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With the current Emergency Measures Agreements with franchised passenger train operating companies set to expire on September 20, industry sources report that some TOCs have been ‘resistant’ to the terms of the successor Emergency Remedial Measures Agreements proposed by the Department for Transport.
Rail Business UK understands that negotiations with owning groups and individual TOCs are still continuing.
Change or bustSpeaking on behalf of the owning groups, the Rail Delivery Group has continued to insist that the private operators should be retained.
CEO Paul Plummer stated ‘the government has an opportunity to accelerate the drive to a renewed system as it considers what replaces EMAs, which were put in place as a short-term response to the pandemic. To ensure passenger numbers recover as quickly as possible, which is good for taxpayers, the economy and the environment, new contracts must lock in incentives for the private sector to grow revenue and run the railway safely and efficiently, while also enabling further reform.’
However, reports in the national press that initial proposals from the industry had been rejected by the government appear to be well-founded; payments to TOCs would have been reduced to deliver a profit of around 1% of operating costs rather than 2% under the EMAs. This is likely to see some proposed ERMA contracts rejected by owning groups.
This echoes comments last month by FirstGroup Chief Executive Matthew Gregory, who stated that ‘passenger volumes are not going to be anywhere near sufficient to go back to where we were before. So they are going to have to continue the level of support to keep everybody moving. The government and the country needs the EMAs to be extended for as long as it takes for the revenue to get back up to somewhere near prior levels. Otherwise you are going to have the rail industry effectively going bust and handed back.’
Operator of Last ResortCurrently discussions with owning groups are covered by strict non-disclosure agreements, but it is understood that the final heads of terms are still to be presented in some cases. The expectation within the industry is that some operators will reluctantly accept the terms on offer, and others will choose to revert to their previous franchise agreements, taking a chance that income will rise swiftly. Yet it is possible that some owning groups will step away completely and the businesses transferred to the Operator of Last Resort.
Industry sources suggest that OLR is preparing to take over ‘more than one’ TOC, and that, given the complex circumstances, DfT has indicated it may not enforce the cross-default mechanism which would see an owning group handing back all franchises if one should default. According to one senior observer, ‘DfT is keen to keep the owning groups in play if possible’.
Further to suggestions that ‘bespoke agreements’ may be concluded for TOCs which move onto ERMAs, it is understood that these may vary in length and financial provisions; according to a senior TOC manager ‘it is widely understood is that this time there won’t be 12 agreements that all drop dead at the same time, they have to start thinking about phasing those for whatever they want to come afterwards’.
Correction in growthWith the industry also being asked to look at more collaborative working and a reduction in competition in favour of more ‘joined up’ thinking, the removal of some commercial pressures may also reduce overall income on top of any reductions caused by decreased commuting.
One TOC director told Rail Business UK ‘no doubt Covid-19 will have created a correction in the growth rate; even if somebody just decides to work one day per week at home there’s the 80% figure and it becomes a permanent correction’.
The demand for flexible ticketing for part-time commuting, which again may reduce overall industry revenue, is now seen as impossible to ignore.
‘The challenge for the industry now is to have the right products for the people who chose to travel to work three days a week. The season ticket model doesn’t work now’, the insider added.
These discussions are likely to cover both carnets and also season tickets that offer a fixed number of days of travel within a two or three month period. ‘Discounts for carnets are all to do with levels of funding and DfT has some tough decisions to make about what it will do with the revenue line and what they are going to do with their pricing strategy in the next 18 months’, the insider continued. ‘So far people haven’t listened to the clarion call to “go back to work — it’s safe”, although off peak is proving a little more popular.’
Pricing astonishmentTOCs on Emergency Measures Agreements note that they are facing the confusing situation of being required by DfT to dampen demand, but at the same time to increase revenue to offset the huge cost of running almost empty trains.
Within the EMAs, there has been a requirement not to sell tickets at fares any lower than those in place when the EMAs were introduced. Some managers have noted with irritation that LNER, which is managed through OLR and so does not have an EMA, has been able to introduce a special offer featuring Edinburgh – London fares as low as £20 which runs until September 2.
‘At the end of this, LNER will come out smelling of roses’, one senior insider commented to Rail Business UK ‘We have noted with some astonishment their pricing announcement; it certainly appears to be one rule for LNER and one for the rest.’
This article first appeared on www.railwaygazette.com
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