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Fares fair?
Business Travel World – February 2008

As business travellers using the railways endured a torrid time in the New Year, it emerged that not only were ticket prices rising but TMC commissions were being cut. Mark Smulian looks at the consequences for rail buyers

It was insult added to injury in January for corporates that use rail. First, the price of the tickets increased by well above the inflation rate. Second, travel management companies found that train operators had slashed the commission they offer to them, leading them to look at transaction fees.

Regulated fares, which include season tickets, savers and standard day returns, increased by 4.8%, while unregulated fares - essentially everything else - rose by an average of 5.4%, though in a few cases by much more.

The Guild of Travel Management Companies accused the train companies of perpetrating a 'double whammy' on business travellers, since "the price rise hides a further backdoor increase in rail fares because commissions to travel management companies have also been cut".

Guild general manager John Williams says the previous 9% commission rate (7% for those TMCs that used the Association of Train Operating Companies' now discontinued ticketing system) had been cut to 5%.

"It means the cost of issuing tickets has increased, therefore that missing 4% has to be absorbed by the TMC or passed on in the management fee," he says.

But how might clients react? If, say, a corporate books a large number of peak time returns from London to Manchester the transaction fee might be a trivial part of its overall spend.

However, if it books numerous tickets from, say, London to Guildford, things look different. The transaction fee, Williams points out, might even exceed the cost of the ticket.

Most will seek to change a flat rate fee, he points out, since the cost to a TMC of processing a booking is similar whatever the ticket's value.

Williams says: "I don't think TMCs will be less willing to sell rail, since their role is to manage business travel for corporate clients and most are now management-fee led rather than relying on ticket commissions, but it might make customers less willing to buy rail through a TMC.

"A company might decide to buy shorter distance tickets for itself, if it gets the same transaction fee charged on each as on a long distance one."

Williams says ATOC has undertaken not to change commission rates again for two years, but he anticipates that rail will eventually go the way of air travel, with zero commissions.

The only exceptions might be large corporates with the muscle to negotiate their own discounts with operators. "But it would be necessary to show both substantial business and incremental business, that you were bringing customers from airlines to them, which is not an option that can be used very often," Williams says.

Grahame Weeks, chairman of rail booking specialist Harry Weeks Travel, says: "I feel the transaction fee approach does not work as well with rail as it does with air, as transaction fees are not well received by corporate customers purchasing business rail.

"If you are trying to charge a fee for a lot of short distance tickets the client may decide to buy them for themselves.

"The train operators have rather shot themselves in the foot as it may drive customers back into station ticket queues, and that will be expensive for them."

Weeks says some clients already tell staff to buy tickets worth less than 20 at stations, and fears this trend might grow.

"We will try to absorb it, but we are having to transfer as much as possible to transaction fees," he says.

What particularly irks the travel management industry is that the fare increases and commission cut have coincided with increasing demand for rail, as lengthy airport check-in queues and pressure from the environmental lobby have encouraged people to turn to trains.

The train operators may have thought this meant they could raise fares and cut commissions without losing much custom.

Williams says: "Rail is getting better, the investment in infrastructure is paying off and timekeeping is improving. Also there is the message that it is more environmentally friendly to go by train."

Weeks agrees, noting: "Demand for rail is growing because the quality of service is good, and frequency and reliability are better than for a long time."

These improvements have come at a price. ATOC director general George Muir says: "We need the revenue from fares to pay for investment in the railway for the benefit of passengers."

Indeed the train companies need it more than ever since the government expects an increasing proportion of rail finance to come from passengers, not taxpayers.

This is the root of the fare increase. Under the reviled Railtrack the government paid so much of the railways' improvement costs that according to last summer's rail white paper: "In 2005-06 taxpayers paid for more of the railway than passengers did, [and] this is clearly not sustainable."

It further noted: "It has been the taxpayer who has funded expenditure increases caused by the loss of control of costs under Railtrack. As Network Rail brings costs back under control, it is right that the demands on taxpayers should also ease."

As for commissions, ATOC sees no good reason why its members should subsidise TMCs.

A spokesman says: "The general market trend in commission rates has been downward as a result of the continuing need to reduce costs and the greater competition emerging between distribution channels.

"Agents now increasingly earn their remuneration through charging fees to clients, with the commission they generate often being passed on to clients as discounts. The changes to rail commission reflect these trends and seek to strike a fair balance between TMCs and train companies."

The Trainline has urged travellers to buy tickets online to secure the best discounts, and advises: "The best savings are available between six and 12 weeks before travel - albeit the sophisticated pricing tools used by some train companies mean prices can go down nearer to the time of travel if bookings are low."

That is surely one of the few cases in which 'rail fares' and 'down' will appear in the same sentence.

Someone will have to pay for delays

Business travellers who use the West Coast Main Line and arranged a holiday over New Year managed to escape the chaos as engineering works overran at the start of the year.

They should benefit from the complex upgrade being carried out at Rugby without having been stranded.

Carlson Wagonlit called the resulting delays "totally unacceptable [at] a key time when many of our customers return from the festive break and need to attend meetings arranged some weeks ago".

Its rail centre saw a 25% increase in calls as customers rebooked on other lines or decided to fly or drive instead.

Last year saw a 12% switch from domestic air to rail among Carlson Wagonlit's customers. But it says: "The chaos caused by these engineering works and the fare increases will do little to endear rail travel to corporate travel managers and travellers alike."

Virgin Trains chief executive Tony Collins, whose main route was unexpectedly severed by the overrun works, urged Network Rail to "ensure it has a firm grip on maintenance".

But Network Rail has no 'grip' because it relies on private contractors, a practice adopted at privatisation. The New Year fiasco may see it take this work in-house.

Chief executive Iain Coucher hauled the errant contractors over the coals and said: "We have a significant programme for developing and expanding the railway and we have to make certain that it is carried out to plan."

Someone must pay for that, and government policy is that more of the burden will fall on passengers, not taxpayers.

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