Franchise failures and more

nlogax · 6 Aug 2018

Starting a new thread to ask some basic questions which I haven't yet seen asked.

We're reading more and more about failing franchises. Northern flailing. GTR wilting. GWR's performance woes. Virgin / Stagecoach giving back east coast services. SWR renegotiating while First Group ponder splitting off their rail businesses. Network Rail projects indefinitely postponed or just plain cancelled...

Bear in mind my perspective is just one of someone who has a long-term but relatively casual interest in our rail network, but who definitely doesn't work in it and whose only experience is as a fare-paying passenger. Beyond this casual interest and trying to keep up with the industry news - via forums and industry press - I'm just another fare-paying layperson.

So the questions I ask of those who are way more 'in the know'.. are all these bad news stories leading to something larger and more unpleasant happening in the UK rail industry? This -feels- like a downward trend, and I can't help but wonder where these failures are taking the network in the future. What are the big, glaring issues, what can be done to resolve them and is there (a) the political will, and (b) the financial resources needed?

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Bertie the bus · 6 Aug 2018

You missed off Trans Pennine Express which isn’t in the best of health financially. The biggest issue by far is the flat lining, or in some cases fall, in passengers numbers. If that continues TOCs will fall like dominoes. There is no doubt the May timetable has caused reputational damage. How long that damage will last and to what extent it will affect passenger numbers is anybody's guess.

nlogax · 6 Aug 2018

Oh sure - my list is no means complete, they're just the ones I've heard most about. Feel free to add more, although they're pretty well documented in this part of the forum..

Journeyman · 6 Aug 2018

nlogax said:
the questions I ask of those who are way more 'in the know.. are all these bad news stories leading to something larger and more unpleasant happening in the UK rail industry? This -feels- like a downward trend, and I can't help but wonder where these failures are taking the network in the future. What are the big, glaring issues, what can be done to resolve them and is there (a) the political will, and (b) the financial resources needed?

It does make me wonder if franchising as we know it is close to collapse. National Express decided a few years ago that the risks were too high and pulled out the UK market entirely. The recent experience of First Group, added to their current financial problems, might see them go the same way. Abellio have had to pump extra cash into ScotRail to keep it going, and apparently there's plenty of Dutch people very unhappy about their taxes funding foreign adventures.

If things carry on the way they're going, I think we'll see far fewer bids being made, especially for the less-lucrative franchises, and those bids that are made will be more conservative and seek more subsidy. We may not be far from only one bidder on some franchises. I think it's clear that the level of risk the government expects franchisees to take on is unacceptably high and something urgently needs to change there.

Bear in mind a franchise bid costs about five million to put together these days. I've seen what goes into them, it's extraordinarily complex. Not many companies can afford to just throw five million away in the current climate.

edwin_m · 6 Aug 2018

Journeyman said:
If things carry on the way they're going, I think we'll see far fewer bids being made, especially for the less-lucrative franchises, and those bids that are made will be more conservative and seek more subsidy.

The bit I've bolded could be the opposite. The less lucrative franchises will need more subsidy, but the operator can be confident they will receive that subsidy unless they make a major mess of things. The real risk is to those franchises where ticket revenue exceeds or at least approaches the operating cost, because that ticket revenue probably depends much more on the state of the national economy than it does on things the franchisee can do anything about. The bidding process also encourages the bidders to make optimistic projections on ridership and revenue, because if they do so they will be promising to pay more premium to (or receive less subsidy from) the government than their competitors, and therefore more likely to win the franchise.

nlogax · 6 Aug 2018

edwin_m said:
The bidding process also encourages the bidders to make optimistic projections on ridership and revenue, because if they do so they will be promising to pay more premium to (or receive less subsidy from) the government than their competitors, and therefore more likely to win the franchise.

Has this changed over the years or has it always been the case? Encouraging bidders to overegg their ridership forecasts is setting them up to fail, especially in the current climate. Has any franchise winner actually realised their ridership projections in recent years?

3141 · 6 Aug 2018

nlogax said:
Has this changed over the years or has it always been the case? Encouraging bidders to overegg their ridership forecasts is setting them up to fail, especially in the current climate. Has any franchise winner actually realised their ridership projections in recent years?

I don't know the answer to that question, and it would take a bit of research to find it in respect of each franchise. But I do recall that when Govia were awarded Southeastern (December 2005, I think), Keith Luderman was quoted as saying that he thought they had taken a more optimistic view of the house-building projections for the area than the rival bidders, and that might explain why they'd won. But some years later, Govia were saying that population growth hadn't come up to their expectations. So it seems that the issue of ridership forecasts has been going on for quite a while.

js1000 · 15 Aug 2018

Some murmurs Arriva are looking to fob off the Northern franchise and hand it back to the DfT.

Passenger numbers over the last year are down around 5%. They're angry about perceived broken promises by Network Rail, DfT and Grayling that have really screwed up their revenue model for the duration of the franchise. Cancelled Oxenholme electrification, failed bi-mode conversion attempt on 30 year EMUs and delayed Preston electrification were never part of the plan when the franchise started in 2016. Cut their losses before things that are out of their control could get worse.

The refusal to change and better optimise the timetables for struggling Northern routes (Bolton to Manchester, Crewe to Liverpool via Manchester etc.) in December was the final straw.

northernchris · 15 Aug 2018

js1000 said:
Some murmurs Arriva are looking to fob off the Northern franchise and hand it back to the DfT.

Passenger numbers over the last year are down around 5%. They're angry about perceived broken promises by Network Rail, DfT and Grayling that have really screwed up their revenue model for the duration of the franchise. Cancelled Oxenholme electrification, failed bi-mode conversion attempt on 30 year EMUs and delayed Preston electrification were never part of the plan when the franchise started in 2016. Cut their losses before things that are out of their control could get worse.

The refusal to change and better optimise the timetables for struggling Northern routes (Bolton to Manchester, Crewe to Liverpool via Manchester etc.) in December was the final straw.

I really wouldn't blame Arriva for handing back Northern. Network Rail have caused significant harm to the railways across the north with their botched upgrades and appalling day to day service regulation. Northern aren't blameless, but Network Rail need to be carrying the can for the May timetable chaos

Journeyman · 15 Aug 2018

northernchris said:
Northern aren't blameless, but Network Rail need to be carrying the can for the May timetable chaos

Absolutely. Grayling seems to be covering up Network Rail's staggering ineptitude and trying to shift blame onto the private-sector TOCs, knowing the public are hostile towards them anyway.

Andyh82 · 15 Aug 2018

How many of the rumours are concrete though and how many are talked up by unions, union members, Labour Party supporters etc, to help fan the flames when the ‘rail in crisis’ agenda is ongoing. With everything so bad tempered in politics and industrial relations these days it’s hard to know what the truth is.

Northern have been rumoured to be in trouble off and on since Serco & Abellio started operating the previous Northern!

47802 · 15 Aug 2018

northernchris said:
I really wouldn't blame Arriva for handing back Northern. Network Rail have caused significant harm to the railways across the north with their botched upgrades and appalling day to day service regulation. Northern aren't blameless, but Network Rail need to be carrying the can for the May timetable chaos

Plus the continuing strikes isn't helping either

Agent_Squash · 15 Aug 2018

js1000 said:
Some murmurs Arriva are looking to fob off the Northern franchise and hand it back to the DfT.

Passenger numbers over the last year are down around 5%. They're angry about perceived broken promises by Network Rail, DfT and Grayling that have really screwed up their revenue model for the duration of the franchise. Cancelled Oxenholme electrification, failed bi-mode conversion attempt on 30 year EMUs and delayed Preston electrification were never part of the plan when the franchise started in 2016. Cut their losses before things that are out of their control could get worse.

The refusal to change and better optimise the timetables for struggling Northern routes (Bolton to Manchester, Crewe to Liverpool via Manchester etc.) in December was the final straw.

I still wonder if Windermere electrification will return as a 'sweetener' for a marginal in the future...

HH · 16 Aug 2018

nlogax said:
Has this changed over the years or has it always been the case? Encouraging bidders to overegg their ridership forecasts is setting them up to fail, especially in the current climate. Has any franchise winner actually realised their ridership projections in recent years?

No, it hasn't changed. Only the early bids, made under the commonly held assumption that Rail was in terminal decline, consistently under-called revenue. Since then the majority of competitions have featured at least one bid that seriously over-egged the revenue forecasts. ECML is a prime example; then there is First: the recent TPE bid (now treated as an onerous contract), their WCML bid back in 2012 (which Branson saved them from having to deliver), their Great Western bid back in 2005, where they luckily had an escape clause. Obviously, now having been bitten (or nearly) several times, they, and others, seem to finally have woken up and smelt the coffee.

Rumours reach me that on the recent SE Franchise, despite the presence of three bidders, one or even two of them may not actually be that keen to win.

nlogax · 16 Aug 2018

HH said:
Rumours reach me that on the recent SE Franchise, despite the presence of three bidders, one or even two of them may not actually be that keen to win.

Thanks for that background! Tidbits like that make me wonder what the financial benefits of becoming a ToC actually are. Will the pool of bidders dry up as reality dawns on the commercial considerations of taking on franchises? Going to be interesting to see what happens..

ForTheLoveOf · 16 Aug 2018

nlogax said:
Thanks for that background! Tidbits like that make me wonder what the financial benefits of becoming a ToC actually are. Will the pool of bidders dry up as reality dawns on the commercial considerations of taking on franchises? Going to be interesting to see what happens..

Well the main financial benefit is that, for the amount of capital which the TOC owner puts in (and guarantees/puts at risk), the return per £ is very high. Of course that's only if everything goes to plan or better than to plan. If things go worse then a lot of money can quickly be lost. So effectively it's a high risk, high potential reward strategy.

47421 · 16 Aug 2018

Suspicion is that Abellio Greater Anglia is also under pressure. Its accounts from over a year ago (updated ones due to be filed by 30 Sept 2018) state they were in negotiations with DfT about the Central London Employment stats used in the revenue risk sharing formula. Platform extensions to allow 10 car Aventras to stop at various stations where SDO is difficult or impossible (eg cus of location of signals and crossings) was required to be completed per Franchise Agreement by 1 Sept 2018, but no sign of any work being done.

The pending Southeastern award will be interesting. On the bidders (1) Abellio, see above, and also press reports that Dutch government is sceptical about its overseas operations (2) Govia, not sure extent to which performance on other franchises can be taken into account under bidding rules, but post GTR timetable mess hard to imagine Grayling enthusiastically announcing Govia as winning bidders and (3) Stagecoach, had fingers burnt on East Coast, and as the First Southwestern franchise runs into big problems with falling usage and not enough power to allow them to deliver on 4TPH to Reading, Windsor and Portsmouth, they must be thinking they dodged a bullet in not winning it and therefore will be very cautious about Southeastern

hwl · 16 Aug 2018

northernchris said:
Northern aren't blameless, but Network Rail need to be carrying the can for the May timetable chaos

And GTR need to take the blame for the chaos down south. Like GTR, Northern hadn't got their act sorted as regards crew training (and still haven't) so Northern need to take more blame than you are suggesting. Alex knew what was coming when he ran to Scotrail...

Journeyman · 16 Aug 2018

ForTheLoveOf said:
Well the main financial benefit is that, for the amount of capital which the TOC owner puts in (and guarantees/puts at risk), the return per £ is very high. Of course that's only if everything goes to plan or better than to plan. If things go worse then a lot of money can quickly be lost. So effectively it's a high risk, high potential reward strategy.

TOCs have to put up performance bonds which they forfeit if they leave the franchise early, and they're meant to be sufficiently high to prevent that happening (typically we're talking hundreds of millions here, if a TOC bails very early on). It's getting to the point now where a lot of TOCs must be thinking that bailing early and losing that money is preferable to hanging on and losing even more money.

js1000 · 16 Aug 2018

Andyh82 said:
Northern have been rumoured to be in trouble off and on since Serco & Abellio started operating the previous Northern!

I don't think Serco & Abellio were ever in any real difficulty on the previous Northern franchise. The subsidy from the government was generous. Off peak fares were reasonable unlike under Arriva. And passenger numbers were consistently solid following the debacle of the previous Northern franchise. And most importantly the franchise model was not consistently screwed over by broken promises from Network Rail and the DfT as has been the case since Arriva took over. Although yes, I would agree Arriva have not been completely blameless either. Interesting 12 months ahead as to which franchise is returned next because I think at least 2 or 3 definitely will.

HH · 16 Aug 2018

47421 said:
Suspicion is that Abellio Greater Anglia is also under pressure. Its accounts from over a year ago (updated ones due to be filed by 30 Sept 2018) state they were in negotiations with DfT about the Central London Employment stats used in the revenue risk sharing formula. Platform extensions to allow 10 car Aventras to stop at various stations where SDO is difficult or impossible (eg cus of location of signals and crossings) was required to be completed per Franchise Agreement by 1 Sept 2018, but no sign of any work being done.

The pending Southeastern award will be interesting. On the bidders (1) Abellio, see above, and also press reports that Dutch government is sceptical about its overseas operations (2) Govia, not sure extent to which performance on other franchises can be taken into account under bidding rules, but post GTR timetable mess hard to imagine Grayling enthusiastically announcing Govia as winning bidders and (3) Stagecoach, had fingers burnt on East Coast, and as the First Southwestern franchise runs into big problems with falling usage and not enough power to allow them to deliver on 4TPH to Reading, Windsor and Portsmouth, they must be thinking they dodged a bullet in not winning it and therefore will be very cautious about Southeastern

NS are as skittish as a newborn colt at the best of times and reports say Abellio made several bid errors. I'll bet Abellio have been told to behave nicely, but they'd better not win it. Stagecoach will have de-risked their bid as they have been doing since they realised the state of ECML, which means they will only win it if the other bidders fail. Officially, the government can't hold GTR's performance against Govia, although if Govia have made certain claims in their bid they might not get marked very highly. In the normal course of events I would say it was Govia's to lose, but they have proved perfectly capable of doing that!

Bertie the bus · 16 Aug 2018

Journeyman said:
Absolutely. Grayling seems to be covering up Network Rail's staggering ineptitude and trying to shift blame onto the private-sector TOCs, knowing the public are hostile towards them anyway.

So Grayling consistently stating it is all Network Rail's fault and making Network Rail pay Northern's season ticket holders' compensation is placing all the blame on the private sector?

One thing is for sure, we won't be told the whole truth about the May timetable fiasco but what does come out will place a lot more of the blame on the TOCs than certain people on forums do.

pdeaves · 16 Aug 2018

I find it interesting that there is an ORR licence consultation for operator of last resort 'DfT OLR2 Limited'. It already has a passenger operator's licence but is now after station, maintenance depot and non-passenger licences. This suggests to me that someone in the DfT is concerned for the future and is preparing an operator of last resort 'in case'.

Sybic26 · 16 Aug 2018

Remember Connex South Central. It was removed from the South Central franchise by the Shadow SRA way back in 2001 .

Agent_Squash · 16 Aug 2018

Sybic26 said:
Remember Connex South Central. It was removed from the South Central franchise by the Shadow SRA way back in 2001 .

No. It was refranchised and won by Govia, who brought out the remainder of the Connex period. That’s why the Southern brand didn’t appear until 2003.

edwin_m · 16 Aug 2018

pdeaves said:
I find it interesting that there is an ORR licence consultation for operator of last resort 'DfT OLR2 Limited'. It already has a passenger operator's licence but is now after station, maintenance depot and non-passenger licences. This suggests to me that someone in the DfT is concerned for the future and is preparing an operator of last resort 'in case'.

I would guess they plan to have an OLR available to take over in case a franchise goes under. The first OLR is running East Coast and probably doesn't have the capacity to take on anything else.

dorsetdesiro · 16 Aug 2018

Sybic26 said:
Remember Connex South Central. It was removed from the South Central franchise by the Shadow SRA way back in 2001 .

That was Connex South Eastern which got nationalised, not Connex South Central. Connex did operate two franchises, South Central and South Eastern with identical liveries so this confusion is understood!

dorsetdesiro · 16 Aug 2018

Which TOC at the moment anyone reckon is on shakier ground, that this newly created OLR is poised to step in?

pdeaves · 16 Aug 2018

edwin_m said:
I would guess they plan to have an OLR available to take over in case a franchise goes under. The first OLR is running East Coast and probably doesn't have the capacity to take on anything else.

Exactly. I was looking at the timing.

F Great Eastern · 16 Aug 2018

The role of the DFT is essentially to nationalise the praise and privatise the blame.

The DFT essentially use the TOCs and Network Rail as shields. They dictate behind the scenes but when something unpopular happens they run away from the stage as fast as they can. When something good happens they are running to get up on that stage as fast as they can and it's laughable really.

At the end of the day we all know the DFT have a huge part to play in this, but the DFT know that the public in general don't give a monkeys about that and will just blame the TOC and that suits the DFT fine, they can go and hide and let someone else take the flack for everything.

They can make cock up after cock up and the naivety of the public means that they will blame the operators for everything and then call for the DFT to be given ever more control by renationalisation, unaware that it's the civil servants who cause many of the problems.

The DFT have this all worked out to a T and are effectively able to nationalise the praise when it happens through a few photo opportunities and slapping logos on an IEP, but vanishing and effectively privatising the blame when something goes wrong, even if it was out of the operators hands.

Why wouldn't you enjoy working for the DFT? It's one of the few public bodies where someone else is held accountable for virtually every single decision that you make whilst you have to be accountable to nothing at all.

Franchise failures and more

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