Rail subsidy bill stays above £4bn 

Revenue grows 19% but costs rise by more than inflation

The passenger rail industry’s finances continued to improve in 2023/24, according to figures published by the Office of Rail and Road (ORR). However, there was still a deficit on the passenger business requiring taxpayer support of £4.1 billion.

Total passenger income during the year was £10.1 billion, 20.5 per cent ahead of the previous year. A further £661m of other operating income brought the total income to £10.8 billion, 19.4 per cent up. Operating costs during the year totalled £14.5 billion, 10.1% up on the previous year, leaving a £3.75 billion deficit. This represented a 10 per cent improvement on 2022/23. Adjusted for inflation, revenue was 12.9 per cent ahead, whilst operating costs were 4.1% higher.

The government paid £4.06 billion in subsidies to the train operating companies, leaving them an operating profit of £316m, at a margin of 2.9%. This gave the operators a 2.2% uplift on operating costs.

Despite the substantial improvement, revenue figures continued to be below pre-Covid numbers, though the gap narrowed significantly during the year. In 2022/23, gap was 29.7 per cent. This year, it had narrowed to 9.6% - a shortfall of just over £1.1 billion. Costs, meanwhile, were 19.5 per cent higher than before the pandemic.

The figures also give some breakdown of operating costs, enabling us to look at both their movement and the percentage breakdown. Highlights include:

• The largest component was staff costs, which, at £4.1 billion, represented 28.2 per cent of the total. The cost was 9.9 per cent lower than 2022/23, and 16.6 per cent up on 2018/19.
• Track access charges paid to Network Rail totalled £3.99 billion, accounting for 27 per cent of the total. The figure was 16.3 per cent up on the year, and fully one-third higher than pre-Covid.
• Rolling stock charges were the third highest component, on 22.9 per cent, giving a total figure of £3.33billion. This represented a increase of 7.6 per cent over the previous year and were 27.3 per cent higher than before the pandemic.
• Diesel fuel is the smallest component identified separately, accounting for 2.5 per cent of total costs. The £404 million total was 10.8 per cent down on the previous year, and 20.2 per cent up on 2018/19’s figure.
• The balance of costs, comprising 19.0 per cent, covered other operating costs. The total, at £2.76 billion, was 8.3 per cent up on the previous year, but only 0.7 per cent ahead of the pre-pandemic figure.

Looking at sector performance, the InterCity operations saw revenue growth of 19.4 per cent, whilst operating costs rose by just 6.2 per cent. The subsidy requirement fell by 45 per cent to £496m, but income remained 10.7 per cent below the 2018/19 total

The commuter services in London and the South East (excluding the Elzabeth Line) saw lower revenue growth, achieving 14.8 per cent. Operating costs were 10.8 per cent higher, and the subsidy requirement fell by 1.5 per cent to £1.32 billion. Income remained 18.3 per cent below pre-Covid levels. The Elizabeth Line earned revenue of £621m, against costs of operation of £607m. Despite this small surplus, a subsidy payment of £91m was made by TfL.

The regional franchises saw revenue growth of 17.4 per cent, whilst costs rose by 12.2 per cent. The subsidy bill totalled £2.15 billion, up from £1.93 billion a year earlier.

Amongst individual TOCs, the largest subsidy was paid to the state-owned ScotRail, at £773m. This public support covered 70 per cent of its total operating costs, with the passenger and other income of £335m covering the operation’s labour costs with £11m to spare. The subsidy was up from £697m a year earlier, and from £457m pre-Covid. The income figure compared with £274m in 2022/23 but was still almost 20 per cent short of the £419m earned in 2018/19.

Also topping the £600m figure was another state-run business, Northern. Here, total subsidy of £652m paid for 64 per cent of operating costs. The passenger and other income of £381m managed to pay for 92 per cent of the wage bill. The subsidy bill was up from £602m in 2022/23 and compared with the £368m paid in 2018/19. Income growth of 13.4 per cent was achieved over the previous year’s total of £336m, but still fell 3 per cent short of the £392m received in 2018/19.

At the other end of the scale, two franchises, West Coast Main Line and East Anglia made premium payments to the DfT. West Coast, run by a FirstGroup/Trenitalia joint venture, remitted £67.2m to government in 2023/24, compared with receipt of £91.3m in subsidy in the previous year. The turnround came as revenue grew by 23.8 per cent to reach £1.09 billion, outstripping the 7.6 per cent increase in operating costs.

East Anglia, run by the Transport UK Group in joint venture with Mitsui, paid £57.8m to DfT. This payment was the second successive one and was more than double the £26.1m paid in 2022/23.  However, a continuing revenue shortfall of 8.0 per cent meant that the premium fell short of the £232m paid to government in the last pre-Covid year. The company’s £687m worth of income compared with £603m in 2022/23, a gain of 13.8 per cent.

The highest proportional revenue growth was the 23.9 per cent achieved by West Coast, discussed above. Next came ScotRail, now owned and operated by Transport Scotland, which saw an increase of 22.4 per cent – although, as we have seen, this did not prevent the need for an increase in subsidy.

In contrast, Transport Scotland’s latest nationalisation – Caledonian Sleeper – saw the poorest revenue performance, with a 14.3 per cent decline, down to £24.8m from £28.9m a year earlier. However, this was offset to some extent by a reduction of 6.4% in operating costs to £54.4m. As a result there was a 3.0 per cent fall in subsidy levels to £29.6m.

Also in decline was Merseyrail, the Serco/Transport UK joint venture, which saw income fall by 2.4 per cent, taking the revenue down to £71.2m. However, the ORR figures show this was the result of a fall in undefined “other income”, whilst income from ticket sales was actually 16 per cent ahead at £45.2m. However, despite the growth, ticket sales remained 15% down on pre-Covid levels.

One TOC had revenue growth in single figures: Essex Thameside, Trenitalia’s heavily commuter-dependent operation, saw growth of 6.4 per cent taking the total to £148m but this left it 26.8 per cent short of full recovery.

Comment

The ORR’s figures once again paint a fascinating picture of an industry still in recovery from the shocking events of five years ago, and the pandemic’s ongoing consequences.  As with the quarterly demand figures I discuss regularly in these posts, we see an industry grappling with ongoing falls in commuting as hybrid and home working become further established and the loss of first class and full price revenue from the fall in business travel.

The year 2023/24 was saw yet more economic and political turmoil, with high inflation and a continuing cost of living crisis. At the same time, ongoing industrial action and poor performance in several companies further damaged the industry’s reputation. It is tempting therefore to suggest that the numbers could have been a great deal worse.

From the Treasury’s point of view, the continuing need for over £4 billion a year in revenue support for the train operators is a concern, especially given the worsening fiscal situation in which the government finds itself.  Particularly worrying were the above-inflation cost increases – with labour costs leading the way on 3.9%. And that’s before the bill lands for the incoming government’s generous pay settlements last summer.

With a process of change getting under way this year, and lasting over the next three to five years, observers will be looking for cost savings; these are promised by the proponents of change following the “simplification” that the new structure is expected to achieve. Full nationalisation under a revived British Railways organisation is promised to be a part of this process – though these figures illustrate once again the variations in performance across the network and the need for an organisational structure that reflects the widely differing markets that operators currently serve.