6 - Scottish rail fares
6.1 Rail fares are one of the ways in which rail passenger services are currently funded. In 2010-11 passenger revenue accounted for £259 million of ScotRail's income, whilst the Scottish Government subsidy payment to ScotRail was £290 million. Overall ScotRail passenger revenue accounted for 26% of the total costs for the provision of ScotRail services on the Scottish network.
6.2 Rail is an environmentally sustainable mode of transport. We want to encourage existing passengers to use more rail services and to attract new passengers to rail, so as to reduce journeys by less environmentally sustainable modes of travel. Fares are a key lever which can help encourage modal shift to rail but fares policy also needs to be considered in terms of ensuring the rail network remains financially sustainable for the Scottish Government.
Four main types of tickets are currently available:
- advance – purchased prior to the day of travel and only valid on the specified date
- off-peak – buy at any time for travel in the off-peak
- anytime – buy at any time for travel at any time
- season – unlimited travel between two stations for a specified period Among the Railcards available, which provide discounted rail travel, are:
- the 16-25 year old rail card (also available to full time students irrespective of age), costing £28 per year and providing 33% discount on rail travel across Great Britain
- the Senior Railcard, available to over 60's the card costs £28 per annum and provides 33% discount on rail travel across Great Britain
Fares simplification and anomalies
6.3 In September 2008 all UK rail ticket-types were simplified in order to assist passengers identify the cheapest or most appropriate tickets. We are considering if further simplification of fares is necessary, or if clearer information about the existing fares and tickets would achieve the same objective of encouraging more people to use rail services.
6.4 Part of ensuring a simplified fares policy, which is understood by the public, is to ensure there are no anomalies within the structure. Anomalies include where one return ticket is more expensive than the cumulative total of a number of individual single tickets. We will continue to work with ScotRail to identify and remove these, and other anomalies, before we let the next franchise.
Regulated and non-regulated fares
6.5 Scottish rail fares are a mixture of regulated and unregulated fares. Regulated fares are those where we set the rules around how much they could change each year. These rules are normally set within the rail franchise contract.
6.6 Currently, in Scotland regulated fares change in January each year in line with the previous July's Retail Price Index plus 1 per cent (RPI+1%). Historically, July's RPI value has been used as this provides sufficient time to update the industry booking and ticketing systems.
6.7 Fares for cross-border services are not set by us but follow the Department for Transport policy, which, from January 2012 will increase regulated fares by an average of RPI +3% each year for three years.
6.8 The regulated fares currently in existence were established through the first franchise and then rolled over into the current franchise. The next franchise will be a good opportunity to review the regulated fares structure. Current regulated fares in Scotland are:
- all ScotRail Season Tickets
- all ScotRail off-peak returns
- all fares in the Strathclyde area
- standard singles, standard day returns and season tickets in the Edinburgh commuter area: the Edinburgh commuter area ranges from the Fife Circle to Falkirk, North Berwick and Addiewell
6.9 All other fares for Scottish flows are unregulated. Unregulated fares can be set by the franchisee on a commercial basis.
6.10 Under the current fares policy, revenue generation is evenly split between regulated and unregulated fares. However actual passenger demand is skewed towards regulated fares. Around three quarters of passenger journeys are undertaken on tickets covered by regulated fares.
6.11 Regulation of at least some fares provides us with a lever to help achieve wider social and economic objectives. Specifically, it enables us to ensure the rail network remains affordable at certain key times of the day and over certain key routes. Fares regulation also helps ensure accessibility to essential services and leisure destinations.
6.12 Regulating rural fares can ensure the rail network remains affordable for rural residents and attractive for leisure and tourist travel. Regulation of urban peak fares, season tickets and fares on rural lines will protect passengers who are likely to have limited alternatives to rail travel and who could face sharp increases in an unregulated market.
6.13 Regulation could also be used to encourage passengers to transfer to less utilised routes. This will be particularly relevant between Edinburgh and Glasgow where we have made significant investments and there are now four routes between the two cities.
6.14 Allowing some fares to be unregulated however, provides the franchisee with an incentive to develop innovative offers which should encourage greater rail usage on lightly used services during quieter periods of the day or week and to manage capacity. The ability of the franchisee to adjust fares on a commercial basis is important in creating incentives for the operator to maximise their efforts to grow revenue and demand.
6.15 Car travel is the most convenient and comfortable alternative to rail for inter-city travel. If fares were increased too much it would encourage modal shift away from rail and therefore reduce the profitability of inter-city services. The market would thus act to regulate any fares increases for inter-city travel meaning there is no need for government to regulate these fares. We are therefore proposing that for the future rail franchise the inter-city rail fares are unregulated.
6.16 Similarly, providing commercial freedom for the operator to use different strategies to attract more passengers onto urban routes in the quieter off-peak periods is likely to be more efficient than blanket regulation of these fares as occurs in the Strathclyde area at present.
6.17 Fares baskets are used in some parts of GB to provide greater flexibility for an operator to vary fares while still retaining an overall cap to protect passengers. A number of fares are included within a fares basket and the value of the fares basket is calculated. This value is then allowed to increase by the set rate, but individual fares can be increased within a larger range provided the overall value of the basket does not exceed the overall threshold. In this way operators can reduce fares on some routes in order to encourage greater patronage while increasing fares by more on other routes where it is suspected passengers will be less sensitive to fares increases. Fares baskets are quite complex to operate and can be complicated for passengers to understand, and therefore contrary to the overall policy of fares simplification.
Finance and subsidy levels
6.18 Revenue from rail passengers has increased each year during the current franchise but still contributes less to ScotRail's total annual income than the government subsidy payments. In 2010-11, as previously discussed, ScotRail's revenue from passengers was £259 million and the franchise payments from the Scottish Government amounted to £290 million. Revenue has increased by 35% between 2005/06 and 2010/11 with the subsidy payment increasing by 27% over the same period.
6.19 It is in our interests to grow demand and revenue in order to minimise subsidy payments and maximise the value from the franchise. Fares regulation can also be used to ensure that an operator does not use fares to generate large profits at the same time as requiring a government subsidy.
6.20 We are considering what the appropriate balance should be between taxpayer subsidy and passenger revenue in funding rail operating costs. This includes considering the case for applying higher fares increases for tickets over Sections of the network where significant enhancements have recently been delivered in order to help pay for those enhancements.
6.21 Regulated fares are currently set by allowing fare prices to rise at a fixed rate in relation to inflation. These fares currently increase each January by RPI+1% and are due to increase by 6% in January 2012 based on a July 2011 RPI value of 5%. This increase is however significantly lower than recent fuel price increases, with, for instance, the average price per litre for unleaded petrol in Scotland increasing by 15.8% over the 12 months to July 2011.
6.22 The Retail Price Index is currently used as the inflation measure and this is used for all GB rail fares. We are considering whether we should continue to have an annual regulated fare change and also whether RPI is the correct Index to use or whether the Consumer Price Index (CPI) would be more appropriate.
6.23 The actual level of change will impact on both passenger numbers and on the level of subsidy that we might have to provide to the franchisee. For example increasing fares by less than RPI+1% could increase the number of people using rail passenger services but as the actual costs for providing the rail services will increase we might have to provide additional subsidy to the franchisee. High fare increases could however constrain rail passenger growth and thereby not assist us in meeting our overall policy agenda of encouraging modal shift to public transport.
6.24 Fares are not the only variable which influence how and when people choose to travel. Other factors such as employment levels and the cost travel by other modes are also important factors. Taking these external factors into account we have estimated that rail demand and revenue would continue to grow for fares increases of up to RPI+3%. Demand in Scotland was forecast to decline for fares increases above RPI+3% although revenue would continue to increase beyond this point.
6.25 Fares need to be set at a level which will generate revenue to help pay for new rail enhancements. We are therefore considering whether those passengers receiving an enhanced service as a consequence of investment in that service should make a contribution through increased fares, rather than having all costs falling to the taxpayer.
6.26 As discussed in Section 5 (train services), demand is poorly matched to capacity across the day for most routes on the Scottish network. Services tend to operate at or above capacity during the peak period while there can be significant spare capacity across the off-peak. This general demand profile is especially inefficient because many peak services are crowded, which constrains further growth and reduces the passenger's journey quality. Deteriorating journey quality and difficulty finding a seat can also lead to reduced customer satisfaction and, in response to fares rises, an increased perception that rail travel fails to provide value for money.
6.27 Currently the fares mechanism is designed to encourage passengers to travel in the off-peak period, where they can. However the differential between peak and off-peak fares is generally too small to have any significant impact on changing behaviour. We are considering increasing the differential in order to free capacity in the peak period to accommodate future growth. Modelling indicates a differential of at least 20% between peak and off-peak fares would be required to have any significant effect on passenger behaviours.
6.28 We have also looked at whether we should introduce a third layer of pricing, so as to encourage passengers to shift from the high peak where services are most crowded to the edges of the peak period, where there is often spare capacity. However, we have concluded that this could create additional confusion into the pricing system and accordingly we do not intend to introduce this type of shoulder-pricing.
6.29 We are also aware that the use of Season Tickets, which in offering substantial reductions to passengers for regular travel, does not generally encourage the use of off-peak services. Whilst we do not intend to change this arrangement at the current time we welcome views on ways in which we could use Season Tickets or shoulder-peak pricing or indeed any other mechanisms to encourage a move from peak to off-peak travel.
6.30 The future development of smart ticketing may however provide an opportunity for using different fares structures to cope with capacity demands. Smart tickets which automatically credited passengers for travelling outside the peak period would provide greater flexibility by enabling passengers to travel at the time most suited to their needs on a particular day.
||What should be the rationale for, and purpose of, our fares policy?
||What fares should be regulated by government and what should be set on a commercial basis? Do your recommendations change by geographic area (the Strathclyde area example), or by type of journey (for example suburban or intercity)?
||How should we achieve a balance between the taxpayer subsidy and passenger revenue contributions in funding the Scottish rail network? At what rate should fares be increased, and how feasible would it be to apply higher increases to Sections of the network which have recently been enhanced?
||What should the difference be between peak and off-peak fares? Will this help encourage people to switch to travelling in the off-peak?