Go-Ahead
Our rail operation, Govia, is owned 65% by Go-Ahead and 35% by Keolis, a French-based operator of passenger transport services which is majority owned by the French national railway SNCF. Through Govia, Go-Ahead operates three rail franchises – Southeastern, Southern and London Midland – making us the UK’s busiest rail operator, carrying almost 30% of rail passengers. There are currently 19 rail franchises in the UK. Figure 3 shows UK rail market share by revenue.
Our strategy is to operate urban intensive commuter franchises centred around London. Around 45% of all commuter rail journeys into London are made on our franchises.
Figure 4 shows that across Britain commuting is the most common reason for taking the train.
View detailed information and performance reviews of our three rail franchises
Rail franchising system
The franchise model was introduced with the privatisation of the rail industry in 1996. Each franchise agreement tenders specific rail operations on a contract basis and typically lasts for around eight years. The Department for Transport (DfT) submits an Invitation to Tender (ITT) to interested bidders which outlines the detailed commitments the franchise must deliver, such as timetabling and capacity. The ITT also outlines the formula to be used for annual regulated (peak time) fare increases, which is typically the preceeding year’s July RPI +1%.
Once the DfT has issued the ITT, train operating companies (TOCs) enter a competitive bidding process for the right to operate the franchise. TOCs assume how much revenue growth they can generate through passenger demand and growth. This is driven by a combination of economic conditions and ‘self help’ measures such as revenue protection and marketing. Based on these revenue and cost assumptions and required returns, the bidder specifies the premium profile they will pay to the DfT or the subsidy profile they require from the DfT to make running the franchise a viable business.
It is important to note that the rail industry is not a single homogeneous entity as each franchise has distinct characteristics. Significant variables include the type of franchise (eg. Intercity; commuter), the age and length of the franchise and the revenue bid assumptions and subsidy/premium profiles.
Broadly speaking, the subsidy and premium profile takes into account indexation so TOCs’ profits are not impacted by inflation changes. The bidding process usually takes around a year and typically costs around £3-4 million per franchise.
TOCs are required to take the revenue risk for any franchise contract, subject to revenue share and support mechanisms outlined below. If TOCs forfeit their franchise agreements for any reason the Government may seek to enforce penalties. This may include a cross default provision of other franchises operated by the parent group.
Over the past four years, Govia has achieved the greatest success rate in UK rail bidding, winning three franchises out of four bids. Most recently, it was announced in June 2009 that Govia had retained the Southern franchise.
View a detailed presentation of our new Southern franchise.
Revenue share & support mechanism
A franchise agreement typically includes a revenue share and support mechanism. Figure 5 shows the DfT model which applies to our franchises.
The revenue share mechanism begins at the start of the franchise and the revenue support mechanism typically starts at the beginning of the fifth year.
If revenue falls to between 94% and 98% of the original target revenue specified in the contract, the government provides additional subsidy equal to 50% of the shortfall between these thresholds. If revenue is below 94% of target, the government provides support of 80% of the shortfall below 94%. Revenue support is designed to provide significant mitigation for revenue shortfalls in the later part of the franchise. There is a symmetrical system for revenue share if revenue exceeds the original target revenue specified in the contract.
Passenger growth & the impact of the current climate
Figure 6 shows that, since the rail industry was privatised, the market has experienced an unprecedented level of growth. Indeed, for the first time since the second world war over 1 billion train journeys were made in the UK in 2003-04, rising to 1.27 billion in 2008-09.
Since 1996 the rail industry has been through a period of unprecedented investment by TOCs and the UK Government, resulting in an improved quality of service. Punctuality levels have reached new highs and according to the National Passenger Survey published in June 2009, 81% of passengers are satisfied with their rail experience.
Levels of growth in passenger numbers and revenue have slowed recently as a result of rising unemployment, less discretionary rail travel and more cost-conscious consumers trading down. At the same time this has been mitigated in part by more people choosing to travel by rail, rather than incurring the costs of private motoring.
Rail franchises have a relatively high proportion of fixed costs which means that profits are sensitive to a fall in revenue. However, TOCs have taken action to help mitigate the impact of the economic climate by reducing costs, where possible, and implementing revenue enhancing initiatives, such as promoting cheaper off-peak fares and greater revenue protection. In addition, the revenue support mechanism may help TOCs who are eligible to receive it.
View the operating cost base and subsidy/premium profile for each of our three rail franchises.
Modal shift
While mostly anecdotal, evidence suggests that passengers are increasingly making the switch from private car to public transport. It is believed that high fuel prices last year acted as a stimulus for people to use bus and rail services. Many passengers have continued to use public transport as they found it had improved significantly from previous experiences.
In addition, the population is increasingly seeking ‘greener’ and healthier lifestyles. Instead of taking the car, people may choose to cycle to the train station or walk to the bus stop. An online survey undertaken by our Brighton & Hove bus company showed that 48% of respondents had made the switch from car to bus for some of their journeys.
View modal shift push and pull factors on the Go-Ahead website.
The focus on reducing carbon emissions, combined with the frustration of driving on congested road networks, is improving people’s attitudes towards public transport.
