares in Britain – anytime, advance, off-peak, super off-peak, season tickets, open returns, etc. Within this zoo, we can identify two key distinctions, which help to understand what is going on and the proliferation of fare levels:

  • Regulated fares and unregulated fares – some fares are regulated, i.e. have their price controlled, but others can be set at any level by the train company
  • National fares and operator-specific fares – national fares are integrated, i.e. allow you to travel between two stations by any reasonable route and on any operator’s train, whereas others are limited to specific operators.

This mixed system recognises that regulation and integration of fares can be important to customers, but it can also be an impediment to the entrepreneurialism of railway operators to tie them up in too much regulation. The troubles with train fares are to a substantial degree a result of the difficulties of making this mixed system hang together. We now look at this in these two distinctions in more detail.

Regulated and unregulated fares
The system of partial fares regulation was devised as a balance between:

  • Making reasonable social provision for the needs of customers at a controlled price
  • Protecting against monopoly abuses
  • Keeping subsidies at a reasonable level
  • Allowing a significant degree of commercial freedom and innovation.

The general rule is that for every potential rail journey provided by a specific operator, there is a regulated fare, but not necessarily at every time of day (some urban regional transport administrations, such as Transport for London, have powers to make local rules).

It works roughly like this:

  • On routes designated as commuter routes, (mostly around London), the regulated fares are the peak (anytime) and season ticket fares
  • On other routes, the regulated fares are the off-peak (saver) fares and also season ticket fares.

The rationale for regulating peak commuter fares, and season tickets more generally, is that commuters have limited ability to switch to other modes or other times of day. Universally, the unregulated off-peak fares on these commuter routes are substantially cheaper, thus Government does not feel a requirement to regulate these.

On other routes, it is the off-peak ‘saver’ fare that is the main regulated fare. The idea is to make social provision for transport, in the sense that passengers should be able to travel at some time of day at this relatively modest, protected fare, although not necessarily at the time of their choice.

Peak travel on these routes, especially intercity routes, includes a lot of business travel, which Government feels no need to protect given competition from other transport modes. It also increases franchise revenue to reduce the burden on the public purse.

National and operator-specific fares
The other key distinction is between national fares and operator specific fares. Operator specific fares are only for the use of a specific operator’s trains. The operator retains all the revenue from such tickets. They do not have to permit others to sell such tickets, and in general they don’t.

A unique national fare is available between any pair of stations, enabling travel by any reasonable route and any operator, thus creating a national integrated tariff. For each national fare, a specified lead operator has the power to set it. A national fare ticket must always be sold at exactly the price shown on its face.

Any additional service charges a seller wishes to make, e.g., for additional agency services, must be an explicit fee charged separately. The revenue from national fares is divided among operators in proportion to the estimated contribution they make to supplying that journey to the passengers who make it. This calculation is done using an industry standard model, called ORCATS, operated by the Rail Delivery Group. There are procedures to recalibrate ORCATS when there is evidence that it is not dividing the revenue fairly. Nevertheless, operators are aware of the foibles of the model and may try to take advantage of them in their timetabling.

Regulated fares are mostly national fares, but many national fares are unregulated. This is because the national fare has to cover the standard product list of anytime and off-peak, etc, and generally one of these will be unregulated. Especially when the off-peak fare is regulated, operators will often undercut it with an operator-specific ticket. This is in part because they will keep all the revenue from that, and because they can control the selling of it. It also means they can use yield management techniques, by having a variety of fares with different restrictions, etc.

Trouble one: why are peak long-distance fares so expensive?
The great majority of people travelling on long distance services either pay off-peak regulated prices, or discounted operator-specific fares. Many peak period intercity trains – with some notable exceptions such as Friday evenings – do not run particularly full.

This is because the operators are more interested in protecting their high fare peak income than filling those particular trains. Aside from a few very popular trains, notably Friday evenings, many off-peak trains are busier, filled with passengers paying deep discount tickets. Part of the Government argument for leaving such fares unregulated is only approximate.

For many city pairs, air and road are not good competition to rail for time-sensitive travellers. Air travel is an important source of competition only on specific routes. Especially in intercity rail’s ‘sweet spot’ of up to about 150 minutes, air has limited ability to offer competition.

It is no surprise that journeys such as those between London and Manchester, Leeds, Bristol, and Birmingham are noted for particularly high fares, much higher than the equivalent on the continent.

With standardised peak fares and substantial excess capacity on many trains, these fares are unlikely to be maximising consumer welfare. Railway investments, rarely profitable in themselves, are typically justified by careful cost-benefit analysis showing how there is a net social benefit from the investment.

But no such analysis is applied to changing fares. Reducing peak fares, at least on some trains, could be a cheaper way of releasing valuable peak rail capacity than investment. This is not to say that devising regulation to make things better would be easy. Regulation is distortionary too, but with such clear welfare detriments, surely, we should examine other ways of doing it.

Trouble two: why are fares so complicated?
Many people complain about the complexity of the British fares system. Aside from short trips, and in cities or commuter zones with integrated fares systems, there’s often a large number of options, with different conditions as to when you can travel and on which trains.

Locating the cheapest suitable option for your journey can be difficult. It gets even harder when you realise the vast number of options that come from ‘splitting the ticket’, i.e., buying several tickets for parts of your journey, which can save you money, sometimes a lot.

Even when you buy tickets from a station ticket clerk, or ticket machine, or the National Rail website, they don’t always offer you the best option among walk-up fares. It requires skill to buy the best tickets, wherever you buy them. Many station ticket machines only sell a selection of tickets.

They are often set up to suggest full price tickets first, and it is not always obvious how to access cheaper options. Onboard ticket sellers typically have ticket machines with limited functionality too. And these sources of tickets will rarely if ever offer you ‘split tickets’ or other exotic money saving options. You may have better luck if you instruct them precisely what tickets you want, if they have the functionality to sell them to you.

Railway operators’ legal responsibility in selling tickets, whether directly or through agents, as set out in the National Conditions of Carriage, is to provide you with the information to help you choose the best ticket for your requirements. One notable issue is that not every kind of ticket is available in every place tickets are sold. Clearly some fares are only available for advance purchase, but not even the full range of walk-up fares are available for sale from every machine or at every station. From 2015 a Code of Practice, overseen by the Office of Rail and Road, added some interpretation to this. The Code of Practice says that a train operating company should act as a neutral party in selling tickets.

What neutrality might mean is a matter of interpretation. But we can say they have not been required to act as the customer’s agent in actively looking for the best option for that customer. The regulatory authorities seem to have concentrated on avoiding certain aspects of ticket sales behaviour seen as poor practice.

It is perhaps unrealistic to expect that operating interests could be made to act as the customer’s agent, as there is a clear conflict of interest. But customers may remain disappointed if the main suppliers of tickets are not selling them the best offers and be expected to look after their own interests in such a complex market.

Fares that don’t add up
One way of trying to scope the vast complication of British rail fares is to look at the numerous and unpredictable ways in which fares ‘don’t add up’. On the one hand, a longer journey can be cheaper than a shorter journey. In general, you are not permitted to buy the longer ticket and travel short, but this is not always practically enforceable, depending on arrangements at the stations where the passenger starts and ends their journey.

On the other hand, a longer journey can be so much more expensive than shorter journeys that you can save money by splitting the ticket. Sometimes you can save money by travelling away from your destination, or beyond it, and then coming back. Sometimes return tickets are more expensive than two singles.

This is not a specifically British issue. There are many other countries where rail fares don’t add up in some of these ways.

Fares ‘don’t add up’ in some other transport sectors too. In the text box, we discuss why that actually makes some good sense in the context of that industry. But they don’t add up in simpler ways, and agents and air fare search tools are designed to help us locate the best options. Thus, the air passenger doesn’t get the impression they are being taken for a fool as rail passengers in Britain might feel.

Ivan Viehoff is Chief Economist at Cambridge Economic Policy Associates (CEPA), a global economic and financial consultancy that specialises in providing policy, regulatory and financial advice. In his career to date, Ivan has extensively worked on major transport issues, but brings a broad cross-industry perspective from the range of his experience. He has provided advice on the economics of rail transport and frequently assists transport regulators, operating companies and governments worldwide.