Commute decline accompanies acceleration of rail industry reform

Answer

In April and May 2020, rail use in the UK dropped to between 4% and 6% of pre-pandemic figures as national lockdown measures ground the country to a halt. Where millions of Brits used to spend multiple hours each day travelling to and from work, our commutes have now been reduced to a slipper-clad stroll to the kitchen table.  

Many office workers won’t miss the considerable weekly outlay in both time and money spent commuting and are now used to saving more and using those precious hours for beneficial things such as more sleep and exercise. Putting pandemics and lockdowns aside for a moment, more time to lead a balanced lifestyle is likely to lead to happier, more productive workers. Allowing employees to work from home also brings cash-saving opportunities for employers, as businesses may look to reduce office space or even move to cheaper, less central locations as the need for accessibility decreases.  Reducing employee travel time is also an opportunity for businesses to address their environmental impact, an issue which is increasingly on the agenda of big companies and individuals alike.  

However, it remains to be seen the extent to which working from home will be the norm when offices are able to reopen, and this is likely to differ from business to business. While some City bosses have announced cuts to office space in a move to increased home working and flexibility, not all employers are sold on remote working as the ‘new normal’. Furthermore, even those workers who do return to the office may change their behaviours and travel patterns after such a long period at home and choose to travel by other means.

This level of uncertainty is rather a shock to the system for the rail industry, considering that 58% of rail journeys were previously made either by commuters or those taking business trips. To put it another way, on a typical weekday in 2019, around a million passengers arrived in London by rail. Not only did commuters make up a large portion of journeys taken, but the type of revenue they generated – steady and reliable, particularly due to season ticket sales – was an important component of train operating companies’ business models.  

Under the rail franchise system, initially introduced by the Railways Act 1993, private train operators bid for contracts known as ‘franchises’ from the Department for Transport (DfT). Those franchise contracts were awarded for a set period of years and allowed them to operate passenger rail services on certain routes. The system faced criticism for various reasons, one being that periodic re-bidding stifled innovation by discouraging train operators from investing in long-term service improvements, as the resultant gains could be enjoyed by a successor train operator in a few short years. 

It would not have been possible for train operators to survive the low and unpredictable passenger numbers seen over the past year without help from the government. The revenue modelling and assumptions on which franchises were originally bid were made wildly inaccurate and unsustainable as a result of covid, which reduced passenger numbers and therefore revenue. Without swift government intervention, franchised train operators would soon have defaulted under the franchise contracts.

This intervention came in the form of temporary Emergency Measure Agreements (EMAs) in March, followed by Emergency Recovery Measures Agreements (ERMAs) in September. The EMAs and ERMAs transferred to the government the revenue risk and costs of running the railway (which were previously borne by the train operators). The ERMAs are expected to bridge the gap to new, shorter term, directly awarded contracts which would lay the groundwork for a permanent move away from the franchise system. Absent covid, a root-and-branch review of Britain’s railways chaired by Keith Williams, which began in 2018, is expected to start the process of establishing the direction of change for the industry. Though the publication of the Williams Review has been delayed, Sam Caughey at the DfT has confirmed that the ERMAs reflect the trajectory of the Williams Review. While change has been on the cards for some time, covid has accelerated industry reform to ensure the survival of the nationally important service that railways provide.

Until the new operating contracts are finalised and made public, it is not certain what the new model will look like. However, it is anticipated that it will focus on performance targets rather than solely on management fees, and will aim to encourage more cooperation between operators. Those responsible for building the new model have plenty to think about, and must also support the government’s aim to “build back better” post covid.

The new model is expected to help operators deliver an improved passenger experience through simplified timetables and more punctual, reliable services. The recently announced introduction of flexible season tickets is an example of the type of changes we might see as part of this rebuilding, and will enable part-time commuters to enjoy the savings afforded by season tickets and provide train operators with stable revenue streams, even from those continuing to work flexibly.

There have also been calls for the government to invest heavily in rail as part of “building back better” for environmental reasons, as prioritising improvements in clean rail could encourage rail travel to become the low carbon transport mode of choice and help the country on its way to Net Zero. These changes to the system have not just been driven by covid and for most are a welcome and long overdue re-think.  

The long-term effects of covid on passenger behaviour remain a matter of speculation, but one possible outcome could be a resurgence of leisure travel by rail. This would potentially mean a move away from basing timetables around peak and off-peak times corresponding to commuting hours, and could lead instead to increased services during the day and at weekends. However, planning services around leisure travel is far more difficult than planning for the predictable twice daily demand of commuters and will bring a new set of challenges for train operators. 

There are many other businesses whose activities intersect the rail industry, who will also be watching commuter behaviour closely over the coming months. You may not have considered the number of interested parties there are behind the scenes, from rolling stock operating companies to real estate investors, asset owners and construction companies, who all have a stake in the industry. The strategically located WHSmith’s and countless other food and retail outlets positioned to provide convenient ‘grab and go’ services to busy travellers will be just as eager to know how passenger behaviour will change. Given its breadth, it is likely that in your legal career, you will find yourself with clients touching part of this industry and will need to be attuned to the issues they are facing.   

The government’s aim is to improve rail services in spite of a shift in commuting behaviour, but there is still much uncertainty for the industry. The Williams Review has not yet been published, the new contracts are yet to be finalised and their effectiveness at achieving the aimed reforms remains to be seen. While government help provides some level of comfort, businesses will no doubt still be keeping a keen eye on the habits of passengers as society begins to reopen its doors.

Isabel Robinson is a first-year trainee solicitor at Burges Salmon. Her current seat is in the projects department.