Emergency Recovery Management Agreements (ERMA)

[LNW-GW Joint]

It looks as though there is trouble looming on the successor to the current Emergency Measures Agreements (EMA) under which the TOCs currently operate services.
This Railway Gazette article cover the issues over agreeing ERMAs, which is all about recovery from the effects of Covid lockdown and getting the economy back to normal.
https://www.railwaygazette.com/uk/t...cy-remedial-measures-agreements/57221.article.

Currently 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.

It also indicates that the EMA TOCs are not allowed to offer lower fares to increase revenue, while OLR TOCs, like LNER, can do so, explaining its special cheap fares.
It looks like 1% margin is on offer from the DfT under ERMA, for a timescale which might vary between TOCs (ie not terminating on the same date).
TOCs can return to their franchise terms, but that will be unviable until revenues are much closer to normal.
It will all have to be resolved by the end of the EMAs on 20 September.

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’.

 

[Ianno87]

It also indicates that the EMA TOCs are not allowed to offer lower fares to increase revenue, while OLR TOCs, like LNER, can do so, explaining its special cheap fares.

Attempting to find the logic in that statement...

Presumably DfT not wanting to be giving "free" profit to the EMA TOCs, as any extra revenue generated would be pure profit.

 

[DorkingMain]

I'd be very surprised if anyone is willing to take the gamble on returning to their franchise agreement. Certainly at my TOC, the commuter flows have dried up almost completely (despite pushes to get people back to work) and I'm sure most TOCs (aside maybe the four mainlines) live and die by season ticket revenue from commuters.

 

[Ianno87]

I'd be very surprised if anyone is willing to take the gamble on returning to their franchise agreement. Certainly at my TOC, the commuter flows have dried up almost completely (despite pushes to get people back to work) and I'm sure most TOCs (aside maybe the four mainlines) live and die by season ticket revenue from commuters.

Ironically LNER are probably the TOC with the least dependency on commuter revenue nationally.

 

[DorkingMain]

That's why I said aside the 4 mainlines. GWR / Avanti / EMR / LNER trains are generally more populated with people doing longer infrequent journeys at a high price.

 

[pdeaves]

It also indicates that the EMA TOCs are not allowed to offer lower fares to increase revenue, while OLR TOCs, like LNER, can do so,

I would not be surprised at all if there's some legal/competition thing that this contravenes.

 

[43096]

That's why I said aside the 4 mainlines. GWR / Avanti / EMR / LNER trains are generally more populated with people doing longer infrequent journeys at a high price.

GWR is heavily commuter focused. It’s basically Thames Valley Metro which is all DfT is interested in and why the West Country gets long distance trains that aren’t fit for purpose.

 

[Starmill]

Attempting to find the logic in that statement...

Presumably DfT not wanting to be giving "free" profit to the EMA TOCs, as any extra revenue generated would be pure profit.

Surely lowering the price level is risky, in case you've overestimated elasticity and it actually causes revenue to drop? DfT is taking on all of that risk, so I'm not surprised they need to approve it. If course, other TOCs actually have lowered the average price level quite effectively by just reintroducing cheaper advance tickets.

 

[Class 170101]

It also indicates that the EMA TOCs are not allowed to offer lower fares to increase revenue, while OLR TOCs, like LNER, can do so, explaining its special cheap fares.
It looks like 1% margin is on offer from the DfT under ERMA, for a timescale which might vary between TOCs (ie not terminating on the same date).

Attempting to find the logic in that statement...

Presumably DfT not wanting to be giving "free" profit to the EMA TOCs, as any extra revenue generated would be pure profit.

But surely it was a fixed fee the TOCs got back, so whether a company collect £1 or £100 in revenue it goes to the DfT / Treasury so why would the DfT object to cheap fares if it tempts passengers back compared to no passengers at all if there were only expensive fares.

 

[Starmill]

But surely it was a fixed fee the TOCs got back, so whether a company collect £1 or £100 in revenue it goes to the DfT / Treasury so why would the DfT object to cheap fares if it tempts passengers back compared to no passengers at all if there were only expensive fares.

Because these calculations are difficult, and there is a big risk of losses if it goes wrong? The DfT are on hook for quasi-unlimited losses.

 

[Nicholas Lewis]

First Group have announced to stock exchange that they have been given an EMA extension to June 2021.https://otp.tools.investis.com/clie.../regulatory-story.aspx?cid=858&newsid=1410815

We are pleased to announce that the Department for Transport (‘DfT’) has today exercised its option to extend the Emergency Measures Agreement (‘EMA’) for Great Western Railway (‘GWR’) until at least 26 June 2021.

Before the end of the EMA period in June 2021, the DfT has an option to further extend the EMA. GWR also has the right to revert to operating with revenue risk but with protection provided though the Forecast Revenue Mechanism until at least 2023. The franchise agreement also makes provision to agree a revenue rebasing which would apply at the end of the EMA term....

 

[Surreyman]

Hate to be pedantic but that statement refers to GWR only, not First group as a whole, i.e no mention of the other First TOCS.

 

[[.n]]

First Group have announced to stock exchange that they have been given an EMA extension to June 2021.https://otp.tools.investis.com/clie.../regulatory-story.aspx?cid=858&newsid=1410815

That's for the GWR franchise

 

[pdeaves]

Correct, GWR only. First's other TOCs are still subject to ongoing negotiations.

 

[theironroad]

Hate to be pedantic but that statement refers to GWR only, not First group as a whole, i.e no mention of the other First TOCS.

Not pedantic at all in this case.

As SWR and TPE were in trouble before covid, I do wonder if First Group will be quite amiable to be shot of both of them. Guess we'll find out this week or next.

 

[LNW-GW Joint]

Does this put off any significant reorganisation of franchising for another 9 months, possibly longer?
It looks like an extension of current EMA terms rather than the supposed Treasury-imposed stricter ERMA contract.
Nothing from DfT yet.

 

[theironroad]

Does this put off any significant reorganisation of franchising for another 9 months, possibly longer?
It looks like an extension of current EMA terms rather than the supposed Treasury-imposed stricter ERMA contract.
Nothing from DfT yet.

Rail Business UK is reporting that the DfT have exercised their option to extend the EMA under the same terms and conditions.

I guess the DfT do need to longer to see how exactly rail travel , especially commuting, is going to recover before putting out a new model.

There would be nothing worse than rushing through changes now to only find that in a year's time that the new model wasn't suitable for a post covid railway.

 

[Meerkat]

As SWR and TPE were in trouble before covid, I do wonder if First Group will be quite amiable to be shot of both of them. Guess we'll find out this week or next.

”In trouble” actually just means an unsustainable premium/subsidy profile.
First might well want to carry on if that was changed. How long can the DfT keep giving deals before competition rules insist on a rebid?

 

[BostonGeorge]

Whilst likely hard to estimate, what is this costing the taxpayer? Ultimately it was the right thing to do to stop our train network from grinding to a halt, but if you compare these agreements to what is taking place with TfL, it’s hard to not conclude the government are exploiting the crisis in London. I eagerly await both TfL’s financial reviews. I cannot imagine KPMG’s will make for pretty reading.

 

[BeHereNow]

”In trouble” actually just means an unsustainable premium/subsidy profile.

Exactly. And having to pay your Parent Company Guarantee would just be paying off your debts from that unsustainable premium profile.

 

[Starmill]

How long can the DfT keep giving deals before competition rules insist on a rebid?

In practice for a very, very long time. The current GWR contract runs until the end of March 2023, with an optional extension of one year. The last time it was re-franchised in an award from an open competition was in 2005-06.

 

[Nicholas Lewis]

”In trouble” actually just means an unsustainable premium/subsidy profile.
First might well want to carry on if that was changed. How long can the DfT keep giving deals before competition rules insist on a rebid?

Presumably we aren't bound by EU competition law anymore or not after 31/12 although given bail outs of European airlines i doubt they need to worry

 

[Ianno87]

Presumably we aren't bound by EU competition law anymore or not after 31/12 although given bail outs of European airlines i doubt they need to worry

EU does permit state subsidies where it is necessary to avoid a "significant economic shift" or words to that effect.

 

[SynthD]

In practice for a very, very long time. The current GWR contract runs until the end of March 2023, with an optional extension of one year. The last time it was re-franchised in an award from an open competition was in 2005-06.

Chiltern paid extra to get such a long franchise. Wonder how they feel about this.

 

[matt_world2004]

Not pedantic at all in this case.

As SWR and TPE were in trouble before covid, I do wonder if First Group will be quite amiable to be shot of both of them. Guess we'll find out this week or next.

I don't think they can be shot of both of them. What would happen if they didn't sign the emra is it would return to the existing franchise agreement . The suppressed passenger demand will mean they will burn through any financial security they put up as condition of winning the franchise and it would eventually default to DOR /OLR it would be far for financially Beneficial for the TOC to agree to emergency remedial measures if it was in trouble before coronavirus. As depending on how long this crisis goes on they may be able to retain the franchise for the length of the contract with a 1% profit margin which is better than what they were getting before.

 

[The Planner]

Chiltern paid extra to get such a long franchise. Wonder how they feel about this.

Chiltern will be direct award territory soon, they will get another few years on top.

 

[Nicholas Lewis]

I don't think they can be shot of both of them. What would happen if they didn't sign the emra is it would return to the existing franchise agreement . The suppressed passenger demand will mean they will burn through any financial security they put up as condition of winning the franchise and it would eventually default to DOR /OLR it would be far for financially Beneficial for the TOC to agree to emergency remedial measures if it was in trouble before coronavirus. As depending on how long this crisis goes on they may be able to retain the franchise for the length of the contract with a 1% profit margin which is better than what they were getting before.

SWR are running such a reduced service they must be saving money and thus getting less management fee or are Dept of Transport specifying service levels ?

 

[John R]

”In trouble” actually just means an unsustainable premium/subsidy profile.
First might well want to carry on if that was changed. How long can the DfT keep giving deals before competition rules insist on a rebid?

I'm not quite sure what the "just" implies, it suggests that it wasn't that serious. The franchises were a disaster for the shareholders, which is just about as serious as it could get.

The shareholders will be quite happy to have had those future losses (which to a large extent had already been recognised in the accounts) completely nullified by the EMA, and indeed I would imagine they will be laughing all the way to the bank. Even if there is an attempt to resurrect the franchise terms, it's clear that passenger volumes will mean the terms will need to be renegotiated. I doubt the shareholders would agree to anything that would broadly replicate the losses they were previously expecting to make, and so would be quite happy to walk away from any deal, remarkably unscathed in comparison to what they would have been expecting at the start of the year.

 

[Surreytraveller]

Presumably we aren't bound by EU competition law anymore or not after 31/12 although given bail outs of European airlines i doubt they need to worry

EU diktats are all written into UK law, so unless we have changed our laws, then they will still apply

 

[matt_world2004]

SWR are running such a reduced service they must be saving money and thus getting less management fee or are Dept of Transport specifying service levels ?

There doesn't seem to be any penalty in the ema agreement if they dont provide a full service. Or I couldn't see any