Rail Transport: Fare and Freight

Task 1

1.1 Introduction

Rail has always been considered a public utility. It has been psychologically associated with the well being of a nation and its government. So what does it mean when prices rise continuously and the affordability decreases continuously? Such questions exist while rail continues to be the second highest receiver of public subsidy.

1.2 Objective

In this task we compare the current prices of rail travel to the old prices that existed, to the international price of rail, and also to the fares existing in other modes of transport. Its feasibility to the common public, by this we intend to determine if ridership might increase in rail in spite of price hikes that look unreasonable. We also look at the competition of low cost airlines to railways and see if rail can ever effectively compete against them in the market.

1.3 Literature Review

‘Charging is the basic tool for shaping transport to the requirements of sustainable development. It is through charging that, in theory at least, traffic volume and structure can be most efficiently regulated, i.e., at the lowest cost and optimized to reflect all the other goals to be met.’ (ECMT, 2005)
These goals are the socio-economic and environmental goals targeted by the government and world bodies. The reason for huge subsidies that exist in the rails sector is mainly due to this. However, we have seen in the UK that an increase in the level of subsidy to make rail functional and affordable hasn’t worked that way.
The rail fares in Great Britain were found to be the most expensive or the second most expensive in the all the distance bands (short commuting, medium commuting and long commuting). It is the highest in the long distance band and second only to Germany in the short commuting band. (Passenger Focus, 2009)
Compare this with the levels of subsidies that exist in each of these countries, France being the highest subsidy provider to railways; it is seen that the subsidies haven’t brought the fare down in Great Britain. In spite of Great Britain being one of the highest payers of Subsidies in Europe, its fares continue to remain very high. This is just one of the disparities that exist in the rail fares in this country.
‘Fifty years ago, rail had been the unchallenged leader of the transport market. It had accounted for 94% of passengers and 84% of goods transport in 1950. Nowadays the modal share of rail stood at 11% of passenger transport and about 27% of freight transport. (ECMT, 2006)
The table below gives the current market share of the Rail passenger services.
This increase in the rail passengers is in spite of a decreasing rail network, and a substantial increase in price.
This could be due to various factors such as time-sensitivity over cost-sensitivity of the passenger market share of the rail. For example, the commuter passenger sector is more receptive to speed and frequency increases and less able to react to price increases. Meaning, this sector doesn’t have any choice but to pay up the price increase in rail in order to avail high speed or high frequency transport.
Another indicator is that the rail efficiency and quality of service must be very high, and where these factors influence passenger share, rail sector might have benefited from it.
However, it is also true that rail passenger traffic has seen an increase across all bands, short medium and long, in passenger numbers despite the increase in prices.
One factor to consider is ‘conditional fare elasticities’. It is essential to look at the fare increase in all sectors to see if travel prices across sectors have also increased in a near similar manner, then the effects of price increase on passenger will be minimized (White, 2002). When the fare increase for public transport is studied, we can see that there has been a substantial increase in bus fares as well. Consider the data in the table below
This indicates that there are other forces behind passenger travel increase, not just price; and that ridership levels may continue to increase due to various considerations discussed above in spite of an increase in price specifically in rail.

1.4 Cost Vs Price of Rail Travel

The monetary price may not directly indicate what we are paying for in transport based on the current system of pricing. One of the big factors to be considered in rail pricing is whether the internalization of external cost factors to society as a whole needs to be quantized and applied as taxes to other modes of transport.
Road transportation generates about four times the nitrogen oxides, sulfur and carbon dioxide emissions per ton-km (Van Ierland et al, 2000). Add to this the noise, air and light pollution costs to the society from Road and Air Transport. Not to mention the use of renewable energy sources for both these transports,
There exists a considerable level of subsidy provided to both rail and road travel. However, most people use road and only a small percentage is currently using rail. Therefore, the public spending on rail means that an average of 200 pounds or an approximate value is given by every person in UK towards rail subsidies even if they don’t directly use it. The main argument relating to it is that the indirect socio-economic / environmental benefits of railways reach every citizen of a country whether they use rail travel or not.

1.5 Railways Vs Low Cost Airlines

The determining factors in choosing a mode of transport for passengers can be grouped into various categories like

1. Price
2. Quality
3. Level of Service
4. Time taken
5. Reliability
6. Frequency
7. Safety

Price however continues to be an over-riding factor in most cases, along with quality of service, frequency of service and availability of seats etc [DfT, 2008].
Before the advent of low cost airlines, rail had a huge monopoly over the long distance market in travel over road. But since the advent of low cost airlines, rail’s share of the long distance passenger market has fallen quite sharply. Affordable airlines have the advantage of speed and time that is very difficult for the railways to compete with. Although high speed railways, especially in Great Britain have tried to regain lost ground. ‘The development of high speed trains in Europe (e.g. the Paris-Lyon Train a Grand Vitesse, TGV service 1984, and the London-Paris Eurostar since 1996) has led in both cases to a significant loss of airline patronage to the rail service (a reduction of 40% in passenger loadings in 1998 between Paris and London) (Cole 2005). The competition introduced can be relevant to European and UK rail statistics as, ‘the European airline industry is characterized by a smaller geographical space and shorter distances between major agglomerations, allowing greater competition from alternative transportation modes, notably high speed rail’ (Lee, 2006). In some instances, the train actually ends up providing faster short distance journey times of 2 to 3 hours when compared with a total of 4 hours by flight including check in and check out times.
Price continues to be the biggest decisive factor in passenger travel choices and in this rail fails considerably with low cost airlines for long distance travels.
Passenger forecasts for airlines, even in the low cost airline category have been in decline over the recent years as compared to rail and road sectors. The price structures are vastly dependent on oil prices and have recently again shot up. Another factor is that a lot of new entrants to the low cost airline passenger share might be the people who would earlier opt for business or first classes. This reduces the airlines from eating into the passenger rail market share. There are also possibilities of saturation in certain airline routes. This saturation in demand and subsequent decline can already be seen in the US markets (Pro Air and Value Jet).
For railways to be able to compete with low cost airlines it needs to

– integrate operators and services throughout Europe (decrease in delays while crossing borders)
– try and cut costs so as to bring down the price further

1.6 Conclusion

Finally, one feels that Rail price increase has not been overtly high compared to similar price trends in road. However, considering that this sector has been heavily subsidized by the government from a long period of time, and the development of this sector has essentially been for public use and affordability, this price hike seems very unreasonable. The socio-economic factors that the government is focusing on while developing rail will never come to fruition if this hike in price is sustained. The modal shift to rail transport also might not happen, taking with it losses in strategic advantages to the social and environmental sectors. This might defeat the purpose of the government strategic plans despite the marginal increasing numbers in passenger demand for rail. Ridership levels however seem poised to increase in spite of the price hikes.

Task 2

2.1 Introduction

Rail freight transport has been in decline for many years due to changes in the industries it transported freight for and the increasing use of Road for long distance freight transport. However a revival of sorts is planned due to its environmental benefits. Organizations currently using road freight are considering shifting to rail, partially or completely for this reason. This might also become a regulatory compliance considering the recent development environmental changes. Rail is best suited to transporting large and regular loads of freight and to serving long distance markets. In some instances rail will be unable to compete with road and air. In most cases, there is a quantifiable percentage of the freight transport sector that is identified as ‘contestable market’ (SRA, 2006) for the rail freight to focus on.

2.2 Objective

The scope of the rail freight depends on expanding its market capture. Stambrook (2006) describes Freight traffic as a derived demand, not consumed for its own sake but is instead a result of other needs (OECD, 2007). Any forecast or strategy related to freight will have to depend on the market sectors that it capitalizes on, and the future growth and forecasts in this market sectors. In this task we focus on the current and potential market sectors of freight to get a fair view of the future of rail freight.
We can see from the table that the Rail Freight has consistently increased during the last years but this pace is much less when compared to the Increase in Road Freight transport. However, this increase has been recorded in spite of a decrease in the railway network which points towards a high increase in the level of efficiency in the rail industry. Even with this being the case, the Rail’s share of the total freight has reduced consistently.

2.31 Commodities transported via Rail Freight

The main considerations in while choosing any mode of transport for transport of goods are

1. The distance between source and destination (Train is deemed viable for long distance freight transfers only, except in cases where planning and placement prove trains to be the better alternative for freight transport)
2. The existence of train stations at the source and destination of freight
3. Type of freight and weight
4. Cost advantages over other transport options
5. Required level of Security against accidents

Various commodities use rail as a full or partial source of freight transfer. The main ones being –

Coal
Petroleum and Petroleum related products
Automotive components
Metals (steel, aluminum etc)
Aggregates
Waste
General Freight

These are further classified into bulk and non bulk, with General Freight consisting of all non-bulk commodities.
The long term forecast of these sectors is not possible, so we will analyze the short term stability of the market sectors that use rail freight.

2.32 Short to Medium Stability of the market sectors

The Aggregate sector is expected to grow at a steady rate of 1% per annum in the rail modal share. Along with this, there is a recognized 25% expected as contestable area for rail freight for future market share expansion. This sector is predicted to be highly stable, with guaranteed growth. The current market capitalization of rail is around 9.8% to 11.2 % of the total market share. An increased use of recycled materials in the future as a part of the focus on environment is also likely to increase growth in this sector. Automotive and the metal sector which mainly consists of freight transport are more difficult sectors to forecast due to the high volatility of demand and supply, along with the variability of a lot of external factors. We have already seen a downslide in the automotive industry, with steel market showing high volatility. One of the restrictive factors in automotive rail freight are the size restrictions. This market sector is also expected to change quite a lot in terms of requirements, therefore a high level of flexibility in any form of freight transfer is expected, and provided the rail sector is able to provide this, there is possibility in the increase of the modal share irrespective of the market prospective of the automotive sector itself. Similarly with metals, infrastructure problems pose a threat to an increase in modal share for rail. Increasing terminal capacity could mean an increase in rail sector freight share irrespective of market performance of the sector. There could be short term stability in the steel sector and increased changes in its market prospective at frequent intervals of time. The coal sector freight transfer, on the other hand, is completely dominated by the rail sector. But, due its effect on the environment and the high rate of emissions, coal is increasingly becoming the less preferred choice of energy. This sector is expected to hugely decline over the coming years due to increased concerns over environment. As the freight sector is mostly dominated by rail, any fluctuation of the market prospect of coal will have a direct and immediate effect on the rail freight sector. [DfT, 2007]

2.33 New Market sectors

General freight is one of the market structures which allows for an increase in modal share for rail, principally because it is one of the sectors where the modal share of rail is very low, and also because the any item that needs transfer and is non bulk can be categorized under this sector. Fact is that some most of the items that fall under General Freight usually are unsuitable for transport through rail. One way to change this is introducing more Intermodality in the transport sector. This involves transfer of goods through containers / pallets which can then be accommodated in rails. This essentially opens up the rail freight market to anything that comes under general freight. A huge growth is expected in this area for rail freight.

2.34 Rail Freight the better option?

Rail freight is not often always replaceable to road transport. However, even if it replaced where ever it was possible to do so, the advantages to be gained are plenty. In the current scenario of global warming, one area where rail freight scores over all others, which cannot be left unseen, is in terms of CO2 emissions. While transport accounts for nearly 28 percent of the overall CO2 emissions of UK, over 80 percent of this is contributed by the road transport sector alone. Replacing the road freight transport by rail wherever possible can only lead us steps closer to the environmental goals of the country and the world. Rail also is a better option in terms of noise pollution (zero in all cases and considerably less than road transport still in high speed rail), air pollution, accident rate and congestion etc.
Another strategic advantage of rail is in the socio-economic development of the country. Rail connectivity can alter economic and social conditions of the places it connects. As a lot of government subsidy goes into rail transport, the socio-economic advantage can be used to selectively re-cultivate run down areas / sections of people etc.
With the expected increase in cost in road transport costs, its problems with congestions, and expected regulations to level the playing field for different modes of transport in the future, investing in rail might be a good option to pursue for long term results. It needs some focus for operating and investing companies, and this needs to be proven worthwhile. Therefore it is quite essential that further the price of rail transport is tightly managed, and made competitive.

2.4 Conclusion

Rail transport plays a major role in reducing the carbon footprint of transport, having the lowest emissions in the transport sector. It reduces congestion and allows for the strategic use of railways to improve socio-economic conditions. It is also a safer mode of transport for freight. Given its share of the market sectors, it also allows a huge potential for growth if capitalized well. With the consistent liberalization of rail freight policies, increase in competitiveness, increased response to commercial factors such as markets and profitability and the continued focus and help of governments on the rail freight sector, a huge surge is expected in growth and use of the rail freight sector.
The government support and focus is expected in the form of –

– More infrastructure investments
– Establishment of Additional rail connections, rail access to more ports
– Realizing the objectives of the ‘Strategic Freight Network’ as proposed in the white paper, ‘Delivering a sustainable railway’ by the Department of Transport
– Aid and initiatives in simplifying the rail freight sector to aid more private investment and increase access.
– More harmonized competitive conditions in terms of financial, social and safety related regulations in road/rail transport

Many reasons exist for the rail freight sector’s inability capture more market share, lack of flexibility, slow progress of rail reforms, lack of harmonization of regulation and internalization of external costs etc. As these divides are poised to lessen considerably over the years, and keeping in mind the other strategies in place, spoken elsewhere in this paper, the outlook for freight is positive. Environmentally, being in the place that we are right now, it would also be the best thing to happen to the transport sector.