What is clear post-pandemic is that the finances and business models of the UK rail industry...

What is clear post-pandemic is that the finances and business models of the UK rail industry have been devastated and the role of government redefined.

Photos courtesy Giles Bailey

The COVID-19 pandemic has upended society across the world over the last 15 months. It has affected the organization of business, trade, retail, education, and socialization across the world. The transport industry has been at the center of many of these changes. As well as dealing with reduced demand for mobility, the how, when, why, and where about travel have been altered. Across Europe, where travel modal choice is often quite varied and multi-faceted, dealing with these changes has been enormously challenging.

In the UK, the effect has been severe. For example, much of the country, with some regional variations, had been in an effective “stay at home” lockdown from late November 2020 to end of March 2021, with a gradual reopening of businesses and the ability to travel through April to the, expected, end of June 2021. This follows earlier lockdowns that originally started in March 2020.

Compliance with these rules has generally been widespread and movement curtailed by all modes. The UK rail industry was typically carrying 20% to 30% of its pre-pandemic demand in early spring 2021. Rail travel in the UK represents 7% of all commuting travel, but within London, it is significantly higher and 80% had used rail-based modes to access jobs in the Central Area. Rail use is also typically high into the other major urban centers. Rail is a core mode of mobility in most European countries for commuting, business, and leisure and generally road capacity is insufficient to replace public transport usage in most corridors.

A new normal?

Some semblance of a “normal” is returning, but what does this mean for rail travel in the UK and more widely in Europe in the late pandemic phase?

While there are conflicting visions of how and when people may, or may not, return to offices, higher education and the associated central area support, leisure, and entertainment services, 15 months on changes in behavior will have occurred. People have experienced a new way of working and interacting, with both some positive and negative aspects. Indications, most specifically from office lettings, are that fewer people will work from these centralized locations.

What is critical for the transport system is this will unpick the web of reasons people had to travel by the extensive public transport networks into central areas and between cities. This was the core to the rail network.

Rules on customer behavior on trains and stations have changed. This includes issues such as crowding, movement through stations, cleanliness of facilities, and mask wearing. It is not clear these new ways of operation will immediately revert to the pre-pandemic ways, or that they should from a customer or operator point of view. A cleaner, more hygienic, less crowded railway is probably in most people’s interest. Furthermore, many customers will remain cautious to distinctly nervous for some time about rail’s ability to be a “safe” mode of transport in the post pandemic world. This may be wholly unfair, as there remains little evidence that public transport was a major vector in the spread of the virus, but nevertheless, it is the perception of many passengers and also many public policy leaders in government. During 2020, there were many overtly hostile messages from leading politicians and public policy leaders about the dangers of using public transport in the UK.

Ability to move forward

What is clear is that the finances and business models of the UK rail industry have been devastated and the role of government redefined.

For 25 years, the UK rail industry has meant to be steadily privatized and led by private sector management, albeit with state support to cover the gap between costs and revenues on certain routes. The key rail actors were train operating companies, rolling stock lessors, an industry regulator, network rail — the infrastructure manager, and the Department for Transport — managing franchises and providing subsidies, as well as receiving premium payments. However, the level of state support was meant to be gradually reduced over time. The pandemic has thrown these plans into disarray, and the expectations of changes in travel patterns and mode choice present little expectation that soon these financial models will return.

There has been growing fatigue from users, stakeholders, and politicians about the outcomes of the privatized UK rail industry. Although there have been substantial successes, such as growing the demand base and new rolling stock, repeated amendments to the industry structure have steadily eroded the role of the private sector and led to more control from central government. Several reviews of the structure of the industry were underway prior to the pandemic.

In London, TfL had taken a divergent model of rail ownership over the last 15 years using private operators for London Overground and a heavy government role in the specification and branding of the service. London Underground’s operation and management remained in public hands.

The pandemic has decimated the financials of the industry. This was clearly unsustainable for an industry structured on steady forecasted demand growth during a competitively won multi-year franchise with operational and investment commitments written into the contracts.

As the national rail industry faced financial collapse in 2020, the UK government intervened in a series of Emergency Measures Agreements (EMAs). Through the EMA, in effect, the TOCs were relieved of their franchise obligations early on but asked to continue to operate services for a period of time through the pandemic. The early intervention was extended via new arrangements known as Emergency Recovery Measures Agreements (ERMAs) last autumn. Now longer-term arrangements are being put in place to formally end the franchises and compensate the TOCs for their losses or make supplementary payments to the DfT. The government is deciding who and how the services will continue to operate in the longer term via National Rail Contracts (NRCs). This is a rolling program as many new realities need to be discussed and agreed with a range of different operators who had previously been in various stages of delivering on their franchise agreements.

What is next? It is clear that the demand for train travel — locally, regionally, and intercity in the UK has changed and it will take some time, if ever, for demand to return to pre-pandemic levels. Trip purposes have also been alerted with less commuting and more off-peak travel for a range of purposes, while many travel needs will be met by a variety of online means. Some of the key user markets, such as to airports and cruise ports, have been weakened. Overall, revenue forecasts have been shown to be unpredictable and this is not conducive to long term revenue risk taking by private operators. And, customers and stakeholders will remain highly sensitive is issues of hygiene in the rail environment for some time to come which will influence the cost base of the industry.

The UK had been the furthest along the route of privatization of national rail services in Europe over the last 20 years, although most other European countries were following the principles as laid out in EU Directives of separating the operation of the rail network from service operation as well as opening services to competition and service tendering. This was generally at first for intercity services and later for local “commuter” services.

A key outcome was that the former state rail monopolies generally had a much stronger role in most other European countries, even if nominally or formally private enterprises.

The impact of the pandemic has again been severe. However, the nature of still state owned, formerly state owned, or dominate national rail operators has defined the response in many countries. European states have generally financially supported their “national” rail operators to maintain service and long-term operations during the pandemic. Private operators who operated state supported tendered services — typically local or regional services — have been generally supported by prompt adjustments to the tendered fees to support continued service operation. This is often in the context of the longer-term investment in core sustainable transport systems that involve substantial rail investment to deliver climate neutral modes of medium- and long-distance travel.

However, competition was still emerging in many European rail markets and it has been these smaller independent operators who have been most exposed during the pandemic. They have not necessarily had the prompt access to state support as demand declined. This has led to significant protest about unfairness in the rail industry. Many curtailed their operations in 2020 and are slowly returning the market in 2021, such as Flixtrain in Germany and WestBahn in Austria.

The nature of European rail competition has often meant that “national” operators are competing in neighboring markets with the local “national” operator. This liberalization has, for example, seen the French national operator — SNCF — as well as the Italian operator — Trenitalia — enter the Spanish market with a new local brands set to compete with the Spanish national operator RENFE. Meanwhile, RENFE has invested in a successful independent operator in central Europe- LEO Express. These are long-term strategic investments that may have been delayed by the pandemic, however, are still continuing across the continent’s rail market.

Disruption and lockdowns have varied in intensity across the continent, but generally demand seems to be returning more quickly than in the UK. The overall market outlook is still relatively bright for the industry due to the priority for train travel versus short distance air across the continent. This had already stimulated a renaissance in long distance overnight rail travel supported by operators, such as OBB from Austria, and this looks set to continue post pandemic.

For 25 years, the UK rail industry has meant to be steadily privatized and led by private sector...

For 25 years, the UK rail industry has meant to be steadily privatized and led by private sector management, albeit with state support to cover the gap between costs and revenues on certain routes.

The road ahead

In the UK, rail investment has continued if not intensified over the last year. For example, the new high-speed rail route from London to the Midlands and the Northwest continues to be constructed at full pace. Construction is also continuing in most European markets, if not increasing, due to climate change commitments.

The European rail industry has experienced severe disruption due to the COVID-19 pandemic. The reaction of states to the necessity to maintain some connectivity during the crisis, but also the longer-term operation of the mode has varied with the UK having to promptly reset its franchising model. However, rail remains an acknowledged key component of future sustainable mobility. Governments across Europe will be the key player in stimulating a return to rail travel by supporting their regional operators to provide services, service quality to meet hygiene demands of customers, and assuring the wider public about the post pandemic safety of rail travel.

About the author
Giles Bailey

Giles Bailey

Director, Stratageeb Ltd.

Giles K Bailey is a director at Stratageeb Ltd., a London based consultancy assisting businesses think about their strategic vision and innovation.

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