Since the privatisation of British Rail in the 90’s, the UK rail industry has seen some massive changes.
The TOC market is mid-way through its third franchising round, so what has changed since the last round? In this blog we explore the issues for TOC’s and how priorities have shifted.
1. Revenue growth gap
New rail franchises are often won based on ambitious (or heroic) revenue growth targets.
Recently, revenue growth has slowed, and new franchises are under pressure. They are seeing big differences between their bid revenue lines and reality once they start operating the franchise.
Revenue has slowed for a number of reasons, but primarily, it comes down to changes in customer behaviour. In the last quarter of 2017, passenger journey annual growth slowed to 0.8%, the lowest it’s been since 2009.
The slowdown was caused by a decrease in passenger journeys in the largest sector; with 6 million fewer passenger journeys recorded in the London and South East sector. Flexible working practices are meaning that less people are commuting in to London every day and the sale of season tickets in London and the South East fell by 2.9%*. There is a trend for Monday to Thursday commuters to now commute for only three days; Tuesday to Thursday.
Revenue growth has also been restricted in some markets by Network Rail’s failure to deliver promised infrastructure enhancements on time. Franchises have bid on the assumption that Network Rail will make significant infrastructure upgrades to increase capacity. In some instances, the failure to complete these upgrades on time has restricted the capacity of the route and damaged projected revenues.
Late running electrification schemes have the greatest impact on TOC revenues; it’s no use having shiny new electric trains if the infrastructure to run them on isn’t ready.
2. Infrastructure Involvement
In the past, infrastructure was solely Network Rail’s domain and not something TOC’s required extensive in house knowledge of. But with new trains, comes the need for new depots and with this, the need for new railway infrastructure.
Today TOC’s can be overseeing the build of depots and their associated rail infrastructure, station improvements and working in alliance with Network Rail on occasion.
Grayling’s recent announcement on East Coast could foreseeably lead to more alliances between TOC’s and Network Rail, further increasing the need to be savvier with regards to infrastructure. If TOC’s want to work with Network Rail, then they need to understand their side of the business too.
3. What’s going to score big in the bid
There are three trends on the agenda that have seen a greater focus in the third round of franchise bidding;
Most successful bids this time around include some form of plan to overhaul the ageing fleet. New trains equal big scores.
This not only has a significant impact on the TOC’s, but also the wider rail industry. Demand for people with new trains experience is soaring, with TOC Groups competing for the best people with leasing companies and train builders.
The mandate for new trains is driven by the DfT bid scoring system and the current low cost of borrowing making new trains more affordable.
In this digital age of transparency, all it takes is for one disgruntled customer’s tweet to go viral, and you have a public relations nightmare on your hands. Equally the vast array of data available from different sources can help B2C companies, such as TOC’s, to understand their customer better and engage with them in different ways.
Rail bid scoring criteria reflects this shift to a customer led railway and improving the overall customer experience gains higher priority than it has in past ITT’s. This is aided by the huge leap in technological advances since the last franchises were awarded.
TOC’s are integrating smart ticketing and apps to enhance the customer value proposition. Wi-Fi on trains, smart ticketing, instant delay repay – these things are quickly being established as the norm, so TOC’s are having to invest in new technology and innovative ideas to keep up with the competition.
Making the railway greener is a hot topic, last week Transport Minister Jo Johnson declared that diesel only trains were to be phased out entirely by 2040.
If TOC’s want to score big at bid, demonstrating how they plan to reduce carbon footprint and energy consumption can make a difference.
4. Franchise churn
In the last round of bidding, the current incumbent operator of the franchise was often a safe bet to win it again. Since the West Coast bid debacle, things are much less certain.
Of the eleven franchises/concessions (this includes DLR & LOROL) with private sector incumbents that have been let so far (since Oct 2012); five have lost out to competing bidders and for a further two one of the JV partners has lost out.
This massive shake up has significantly altered the division of market share between the main TOC’s, with Arriva, Abellio and MTR seeing significant increases and the likes of Serco and National Express phasing out their rail offering.
5. Maturing Market
Groups have now established where they sit in the market and are developing a much more selective process for determining which bids to go for and which won’t work for them. Many groups now have a “type” that they go for; commuter railways, intercity or regional.
Because of this, bids are better planned and better run. Bid teams are no longer associated so much with long days and late nights in the office – at least up until the final two week stint anyway.
The downside to this selectivity is that the DfT and other rail authorities have much tighter longlists and shortlists of bidders to pick from. This isn’t helped by the lack of new entrants to the market, despite DfT’s attempt to attract new players from international markets, there hasn’t been an increase in bidders for most franchise competitions.
The exception is the West Coast Partnership, which has attracted interest from overseas. This could form a foot hold for future growth for the winner in the UK. To keep these international players engaged and interested in the UK market beyond West Coast may require some changes to the franchising process.
It’s not just the TOC market that is having to evolve to keep up with industry shifts. The transport sector in general is seeing some huge advances and many of our clients are adapting their senior management teams to keep up. Click HERE to see how we could help you find the best talent.