The rail industry has announced today that train fares will rise by an average of 3.4% from January 2018. This annual fare increase is based on two separate calculations: the Government-directed ‘cap’ for regulated fares and the industry’s commercial considerations regarding other, ‘unregulated’ fares.
This blog post provides a brief overview of the fares decision for 2018 and some context for that decision.
How much will fares go up for 2018?
On 5 December the rail industry, under the auspices of the Rail Delivery Group (RDG), announced that the average fares increase for 2018 would be 3.4%. This overall figure masks differences between different routes and types of ticket.
The maximum increase for regulated fares in 2018 is 3.6%, based on the July 2017 Retail Price Index (RPI). If regulated fares are increased across the board up to the cap level, then this implies that unregulated fares, set at commercial rates, are likely to increase by less.
Transport Focus, the independent transport user watchdog, pointed to the divergence between stagnant incomes and rising fare prices and stated that ‘fair’ fares needed to be reinforced by consumer confidence that they were purchasing the best value ticket – a problem which has been emphasised repeatedly over the past decade and more by passenger groups and Parliamentarians.
How is this determined?
The Government of the day can vary the annual regulated fares cap by, for example, setting a cap of RPI plus or minus X%, as it has done in the past. At the moment the cap is RPI +/- zero.
About 45% of all rail fares are ‘regulated’, i.e. annual increases are subject to a ‘cap’ set by Government. As stated above, regulated fare increases are linked to the RPI figure for July of the previous year (e.g. fares beginning in January 2018 are based on the RPI for July 2017). The inflation link dates back to 1996. There have been calls for the Government to switch to a ‘fairer’ measure of inflation to set the cap, but they have to date resisted this change.
Unregulated fares can also be subject to a cap under certain circumstances. For example, in 2016 the Competition and Markets Authority (CMA) capped unregulated fares on three routes which form part of the Northern rail franchise (Leeds to Sheffield, Wakefield to Sheffield and Chester to Manchester). This was related to concerns about a substantial lessening of competition.
Have fares increased over the past decade?
Yes. Rail fares are roughly 50% higher than in 2007, compared with a 30% increase in motoring costs and a 70% increase in bus fares over the same time period.
Why do fares keep going up?
The key driver of higher fares over the past decade has been a policy decision by consecutive governments to shift the burden of funding the railways from the taxpayer to the passenger.
This began in 2004 when the regulated fare cap was changed from RPI-1 to RPI+1. In its 2007 rail White Paper the Labour Government explained that “historically there has been considerable (and often year-on-year) variation in levels of subsidy, from 50 per cent of rail funding in 1992/93 to just 15 per cent in 1995/96, reflecting the sales of assets as part of the privatisation process”.
However, after privatisation there was a consistent increase in the proportion of rail costs funded by the taxpayer, and a pattern of 25–35% subsidy in the second half of the 1990s became 40–50% after 2000. By 2005/06 taxpayers were paying a higher proportion than fare payers. The White Paper stated that “this is clearly not sustainable” and said that between 2009 and 2014 ‘cost efficiencies’ would “allow the subsidy requirement to return closer to historic levels”.
In its 2012 command paper, the Coalition Government stated its intention to bring down taxpayer and fare payer funding for the railway: “we will reduce and then put an end to above-inflation rises in average regulated fares, as well as relieving pressure on taxpayer funding”.
Information published by the regulator in February 2017 showed that while in 2015-16 passengers still contributed almost half of the rail industry’s income (48.2%), the proportion of was down from over 50% in 2014/15.
As indicated below, Government support to the rail industry increased from £5.6bn in 2014/15 to £6.7bn in 2015/16. We may well expect to see that support continue to rise over coming years as construction begins on major, publicly-funded, infrastructure projects like HS2, with a currently projected cost of £56bn.
A final reason as to why fares are high and continue to go up is the inherent cost of running and upgrading the railway. Some argue that there are higher costs associated with the ‘fractured’ structure of the rail industry in Britain and that a better integrated system (whether in the public or private sector) would bring the overall costs down and allow for fare reductions. This is explored in more detail in section 5 of House of Commons Library paper CBP 7177 Transport 2015, 14 May 2015.
What are regulated and unregulated fares?
Regulated fares fall into two categories, known as ‘protected fares’ and ‘commuter fares’:
- Protected fares include saver returns, standard returns and weekly season tickets; and
- Commuter fares include season tickets to, from and within the London Travelcard zones; standard singles and returns for journeys wholly within the London Travelcard zones; and standard singles and standard returns to any station in the Travelcard zones from a defined London suburban area, roughly 35-50 miles from London.
All other fares are unregulated and train companies are free to determine these fares according to market forces. Unregulated fares include things like first class, advance purchase and saver tickets.
For more information about rail fares and ticketing policy, see House of Commons Library paper CBP 1904, Rail fares and ticketing, 23 February 2017.