How are fares regulated?

The Department for Transport (DfT) regulates prices of season tickets and standard day singles and returns. Other fares, including off-peak, promotional, and all first class tickets, are set freely by the train operators according to what the market will bear. Nationally (i.e. in GB), regulated tickets represent just over 42% of all fare revenue. (Just over half of all expenditure on rail fares is paid to train operators in London and the South East.)

Increases in regulated fares are linked to inflation as measured by the all-items Retail Price Index (‘RPI’). Since the completion of a review by the Strategic Rail Authority in 2003, most train operator’s ‘baskets’ of regulated fares can be raised by the 12-month change in the RPI (based on the previous July’s figure) plus 1 percentage point (‘pp’). So beginning 2 January 2007, most train operators will be raising their regulated fares on average by the 12-month change in the RPI to July 2006 (3.3%) plus 1 pp, or 4.3% in total.

Southeastern’s fare regime

Under the terms of its franchise, our train operator, Southeastern, is permitted to raise its regulated fares annually by the RPI plus 3 pp, or 6.3%. Their increase this year is the highest in the country (matched only by the West Yorkshire Passenger Transport Executive).

In order to provide incentives for improvements in services, all train operators are allowed to vary individual fares within their regulated ‘baskets’ provided that the (revenue) weighted average increase overall is no more than the formula. (On a weighted basis above- and below-average changes must therefore cancel out.) There is, moreover, a 5 pp ‘cap’ on the amount an individual fare can be raised above the average allowed. So for Southeastern, the maximum annual increase at an individual station can be the change in RPI + 3pp + 5pp. In 2007 the maximum regulated fare increase is therefore 11.3%.

Increases in Sevenoaks fares

This year’s increase in the price of season tickets from Sevenoaks to London of 10.7% is thus close to the maximum allowed. The Chart below compares the increase at Sevenoaks with some other large stations on the Kent franchise.

Increase in the price of an annual season from January 2007

Source: Southeastern.

In the latest fare round, above-average increases have been applied to Orpington, Sevenoaks and Ashford, but below-average increases to Tonbridge, Tunbridge Wells and Maidstone. An inspection of the trend in fares at those stations shows that the costs of season tickets at Tonbridge, Tunbridge Wells and Ashford rose relative to Sevenoaks between 1998 and 2002 but have been lowered progressively since then and the relativities are now back close to their 1995 levels. Southeastern has said that above-average increases have generally been applied to stations with faster and more frequent services. At present we do not know whether the adjustment this year to Sevenoaks fares is a once-off ‘correction’ or the first of a number of above-average increases.

How do fares increases compare with inflation?

What is the trend in the ‘real’ (inflation-adjusted) cost of fares? As in all such calculations, it rather depends on the starting point.

SRTA has obtained information on fares going back to 1995. These are shown after adjustment for the change in the RPI since 1995.

Trend in ‘real’ fares Sevenoaks to London (Feb. 1995=100)

Indices of fares deflated by the all-items RPI.

Sources: Southeastern (fares) and National Statistics (RPI). In 1995 fares were increased in February. Figure for January 2007 are based on the change in the RPI to November 2006 (3.9%).

The chart show that recent above-inflation increases have restored the real cost of regulated fares (seasons and ordinary standard class returns) to a little below their level in the mid-1990s, although the real price of unregulated off-peak day return tickets is now some 9% higher than the 1995 base year.

Prices of season tickets from Sevenoaks were cut in January 1999, were left unchanged in January 2001, and reduced in January 2002 (latterly largely to compensate for a decline in performance following the Hatfield crash). At that time, the formula for annual fare changes was RPI minus 1pp. However, train operators in London and the South East were also subject to the Fares Incentive Adjustment Payments system (‘FIAP’), whereby an adjustment of up to ± 2 pp was made in relation to performance against standards in the year to the previous July. Following the SRA review mentioned above, this automatic link between changes in regulated fares and performance was replaced by the system of rebates under the Passengers’ Charter.

The fact that the real costs of season tickets are, on balance, a little below those of 12 years ago will, however, be of little consolation to those who began to commute from Sevenoaks more recently. In real terms the price of an annual standard class season in January 2007 will be nearly 21% higher than it was at the trough in January 2002.

A longer perspective shows that while overall the real cost of fares has changed little since the mid-1990s, fares prior to 1995 had risen sharply ahead of privatisation. The solid blue line in the chart below shows the train fares component of the RPI relative to the all-items RPI since January 1987. The shorter dashed series show the price of tickets using data published by the Office of Rail Regulation, again adjusted for inflation. The profile of the real price of regulated fares charged by London and South East train operators is similar to that of Sevenoaks. Note that the chart does not show the impact of the change in fares in January 2007 as the data are not yet available.

Longer-term trend in ‘real’ fares 1987- 2006 (Jan. 1995 = 100)

Indices of fares deflated by the all-items RPI.

Sources: Price of rail tickets Office of Rail Regulation (prices of rail tickets) and National Statistics (RPI data – all-items and train fares series). In 1990 and 1995 fares were increased in February rather than January which accounts for the apparent reductions in those years. (The February values for the train fares component of the RPI in those years are 90.7 and 102.4 respectively.)