Wednesday 27 October 2021


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rail unveiled

::: RMT threatens national industrial action over service cuts

more about profit

We often hear about ‘profits’ being made by railway operators, but the passenger railway still needs to be subsidised.

Where is the money going?

Where is the money going?

Profit seems such a simple term. But it is not.

An individual franchise needs to be profitable for its owner – which has a contract with the state to run trains to a particular timetable on specified routes for a limited length of time.

The Rail Delivery Group says passenger operators yield a profit of 3% for their owners, which is not a large margin by wider commercial standards.

In other words, for each £ received, 3p is passed to the shareholders or company reserves. However, another way of measuring profits is to set them against the amount of capital invested, and this calculation produces a much more favourable result.

Franchisees own very little – they lease the trains, rent the track, depots and stations, and occupy offices on normal commercial terms.

Their property includes staff uniforms, intellectual rights in their branding and perhaps the crockery in First Class, but not much else. One of the biggest outlays franchisees have to make is bidding for their franchises in the first place (these days, £10 million + is typical). Of course, if they fail to win these costs are lost, and even if they are successful there is no refund: they must repay themselves with the profits from the succeeding franchise.

After that, their capital outlay is small – much less than would usually be expected from a business turning over many hundreds of millions a year. So now a 3% return on net turnover looks quite good.

Does everyone win?

No – at least, not in cash terms. The Department for Transport may be paying an outright annual subsidy (it depends on the contract) and providing ‘revenue support’ if income is lower than expected, while it also pays a Direct Grant to Network Rail (c.£4 billion a year). In turn, Network Rail does not need to charge franchised operators the full rate for track and station access, because the Direct Grant is subsidising all concerned behind the scenes.

It is hardly surprising that many operators pay premiums, because a major element of their costs – track access charges – is being heavily subsidised. Only a handful of franchises (three at the last count) have made a ’real’ profit for the state in recent times, and it seems quite likely that the total will fall to one (at best) in 2016-17.

bidding for rail franchises: revenue
profits and losses
why don’t the railways make a profit?


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