The Rail Fares Conundrum

New surge in inflation point to a hefty new year hike in rail fares

The prospect of an almost 6% increase in regulated rail fares next year has arisen as inflation trended upwards once more, much to the horror of rail campaigners and passenger groups. We look at the arguments and wonder what the government might do, given the fiscal constraints that it faces and the market realities of the rail industry. 

The recent resurgence of inflation in our economy has caused more than a little concern in railway circles. The Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) rose to 3.8 per cent in July, whilst, at the same time, the old Retail Prices Index (RPI) hit 4.8 per cent. This matters to the rail industry, because the July figure for RPI has traditionally been the benchmark for the following January’s rail fare increase. The even worse news for travellers is that a maintenance of the RPI + 1 per cent policy adopted by the Government for fares in 2025 would therefore push regulated rail fares up by 5.8 per cent.

This news comes on top of the recently published figures from the Office of Rail and Road (ORR), which showed that rail fares increased on average by 5.1 per cent during 2024/25, compared with an RPI increase of 3.2 per cent, suggesting a 1.9 per cent real increase.

The increases varied by sector, with the long distance InterCity sector rising the most, 5.4 per cent, compared with London and the South East (5.2 per cent) and the regional sector (4.0 per cent). Looking at different ticket types, largest increases came in the super off-peak category, 5.9 per cent, followed by advance on 5.7 per cent, off-peak 5.0 per cent, anytime on 4.6 per cent and season tickets on 4.3 per cent.

Overall, the regulated fares rose by 4.5 per cent, very slightly below the government’s 4.6 per cent cap. Unregulated standard class fares rose by 5.5 per cent, whilst the first class went up by a smaller 3.7 per cent.

The increases recorded here are, of course, based on the fares charged. What the public actually pays can vary quite widely – they can save money by switching to advance tickets or shifting travel times to take advantage of off-peak discounts, for instance. This is something we keep an eye on at Passenger Transport Monitor by looking at the income the railway gets for each passenger kilometre travelled, which we call the yield. We think that this is the best measure, since it eliminates the changes in average journey lengths (which were steady in 2024/25 but have been falling over time) and other factors which can affect the average fare paid. The figures, taken from the ORR’s quarterly rail statistics, are shown in Table A.

Table A: Changes in Yields and Fares between 2024 and 2025, by Sector

Yields in Pence Per Passenger Kilometre

This suggests that the 5.1 per cent headline increase only delivered a 3.3 per cent yield, with two sectors  showing significant shortfalls – InterCity delivering a yield increase of 2.9 per cent (0.8 per cent real) from a fare rise of 5.4 per cent, whilst the London & SE achieved 3.1 per cent (1.1 per cent real) from a fare rise of 5.2 per cent. Only the regional sector achieved a growth in yield higher than the headline fare increase, this time a 12 per cent growth (4.2 per cent real) from a 4.0 per cent fare increase.

The same pattern is repeated when we look at the yields for each ticket, as can be seen in Table B.

Table B: Changes in Yields and Fares between 2024 and 2025, by Ticket Type

Yields in Pence Per Passenger Kilometre

These figures show that a 4.6 per cent increase in anytime/peak tickets delivered a 2.2 per cent yield improvement, which fell to just 0.6 per cent when adjusted for inflation. Similarly, a 5.7 per cent rise in advance ticket prices delivered a 2.3 per cent increase in yields (0.7 per cent real). The off-peak rise of 5.0 per cent led to a 1.4 per cent rise in yields, which actually turned into a small real fall when adjusted for inflation.

These changes help to explain the fact that, whereas the number of passenger kilometres travelled rose by 7.5 per cent in 2024/25, total passenger revenue during the year only increased by 4.8 per cent in real terms, and remains some 16.4 per cent below the levels seen before the pandemic. Meanwhile, yields remain around 10 per cent lower in real terms than immediately before Covid. The gap rises to 14.5 per cent on the InterCity routes.

Comment

Quite why the industry and the government are still using the now widely disregarded Retail Prices Index as their benchmark, when most other measures use the Consumer Prices Index these days, has yet to be explained. Interestingly, alongside the ORR’s figures for national rail fares and the RPI, the ONS also publishes a CPI index for rail travel – including other networks such as the London Underground and the regional tram and metro systems.

Ben Plowden, chief executive of Campaign for Better Transport commented on the prospects for an increase: “With the railways now moving under public control, the question is how fares policy will make rail more affordable and attractive to use.”

However, the question arises from that statement is this; “to whom does rail need to be more affordable – the passenger or the Government?” Clearly to Ben and his fellow pro-rail campaigners, the answer is existing and potential future customers. However, one suspects that things look rather different from the inside Great Minster House or H M Treasury, looking to save money on the total spending on revenue support in the industry. This amounted to £12.5 billion in 2023/24 - £4.1 billion to the train operators and £8.4 billion to Network Rail.

Then there’s another £10 billion or so on enhancements and projects such as HS2 – there’s a need to save money here too – witness the pausing of projects announced by the Chancellor after the spending review, but this is slightly less urgent, since it counts as investment and does not therefore affect the fiscal rules set by the incoming government last year. These require the current expenditure by the government to be equal to or less than income from taxation and other sources by 2029/30. At the moment, expectations are that the Government will iss that target by upwards of £20 billion a year.

So, what should we expect the government to do about rail fares? There are several reasons, it seems to me, why the government may well stick to the RPI+1 per cent formula set last year. With the bond markets worrying constantly about the Chancellor’s ability to deliver her economic forecasts, and charging higher interest rates on Government borrowing as a result, there is a need to raise revenue not cut it. This becomes even more important when considering the pressure placed on the Treasury by that fiscal rule – slower economic growth, higher interest payments and higher inflation all mean that there is now expected to be funding gap of upwards of £20 billion by the end of this Parliament. That will have to be bridged either by spending cuts or increased taxes – hence all the speculation about which revenue-raising wheeze the Treasury will adopt next.

Then there’s the political angle: to be blunt (and, possibly a bit cynical), there are precious few votes for Labour in keeping rail fares low. We know from the National Travel Survey that more than 70 per cent of rail journeys are made by people in the top three income brackets, and 54 per cent by the top two. These people are hardly likely to be part of the party’s core vote, or to live in constituencies on the party’s target list. Many of the seats in outer London and the Home Counties were once solidly Tory (hence seven years of real-term freezes on regulated fares until Covid) and the moves last year were to the Liberal Democrats or the Greens. Local government results in May showed some strong swings to Reform, but seats in the commuter belt will not determine the result of the next General Election.

Lastly, there is the market point: we are back to post-1923 highs for rail passenger journeys and within two per cent of once again exceeding that year’s total of 1,772 million. That does not suggest that price is a currently a barrier to market growth.

So, to answer the question I posed earlier – what matters at the moment to the Government is that the railways become more affordable to them. Don’t expect this to change any time soon, either. Meanwhile, the best that the new GBR can hope for is to hire some really clever yield managers to lever in more income from existing fare structures.

An edited version of an article published in Rail Professional magazine. More analysis of the most recent rail revenue figures is contained in Quarterly Rail Stats - March 2025.