Profitability and Cross-Subsidy

[GordonT]

Are there any specific UK rail services which could reasonably be said to be profitable and if so do the profits to an extent offset the extent of losses incurred elsewhere on the network?

 

[LNW-GW Joint]

A few TOCs made a paper profit when they were franchises pre-Covid, but none do now though LNER comes close.
But that ignores the grant Network Rail gets to cover increased TOC access charges that are paid direct by DfT.
The upshot is that no TOC makes a real profit.
The TOCs get a small management fee (something like 2% of costs) for running the trains, which goes to their shareholders.

The best-performing TOCs used to include SWR and Thameslink, but they are suffering revenue loss with the drop in peak-hour commuting to London.
Regional TOCs like Northern, TfW and Scotrail were always subsidy-heavy.

 

[geoffk]

The TOCs get a small management fee (something like 2% of costs) for running the trains, which goes to their shareholders.

Is the management fee a fixed sum or does it vary to take account of train cancellations? Surely if, say, 5% of trains are cancelled the fee should go down by that amount.

 

[Class 170101]

Is the management fee a fixed sum or does it vary to take account of train cancellations? Surely if, say, 5% of trains are cancelled the fee should go down by that amount.

Some is fixed but they can earn more for meeting targets.

 

[Bald Rick]

Yes, lots, and yes, they ‘cross subsidise’

 

[12LDA28C]

Surely if, say, 5% of trains are cancelled the fee should go down by that amount.

That would seem rather unfair if the majority of those trains were cancelled due to NR infrastructure failure or other issues outside the TOC's control.

 

[GordonT]

Yes, lots, and yes, they ‘cross subsidise’

I suppose there are two very contrasting ways of looking at this.
i) Taking the rough with the smooth helps to conserve a larger network and some of the less profitable services might feed passengers into the money spinners.
ii) Passengers who only use the profitable services are arguably paying more than they need to if a proportion of revenue goes to "propping up" dead wood services.

 

[deltic]

Yes, lots, and yes, they ‘cross subsidise’

Which services are profitable?

 

[Dr Hoo]

The TOCs get a small management fee (something like 2% of costs) for running the trains, which goes to their shareholders.

This keeps coming up and I have asked about it before but not really had an answer.

So, to ask again, 2% of turnover (which could run into £millions) is literally a straight ‘bung’ into shareholders’ pockets without the TOC actually doing anything?

 

[Craig1122]

This keeps coming up and I have asked about it before but not really had an answer.

So, to ask again, 2% of turnover (which could run into £millions) is literally a straight ‘bung’ into shareholders’ pockets without the TOC actually doing anything?

I believe it's cost to operate + 2% where the cost is as agreed with Dft. Hence why TOC's can't do anything without their agreement. Revenue goes straight to the treasury. Extra bonuses can be earned by exceeding certain targets.

== Doublepost prevention - post automatically merged: 31 Jan 2024 ==

I think at one time SWT was profitable even factoring in Network Rail costs. The interesting comparison is that in the late BR era only Regional Railways required significant subsidy so it does call into question the efficiency of privatisation. With BR a lump sum payment was agreed with government to operate the "social railway".

 

[Watershed]

I think at one time SWT was profitable even factoring in Network Rail costs. The interesting comparison is that in the late BR era only Regional Railways required significant subsidy so it does call into question the efficiency of privatisation. With BR a lump sum payment was agreed with government to operate the "social railway".

SWR and VTEC (as was) were the only TOCs to "break even" from a taxpayer perspective when Network Rail subsidy was considered, but that was largely because they were paying unsustainable franchise premiums.

With high costs up significantly, passenger numbers down and in particular revenue (due to the shift away from lucrative business and reliable commuter traffic) it's no surprise that the railway is in a difficult financial position.

BR also only achieved what it did by underinvesting in a lot of areas. A huge amount of money went into new rolling stock and infrastructure upgrades in the first decade or so of privatisation - money that BR could only have dreamed of seeking, even if (frustratingly) it would likely have managed to achieve a lot more with it.

 

[Clarence Yard]

It’s not done on turnover or costs + 2%. It is an (index linked) fixed fee for the duration of the contract, the size of the sum being related to the size of the TOC.

On top of this, you can earn a contract performance fee, which is usually 2.5 times the fixed fee if you get 100%, which you won’t. It’s a contract performance fee, only part of which relates to train performance. Co-operating with the DfT/NR and keeping to their budget forms a significant proportion of that performance fee assessment.

If you look at an NRC on the DfT website, you can see how it all works although the exact money for the fees (both fixed and performance) and percentages for the performance fee are usually redacted.

You are right to say that the basic fee is earned for just “being there” (as effectively a managing agent for the DfT) and it goes straight to the owning group, as does the performance fee.

As to any service being profitable, individual service profitability went out decades ago as dividing up the fixed costs became too much of a faff, creating endless arguments. The DfT tends to run the rail budget as one with TOCs, pre-covid, being given individual contribution/subsidy targets as part of their contract. Now, with the Government taking all the revenue and paying for all the costs, the TOCs are very strictly controlled on those costs.

 

[Bald Rick]

Which services are profitable?

Lots. Most commuter services to/from London that start outside the M25. Most daytime long distance services to/from London.

A morning peak 12 coach Thameslink service from Bedford will be carrying £20k+ worth of revenue. Similar from Southampton, Portsmouth, Brighton, Colchester, Canterbury, Cambridge, Northampton, etc etc.

A morning peak 3 coach Northern service into Leeds will be carrying maybe £1k, and cost about the same to operate, potentially more.

Of course there is much debate to be had about allocation of costs and what is marginal / fixed cost.

 

[Lurcheroo]

On a smaller scale I had heard that Manchester - Swansea was TFW’s only profitable route. I guess the profits of that go on running their other routes.
Don’t see why it wouldn’t work on a larger scale.

 

[deltic]

Lots. Most commuter services to/from London that start outside the M25. Most daytime long distance services to/from London.

A morning peak 12 coach Thameslink service from Bedford will be carrying £20k+ worth of revenue. Similar from Southampton, Portsmouth, Brighton, Colchester, Canterbury, Cambridge, Northampton, etc etc.

A morning peak 3 coach Northern service into Leeds will be carrying maybe £1k, and cost about the same to operate, potentially more.

Of course there is much debate to be had about allocation of costs and what is marginal / fixed cost.

This is rather a strange way of looking at profitability. These individual services are only "profitable" because a high proportion of costs have been allocated to other services.

There will be many services whose marginal revenue exceeds their marginal cost but doesn't mean the route from A to B is profitable.

 

[LickeyIncliner]

This is rather a strange way of looking at profitability. These individual services are only "profitable" because a high proportion of costs have been allocated to other services.

There will be many services whose marginal revenue exceeds their marginal cost but doesn't mean the route from A to B is profitable.

It's not strange, it's just that an individual train is a fairly narrow definition of "a service" (and the OP asked about services, not routes). If an operator who runs a half-hourly service in the peaks and hourly between peaks is deciding whether it would be profitable to increase to inter-peak service to half-hourly, then marginal revenue (from additional ticket sales) minus marginal costs (energy, track access charges, additional maintenance, etc) is an appropriate measure. For bigger decisions it gets much more complicated, and the questions of which costs are allocated to which services are critical and complex and don't have a single right answer.

 

[TUC]

It’s not done on turnover or costs + 2%. It is an (index linked) fixed fee for the duration of the contract, the size of the sum being related to the size of the TOC.

On top of this, you can earn a contract performance fee, which is usually 2.5 times the fixed fee if you get 100%, which you won’t. It’s a contract performance fee, only part of which relates to train performance. Co-operating with the DfT/NR and keeping to their budget forms a significant proportion of that performance fee assessment.

If you look at an NRC on the DfT website, you can see how it all works although the exact money for the fees (both fixed and performance) and percentages for the performance fee are usually redacted.

You are right to say that the basic fee is earned for just “being there” (as effectively a managing agent for the DfT) and it goes straight to the owning group, as does the performance fee.

As to any service being profitable, individual service profitability went out decades ago as dividing up the fixed costs became too much of a faff, creating endless arguments. The DfT tends to run the rail budget as one with TOCs, pre-covid, being given individual contribution/subsidy targets as part of their contract. Now, with the Government taking all the revenue and paying for all the costs, the TOCs are very strictly controlled on those costs.

It is very hard to see how these arrangements lead to greater incentives to attract passengers and income than a traditional franchise with the main way to make a profit being to grow passenger volumes.

 

[Bald Rick]

This is rather a strange way of looking at profitability.

Hence my last sentence!

But there’s no doubt that if you take two services that cost the same to provide, but one of them generates 20 x the income of the other, then the former is goign to be more ‘profitable’. Or at the very least, less loss making.

 

[Scanderina]

ORR's industry financials are a good place to look on this. This publication used to include a TOC-by-TOC breakdown - e.g. see the 2018-19 version, page 16 - which included an allocation of both infrastructure and train operating costs and showed that only Essex Thameside (now c2c) and South Western were profitable, with Greater Anglia and East Coast (now LNER) breaking even. Note that this view is about the degree of subsidy needed to support the services, rather than how much money the TOC makes running the services, which are two very different things.