A new report by KPMG has provided powerful evidence of how franchising has been a key ingredient in the recent success of Britain’s railways, says Michael Roberts

The Association of Train Operating Companies recently published Growth and Prosperity, a report into how franchising has helped transform Britain’s railway. Revealing as it does a story of increasing revenue, driven largely by phenomenal passenger growth, which is helping to sustain investment in the rail network, it should be on the summer reading list of all professionals in the passenger transport industry.

Based on data collated and analysed by KPMG, the report provides powerful evidence of how franchising has been a key ingredient in the rail industry’s recent success. It demonstrates how passenger revenue rose by £3.2bn between 1997-98 and 2011-12, with 96% of the increase coming from passenger growth and just 4% from fare changes. At the same time, growth in costs, such as staff, leasing and fuel have been constrained. Passenger journeys per employee have increased by 37% and operating margins were, on average, around 3% of turnover.

By containing the costs they can control while overseeing a vast increase in revenue, train operators have increased the surplus being generated by train operations. This has gone from £600m in 1997-98 to £2bn in 2011-12 and is reflected in a fall in net subsidy from government to train operators from £1.4bn to £81m over the last decade. When the combined effects of passenger growth and declining subsidy are taken together, the impact is a fall in subsidy per passenger journey of 18%.

With only a small part of the increased surplus feeding through into train operator profit margins, the money that is available for government to reinvest in the railway has increased more than four-fold from £400m to £1.7bn.

As already suggested, key to this increase in revenue has been passenger growth. Our report considers a range of potential external demand drivers that are often said to contribute to journey numbers and draws the conclusion that these only partially explain the increase in journeys.

Comparisons between economic growth and passenger growth in the last 15 years of British Rail and the first 15 years of franchising reveal that between 1982-83 and 1997-98, journey growth was half GDP growth. From 1997-98 to 2011-12 it was almost double. Since 1997-98, rail prices and motoring costs have broadly mirrored each other overall. In addition, it is not obvious that any change in the relative cost to users of the two modes is driving rail growth.

The so-called ‘London effect’, reflecting the strong relationship between the London and South East economy and demand for rail travel, also does not fully explain what is happening. Rail journey growth in the region outstripped growth in Tube travel, at 73% and 43% respectively. Similarly, peak journeys in London and the South East increased by just 17% in the last 15 years, almost exactly in line with the national average. This suggests that the major growth in rail travel has not been on the back of a captive commuter market.

Neither does the growing UK population explain passenger growth. Rail journeys per person are outstripping population growth nationally. While annual journeys per head of population increased during the years leading up to franchising from 11.5 in 1982-83 to 14.9 in 1997-98, this figure had accelerated to 22.4 journeys by 2011-12. As the RAC Foundation noted in On the Move, its report published last year, the growth in rail travel, compared to car use, is remarkably evenly spread across the country and has resulted from a larger proportion of the population using rail services over time, rather than existing passengers travelling more often. “The main conclusion concerning the increase in National Rail travel between 1995-7 and 2005-07 is that the growth in passenger kilometres of 50% per person is almost entirely explained by an expanding market base,” the report said. And rail’s market has continued to expand since the data was evaluated in the RAC report.

A further explanation often cited for the growth in rail travel is increased investment in the network. While it is important to acknowledge that significant investment in new trains, faster services and better stations have all played a part in promoting growth, most of the expenditure by Railtrack and Network Rail between 1997-98 and 2011-12 was on maintaining the railway to clear the backlog in maintenance and renewals that built up under BR.

While investment and external demand drivers will clearly have supported the growth in rail passengers, they do not alone explain the success. Journey growth in Britain has significantly outstripped publicly-run railways at home and abroad. As well as higher growth than the publicly-run London Underground, growth in the UK exceeds that of the state-owned railways in France, Germany and the Netherlands.

In Britain, rail franchises are incentivised to deliver and, where possible, exceed the revenue targets they have set out in their bids. Key to achieving this is finding out what customers want and providing it in a cost-efficient way.

The evidence suggests train operators are doing this with great success. The National Passenger Survey, conducted twice a year by the independent passenger watchdog, shows increasing satisfaction with services. Overall satisfaction rose from 76% in 1999 to 82% in Spring 2013. Taking into account passenger growth, this is equivalent to an extra 500 million journeys being rated ‘satisfactory’ or ‘good’ each year. By working with Network Rail, punctuality – a key driver of passenger satisfaction – has overtaken the level in 1997-98 to stand at a near record high of 91.6% of short and long-distance services arriving within five or 10 minutes, respectively, of their scheduled arrival time in 2012.

Further improvements for customers include an extra 4,000 services a day compared to the mid-1990s, an increase of 20%. Frequencies on many mainline routes across the country have been doubled since 1997-98.

As well as benefitting from improved services, the average price paid per mile by passengers has stayed almost flat, rising 0.8p or 4% between 1997-98 and 2011-12. This shows that while government policy since 2004 has been to increase regulated fares (such as season tickets) above the rate of inflation, passengers are responding to the choice of tickets and prices offered by train operators. More than a million journeys are now made each week using cheaper advance fares, and increasing numbers of journeys are made with off-peak and other discounted fares.

Our railway is now serving more than 1.5 billion journeys a year, more than at any time since the 1920s. This is due to many factors and reflects the work of organisations across the rail industry but central to the success is franchising, as government specifies improvements it wants to buy, and operators commit to a payment line which drives them to attract more passengers and contain costs.

The competitive bidding process drives innovation in how this is done, through improvements to services, pricing, better timetables and investment. Furthermore, franchises are motivated to deliver on the contracts they have with government in order to improve their chances of retaining their business.

In the franchising process, government has devised a winning formula where competition injects new ideas and skills to enhance services, attract more passengers and keep costs down. This is generating record levels of revenue to pay for more and better services, in turn creating a virtuous circle by encouraging greater rail use. A strong partnership between the public and private sectors is delivering for passengers, taxpayers and the country as a whole. It is no wonder that many other countries are seeking to replicate our success by adopting the franchising model.

The transformation of the railway that I have described is a uniquely British success story. I hope you enjoy reading about it in more detail in your copy of Growth and Prosperity which is included with this edition of Passenger Transport.