Thursday, 15 March 2007

Profit and service: perfect bedfellows

There is a much repeated fallacy that it is impossible for a private rail company to provide a good service. First Great Western has often been a victim of this allegation with a view that they have put profit before service.

The truth is that it isn’t impossible for a private company with shareholders to run a good railway service.

Over the longer term, a private company has got to deliver a steady and continuous growth in profits to satisfy both shareholders and the City. It is only possible to delivery such growth by satisfying customers. Cutting costs to the detriment of customer service certainly delivers a short term profits boost, but it doesn’t deliver sustainable growth – if only because existing customers eventually desert the service and it becomes increasingly difficulty to attract new ones because of a poor reputation. The ultimate consequence of such a position is that it becomes very hard to grow the top line (or revenues) and having already undertaken a cost cutting exercise the company has nowhere to turn to grow the bottom line or profits. And that is precisely why no sensible private company looks after shareholders to the detriment of customers.

When properly managed, cost cutting does, of course, have a part to play. And so it should: it makes things cheaper for customers and provides more money for future investment as well as allowing a better return for shareholders who, incidentally, are one of the sources for future capital investment. But it isn't the engine of growth of most private organisations.

I accept that today’s railway is run on a short term basis and this is, indeed, one of the central causes of many of the current problems. But the short term nature is not a problem caused by private businesses like First Great Western - it is a political problem brought about by an unsound franchising structure and a government that refuses to provide any long term strategic direction.


Tehmina Goskar said...

I agree with your comment that much of the problems with the railways lies with bad political decisions but I think in this case you are wrong to say that companies like FGW are balancing profit and service - or will _have_ to to be a successful company.

They are not like other companies with shareholders. The fact is they receive a rather large subsidy from the government (like a present so it is no more a problem for the government itself). The fact is many people cannot desert the trains as it is either their only form of transport or the alternative, sitting in traffic that is so bad, it is still preferable to use the terrible train service. The fact is is that you cannot 'choose' not to use FGW just because you don't like them. What other companies run on the same lines? It is a monopoly.

Profit and service can only be perfect bed-fellows if the company employs a socially responsible ethos. FGW are not socially responsible as they have cut services and regularly cancel the ones they do run (often without excuse) without investing in new trains. South West Trains have managed to turn over a profit, run lines to London and regional lines while investing in new, more efficient trains and depots, so why can't First? I would also suggest that First Group across the country are letting their 'customers' down. Look at how they've forced up bus fares? It's money, money, fast, fast.

CJ Harrison said...

First of all, I broadly agree that the way in which the current system is structured does not result in as much customer focus as would exist in other service industries such as shops or restaurants. However, as I have said elsewhere on the blog, this is mostly because of the system created by politicians than it is because rail is different from other service industries.

Is rail a monopoly? No, it isn’t. Not really. There is choice. If you want to get to Cornwall from London you have a number of options. If you do want to go by train, you can use First Great Western – but you don’t have to, you could use South West Trains or Virgin. Some argue that that isn’t a choice because the journey times of the other two operators are longer. But it is a choice: most people would select FGW because they make an active *choice* that it is the fastest operator and speed of getting to their destination is desirable to them. If FGW were to put prices to Cornwall up by extortionate amounts more people would travel by other operators as they would make an active choice that although FGW was faster, the cost was really not worth it. In this sense it’s exactly the same as most other choices. Do you go take a taxi to your destination because it’s faster, or do you travel by public transport which takes longer but is much cheaper?

But then, you don’t even have to go by train. You could travel by air (BA have just announced a new service to Newquay); you could go by coach; you could hire a car. There are other options. And, in a dynamic market, all of these options compete. So, if FGW put up prices or offer bad service another operator – even if they’re not rail – should see an opportunity for them to grow their business by offering something more attractive to consumers.

So, in short, FGW does have to compete and does have to listen to customers in order to grow their business. And growth includes attracting passengers who currently use other means of travel – and they can only do that if they, as discussed above, offer something better.

All of that said, there are defects in the current system: it’s short term nature means the responsiveness to customers is less than it should be; the fact that the TOCs have obligations to the government means there is a constant battle over whether they service the government or the public (and, believe me, the government usually does not act in the public interest); and, the fact that many aspects of rail policy – such as most fare increases – are outside of the TOCs control means that they cannot take full account of public demand. But these are not problems with private industry; they are political problems.

Finally, just to note: over the course of the franchise First Great Western (and indeed most other recently appointed operators) will not receive a subsidy – they will, in fact, have to pay huge amounts to the government.

Anonymous said...

It is interesting to mention the Cornwall to London route in the context of charging exorbitant prices.

A single ticket on the only daytime service to reach London before 11:20 costs £111 from Truro, for a 260 mile trip.

While it may not be an absolute monopoly, there is clearly a degree of monopoly pricing power being exercised, otherwise such examples (common to other rail operators) would not exist.

Franchises are basically state protected monopolies, ostensibly collecting huge premiums for the government in return for the right to put up fares far in advance of inflation, even where price regulated.

The industry regulation is such that it is near impossible for a non franchised operation to compete - Grand Central have spent much money and several years trying to achieve this on a very small scale.

They were pursued through the courts, barred from being interviewed at GNER stations on the proposed route, and are as yet still to run their first service. When (and if) it does they will also be barred from calling at Peterborough to avoid encroaching on other operators interests.

This all seems very strange in what is suppose to be a 'free and competitive' EU single market.

Returning to Cornwall, South West Trains run one train a week, Virgin three, maybe four a day from Exeter.

While there are alternatives for some, FGW have a sizeable market to themselves, and this is reflected in fact that people continue to use a service that attains very poor value for money satisfaction.

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