1.2 Calculating Top Down Operating Costs of the Network

Transcription

1 Technical Note Client: Nexus Author: Steve Warburton Date Written: 22 May 2012 File Ref: T:/30079 Quality Assurance Revision Draft Prepared by Checked by Approved by Date 22/05/2012 CDM SW Guildhall House Guildhall Street Preston PR1 3NU Telephone: Fax: Network Costing 2012 (Revised) 1.1 Introduction This note updates and uses the same methodology as previous work undertaken as part of the ANDP project and subsequently updated for the QC business case. Base figures for the top-down method have been updated based on the most recent published accounts for operators Arriva Northumbria for year end December 2010, Stagecoach Busways for April 2011 and Go North East for June Published accounts for Arriva companies for year ending December 2011 are not yet available Figures have been adjusted to December 2011 prices using CPT cost indices for Northern England, taking the mid point of the accounting year as representative. The bottom-up costing method, based on drivers wage rates and other known costs is shown in section 1.10 and a comparison of the two methods is made at the end of this document. 1.2 Calculating Top Down Operating Costs of the Network The base point for calculating the current costs of providing buses in Tyne and Wear is the annual accounts data for what are now just three major operating companies in the area: Arriva Northumbria, Go North East and Stagecoach Busways. Go North East Ltd includes all activity by Go North East companies. Go Northern is still used as an operating company for licensing purposes but all financial transactions are recorded under Go North East Ltd. Arriva Northumbria is one of five separately reported companies which make up Arriva North East s group operations. 1.3 Accounts Data Accounts data for big group companies cannot be relied on wholly. In some cases a greater share of overhead costs is borne by some subsidiary companies. This is certainly the case for the Arriva North East group. Arriva 2012.doc Network Costing 2012 (Revised) 1 of 17

2 Northumbria carries a much higher number of administrative staff than other companies in the group even though Arriva North East Ltd still functions as an administrative company. The company set-up at Arriva Northumbria is dealt with in further detail below. In its turn Stagecoach Busways is also part of a regional grouping of subsidiary companies and it is likely that there is some cost transfer, particularly in relation to sister company Stagecoach Cleveland Transit (although the accounts for that company show no apparent crossreference to Busways) and to the group servicing company Stagecoach Services Ltd Reporting of costs within the accounts broken down by cost category varies considerably between the companies. None reports a full breakdown of all costs and indeed within the accounts there can be several appearances of a figure referred to as total operating costs which varies by significant sums. For consistency we have taken the top line Profit & Loss Account figure shown in the appropriate accounts. For each of the companies referred to in this document there were only three cost figures available for direct comparison: a) Total Operating Cost (from P&L summary) b) Staff costs c) Depreciation and Leasing Charges Broadly, b) and c) above represent a significant proportion of all costs. Other cost categories can be estimated using figures published by CPT. A summary of the accounts results for the three major operators is shown in Table 1. Table 1: Summary of Performance from Accounts Data Major Operators Year End 2010/2011: Heading Arriva Northumbria Go North East Stagecoach Busways Total Operating Costs 24,722,000 81,775,000 46,300,000 Staff Costs 16,147,000 47,433,000 27,267,000 Staff Costs as % Total 65.3% 58.0% 58.9% Depreciation and Leases 2,950,000 6,639,000 3,392,000 Depreciation as % Total 11.9% 8.1% 7.3% Total of 'Other' Costs 5,625,000 27,703,000 15,641, Straightforward acceptance of accounts data is, we believe, unwise, for both Arriva Northumbria and Stagecoach Busways. Arriva Northumbria s proportion of staff costs, at 65.3%, is simply not credible. This implies that overhead, fuel and maintenance costs are around a third of the level of the other two companies if we adopt CPT s cost breakdown figures for other costs doc Network Costing 2012 (Revised) 2 of 17

3 1.3.5 Arriva Northumbria s accounts show 99 administrative staff (from 115 in 2009), equal to 20% of the number of drivers, with a similar figure at each of Arriva Durham County, Arriva Tees & District and Arriva Teesside. We have made an adjustment to the accounts figures by subtracting administrative expenses of 3,229,400 from the staff costs total and reallocated it as overhead costs In addition, operating cost of the support company Arriva North East totalled 152K in the year to December We have made the assumption that one third of this should be accrued by Arriva Northumbria and added a further 51K to its overhead costs. It appears that administrative staff costs are increasingly being borne by Arriva Northumbria The area of concern with Stagecoach Busways relates to depreciation and leasing charges. Given its ongoing large investment in new vehicles we would not expect depreciation to constitute only 7% of costs (which in turn leads us to calculate much higher overheads at Stagecoach Busways). The accounts make reference to additional Hire purchase costs and we are aware of Stagecoach s group approach to financing new vehicles Although we do not know for certain that this figure relates wholly to vehicles we have adjusted the accounts figures to add this sum to depreciation and leasing costs. This produces cost estimates much more in line with expectations. Although this revised figure is slightly higher than the other two operators, this does reflect fleet replacement rates Arriva Northumbria shows a disproportionately high proportion of costs allocated to depreciation and leasing, but we accept this following significant fleet investment and a high proportion of leasing of vehicles rather than purchase. The revised figures produce the numbers shown in Table 2. Table 2: Revised Summary of Performance from Adjusted Accounts Data Major Operators Year End 2010/2011: Heading Arriva Northumbria Go North East Grp Stagecoach Busways Total Operating Costs 24,772,667 81,775,000 46,300,000 Staff Costs 13,314,000 47,433,000 27,267,000 Staff Costs as % Total 53.7% 58.0% 58.9% Depreciation and Leases 2,950,000 6,639,000 3,746,000 Depreciation as % Total 11.9% 8.1% 8.1% Total of 'Other' Costs 8,508,667 27,703,000 15,287, Other Costs In order to allocate costs to each service we need to establish baseline figures for fixed and variable costs. Generally, costs are broken down into a number 2012.doc Network Costing 2012 (Revised) 3 of 17

4 of sub headings. CPT provides six monthly regional statistics on percentage changes to operating costs. For some periods CPT also gives a breakdown of the percentage of all costs by category. Given the availability of cost increase percentage figures for each category these proportions can be estimated for other periods. The regional figures for cost increases since December 2008 are shown in Table 3 and the actual make-up of costs in Table It should be noted that these figures, although published six monthly, report percentage changes in the previous twelve months. So, for example, using figures in Table 3 to calculate price change in fuel from Dec 2008 to Dec 2010 the start figure would be multiplied by the figures in column 4 and column 6 only. Table 3: CPT Cost Inflation Figures for Northern England Percentage Change in the 12 Months to: Split at Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Overall 100% 6.4% 6.2% 3.2% 1.5% 3.2% 3.7% Drivers' Wages and On Costs 45.1% 3.6% 3.4% 1.1% 2.4% 5.1% 3.6% Other Labour and Staff Costs 15.0% 4.3% 3.2% -1.1% 0.2% 3.9% 3.2% Insurance and Claims 4.1% 10.6% 7.7% 5.0% 9.9% 7.5% 0.0% Fuel 11.8% 20.7% 24.7% 13.9% -6.4% -6.6% 3.0% Maintenance Materials 5.0% -0.3% -1.3% -1.6% 1.5% 5.9% 5.7% Depreciation and Leasing 7.0% 9.0% 9.2% 6.5% 3.5% -0.2% 1.4% Other Operating Costs 12.0% 2.1% -1.7% 1.1% 6.9% 8.3% 6.6% Table 4: CPT Cost Breakdowns Percentage Cost Make-up in the 12 Months to: Jun-10 Dec-10 Dec-11 Drivers' Wages and On Costs 41.1% 44.5% 44.5% Other Labour and Staff Costs 13.6% 14.5% 14.4% Insurance and Claims 3.8% 4.5% 4.3% Fuel 17.9% 12.8% 12.7% Maintenance Materials 4.3% 4.7% 4.8% Depreciation and Leasing 6.8% 7.4% 7.2% Other Operating Costs 12.5% 11.7% 12.1% From our adjusted accounts figures we have total operating cost, wages costs and depreciation. This leaves us with a figure for each company for other costs, the bottom line in Table 2. From Table 4 above we then estimate a breakdown of these remaining other costs appropriate to each company, taking reported costs as being those relevant to the nearest mid point of the year reported (June 2010 for Arriva Northumbria, December 2010 for Go North East and Stagecoach Busways). We have assumed that maintenance 2012.doc Network Costing 2012 (Revised) 4 of 17

5 costs divide 50:50 between variable and fixed costs for the purpose of cost calculation. Table 5: Estimated Cost Breakdowns from Revised Accounts Data Arriva Northumbria As % Go North East As % Stagecoach Busways As % Total Operating Cost 24,772,667 81,775,000 46,300,000 Wages costs 13,314, % 47,433, % 27,267, % Depreciation and leasing 2,950, % 6,639, % 3,746, % Total known cost 16,264, % 54,072, % 31,013, % Total unknown costs 8,508,667 27,703,000 15,287,000 Insurance and Claims 841, % 3,679, % 2,030, % Fuel 3,956, % 10,543, % 5,818, % Maintenance Materials 947, % 3,847, % 2,123, % Other Operating Costs 2,762, % 9,632, % 5,315, % From our calculations we can estimate the proportions of costs appropriate to the companies reporting date. We then need to update these accounts figures to those appropriate to December 2011 to better reflect the March 2012 baseline network and to bring figures for the three operators into line. The CPT cost inflation figures shown in Table 3 allow us to apply more accurate calculations of cost increases in each category than we would produce by simply applying a general RPI or CPI increase. Using these figures we obtain estimated December 2011 figures as shown in Table 6 below and the proportions of costs spread over all three major operators in Figure A. Table 6: Estimated Cost Breakdowns for December 2011 Arriva Northumbria Go North East Stagecoach Busways Total Operating Costs 25,851,081 84,455,583 47,817,497 Staff Costs 14,149,733 49,045,722 28,194,078 Staff Costs as % Total 54.7% 58.1% 59.0% Depreciation and Leases 2,964,709 6,731,946 3,798,444 Depreciation as % Total 11.5% 8.0% 7.9% Total of 'Other' Costs 8,736,640 28,677,915 15,824,975 Estimated fuel costs 3,750,859 10,859,800 5,992,627 Estimated Maintenance variable 516,122 2,033,553 1,122,150 Estimated Maintenance fixed 516,122 2,033,553 1,122,150 Estimated other costs (fixed) 3,953,536 13,751,010 7,588, doc Network Costing 2012 (Revised) 5 of 17

6 Figure A: Estimated Average Breakdown of Costs at December 2011 Overheads 16% Maintenance 5% Fuel 13% Staff Costs 57% Depreciation and Leases 9% 1.5 Profits It is appropriate to look briefly at reported profit margins. The reported profit margins are shown in Table 7 below for the period of TAS analysis (2008 to 2011 inclusive). All three main operators have improved their financial performance year on year Arriva Northumbria s poor performance in has turned round into 2010, but the underlying cost and revenue has barely moved the reported improvement results from other operating income of 1.5m in the year Stagecoach Busways and Go North East performance has improved with increased turnover more than matching increased operating costs. Internal recharges from Stagecoach Services Ltd (for admin support and procurements services) are not wholly included; thus reported profit at Busways may be overstated. Weighting individual company profits by fleet size gives us an average Tyne & Wear profit margin of 12.36%. 1 See also C Cheek Arriva s Wheels come off in Northumbria, Passenger Transport 18 March 2011 p doc Network Costing 2012 (Revised) 6 of 17

7 Table 7: Operating Company Profit Margins 2009/2011 Company Arriva Northumbria Go North East Stagecoach Busways Pre Tax Profit Margin Net Profit Margin after Tax Dec % 3.2% Dec % -1.9% Dec % 3.9% Jun % 6.3% Jun % 3.9% Jun % 3.0% Apr % 17.6% Apr % 17.1% Apr % 13.9% 1.6 Unit Costs In order to begin to translate these overall figures into costs which can be applied to each service we need to identify which costs are allocated directly (variable costs, charged by the hour) or are fixed (charged by peak vehicle). These are shown below in Table 8. Table 8: Breakdown of Operator Costs at Calculated Dec 2011 Levels: Heading Arriva Northumbria Go North East Stagecoach Busways Labour Costs (by Hour) 14,149,733 49,045,722 28,194,078 Fuel Costs (by hour) 3,750,859 10,859,800 5,992,627 50% Maintenance (by hour) 516,122 2,033,553 1,122,150 All Variable Costs (by hour) 18,416,715 61,939,074 35,308,855 Depreciation (by PVR) 2,964,709 6,731,946 3,798,444 50% Maintenance (by PVR) 516,122 2,033,553 1,122,150 Other Overheads (by PVR) 3,953,536 13,751,010 7,588,048 All Fixed Costs (by PVR) 7,434,367 22,516,509 12,508,642 Total Costs 25,851,081 84,455,583 47,817, Resource Calculations Having established total cost figures we then need to calculate the level of resource to which these overall figures apply. Current timetables allow a calculation of resources used to operate current services in Tyne & Wear, including cross boundary services into County Durham and Northumberland. Given that the mid point of the accounts data refers to mid to late 2011 and 2012.doc Network Costing 2012 (Revised) 7 of 17

8 that our most recent baseline calculations of resources refers to March 2012 we have taken this level of resource as a reasonable reflection These calculations include all special works services published on the Nexus website but do not include school or contract operations, nor do they include services operated by Arriva or Go North East wholly outside Tyne & Wear. Occasional cross-boundary services such as 710 have also been excluded It should be noted that these calculations relate to hours in service but generally include layovers but do not include an allowance for hours involved in operating dead mileage, which typically account for around 5% of operations. Thus the end figures for cost per hour will relate to timetabled hours rather than wheel-turning hours Peak vehicle figures have also been calculated from timetables. This is a less certain calculation than that for hours in service as various assumptions have to be made regarding vehicle workings and service interworkings. For additional vehicles employed at peaks we have adopted the rule that any journey which ends before 0815 or starts after 1600 is operated in conjunction with a school working and is not counted as a peak vehicle. Where a service operates all day except for gaps at school times we have assumed that the service does attract peak vehicle cost. As is noted in our calculations below, this approach has produced realistic figures in relation to actual fleet allocations Fleet allocation figures for all three companies are widely available from a variety of sources. Allocation always exceeds Peak Vehicle Requirement (PVR) to allow for vehicles out of service for maintenance etc. otherwise described as the percentage engineering spare. Assuming an average level of engineering spare for Arriva and GNE of 13% (calculated from Arriva figures) and 10% for Stagecoach allows us to calculate figures for overall company PVR and we can then factor our calculated figures for hours of operation across the companies. This might lead to a slight overestimate of service hours as the peak vehicles excluded from our initial calculation are less likely to be in all day service, although it will initially encompass services wholly within County Durham or Northumberland The comparative figures are shown below in Table 9. This includes calculations for services provided by other operators. It should be noted that Arriva Durham County and Arriva Teesside operations, along with Stagecoach Cumberland s share of service 685, are counted as other operators as these services costs are included within separate company accounts. Annual figures have been calculated by reference to the service pattern across the year including holiday periods and standard week figures are multiplied by to arrive at an annual figure doc Network Costing 2012 (Revised) 8 of 17

9 Table 9: Peak Vehicle and Hours Calculations Tyne and Wear Network from Service Calculations Arriva Northumbria Go North East Stagecoach Busways Others PVR Tyne & Wear Network Week T&W Hours in service 12,221 40,775 27,655 2,328 Annual T&W Hours in service 625,567 2,087,293 1,415, ,179 Ave hours per PVR 4,583 4,390 4,452 2,740 Ave hours per PVR per week From Fleet Allocations Fleet Size Estimated Total PVR Estimated non T&W PVR Estimated total hours 745,594 2,631,306 1,438, , In the absence of published accounts we need to provide estimates of costs for the other operators. Previous work has estimated that for smaller operators, the absence or reduction of sick pay arrangements and reduced pension contributions will reduce staff costs by 11.6% and that overheads are reduced by around 50%. These factors have been applied to average costs for the major operators to produce cost estimates for the other operators. These will probably underestimate costs for the larger other operators such as Arriva Durham County but will be balanced by overestimates for very small operators such as the Taxibus operators From all of the above calculations we can then arrive at standard figures to apply costs to each service based on PVR and hours of operation; these are shown below in Table 10. As we know the primary operator of each current service these could then be used to apply operator-specific costs to each service. Table 10: Estimated Hourly and Peak Vehicle Costs by Operator Calculated Cost Figures Arriva Northumbria Go North East Stagecoach Busways Others Labour Costs per hour Fuel Costs per hour Maintenance costs per hour Total Charge per Hour Depreciation per PVR 18,223 11,231 11,756 12,435 Maintenance per PVR 3,172 3,392 3,473 3,383 Overheads per PVR 24,301 22,940 23,485 18,645 Total charge per PVR 45,697 37,563 38,714 34, doc Network Costing 2012 (Revised) 9 of 17

10 1.8 Estimating Costs for Individual Services We can use the figures in Table 10 to estimate operating costs for any particular service based on simple figures for PVR and timetabled hours: All day services would be expected to attract both PVR and hours costs Evening, Sunday or early morning journeys are expected to attract only the hours-based costs For example, a typical secured daytime service if run by Go North East using one bus operating for 72 hours per week would be expected to incur weekly costs as follows: 37,563 / PVR cost per week = 734 per week per hour = 1,695 per week Total estimate: 2,429 per week 1.9 The New Network For the new network, we cannot necessarily make assumptions about the operator of a service so we have calculated average figures for cost per PVR and per hour weighted by the size of the existing operations. This produces figures of: per hour and 38,946 per PVR Using a calculation including an allowance of 5% for dead mileage an average Tyne & Wear bus operates 91.4 hours per week. The equivalent annual operating cost of this average bus is therefore calculated as: = (A * B * C) + D where A is the average cost per hour ( for Tyne and Wear) B is the average hours per bus per week (91.4) C is an annualisation factor representing operating weeks per year (51.19) D is the average PVR cost per annum ( 38,946) Thus, we calculate the estimated average cost of operating a bus per year in Tyne and Wear at 143,748, an increase of 1% on our previous calculation. These figures contain several assumptions and estimates and there are reasons why real costs would diverge from these: 2012.doc Network Costing 2012 (Revised) 10 of 17

11 Operators may consider that their core networks cover most of their overheads. They might take the view, therefore, that daytime secured services do not need to cover the same level of overhead. Operators may wish evening and Sunday operations to cover some proportion or make a contribution to overhead costs, for quite valid reasons such as late inspector / supervisor cover and so on. There may be significant variations in costs by vehicle type or for different driver pay rates. Each operator will have its own costing method and might load more overhead costs onto hours (or mileage) rather than fixed cost. There is no right answer to the question of how much a service costs to run! 1.10 Bottom-Up Service Costing This section compiles operating costs from the bottom up using assumed or known driver pay rates, fuel costs etc. built up to give two overall costs per peak, by vehicle and per operating hour. It uses a combination of researched actual figures and assumptions to achieve the calculations. The percentage of assumed figures is probably higher than in the top down method above because there is a greater element of the unknown and fewer published figures available on which to work This methodology was developed from earlier work carried out for GMPTE but reflects the fact that there are key differences in the Tyne & Wear operations: The driver pay rates are higher in Greater Manchester. New starter rates are much higher but evidence in 2007 suggested the difference in rates for long-established staff was less marked. The proportion of dead mileage in Tyne & Wear is much lower than in Greater Manchester (we estimate 5% in T&W against 11% in GM) GM s proportion is very high due to dead running between depots and Manchester city centre for driver reliefs and a high degree of operation remote from depots. Average working hours per bus are far higher in Tyne & Wear than in Greater Manchester due to there being fewer peak-only services and much better proportionate evening and Sunday service provision in Tyne & Wear. The proportion of the network provided by other smaller operators particularly the secured services - is much higher in Greater Manchester doc Network Costing 2012 (Revised) 11 of 17

12 Compared to earlier work we made a significant uplift in the assumed overhead charges as comparisons of the previously estimated level with available figures from accounts showed we had underestimated these and, in particular, had insufficiently reflected financing costs. Table 11: Assumptions and Available Figures Item Cost Notes Driver Base Pay Rate 9.43 per hour Scheduling Inefficiency Driver Add-on costs Pay differential Fuel Cost (Net) 24% 31% (after allowing for scheduling inefficiency) None 56.9p/litre Estimation based on available detail of pay rates (see paragraph below) To translate timetabled hours into paid hours. Allows for dead running, unscheduled time, makeup time etc. Figure calculated from several actual crew rosters. Broken down into Pensions 9%; National Insurance 8%; Holiday Pay 11% and Sick Pay 3%. Also taken from actual figures supplied by operators. Assumes no difference in pay rates by vehicle size or operator. Previous figure increased by CPT average increase. BSOG allowed for at pence per litre equating to purchase price 1.00/litre but see later note. Tyres 1.47 pence/km Translated to hourly charge using average speed Operating Speed Assumed operating hours per week Fleet Composition 17.5km/hr 91.4 Actual Average figure taken from previous research in urban areas Tyne & Wear figure from 2009 timetable calculations plus 5% allowance for dead running. Taken from fleet list detail plus estimate for other operators Engineering Spare 13% Same as previous calculation Maintenance Cost Depreciation Overheads Average 1.46/hr and 8,094/PVR Average 9,673 per PVR Profit Margin 12.36% 22,634 per PVR Varied according to vehicle type annual costs divided 50/50 between PVR and hours-based cost Purchase Price less estimated residual value straight line depreciation over 15 years (10 for midi). From figures provided by major operators for another piece of work adjusted to allow for increases in financing costs and increased using CPT index Weighted average from major operators accounts doc Network Costing 2012 (Revised) 12 of 17

13 Table 12: Figures for Different Bus Types Item and Type Artic Double Single Small Single Fuel Consumption (km/l) Fuel and Tyres Cost per hour Fixed Maintenance Cost per bus 12,343 8,816 8,228 7,347 6,465 Variable Maintenance Cost per hr Purchase Price 240, , , , ,848 Residual Value 20,000 18,000 12,000 11,000 10,000 Depreciation Period (Years) Depreciation per PVR per annum 14,677 11,579 8,806 9,173 9,785 Midi Table 13: Calculated PVR Composition in Tyne & Wear Company and Type Artic Double Single Small Single Midi All TAW Arriva Northumbria Go North East Stagecoach Busways Others Totals Figures in Table 12 and Table 13 were used to compile a weighted average figure for bus operation in Tyne and Wear reflecting the actual composition of the fleet, broken down by category as shown in Table 14. Using our calculated figure of 91.4 hours average per bus per week, the estimated average cost of operating a bus per year using this method is: = (A * B * C) + D where A is the average cost per hour ( for Tyne and Wear) B is the average hours per bus per week (91.4) C is an annualisation factor representing operating weeks per year (51.19) D is the average PVR cost per annum ( 40,517) Thus, we calculate the estimated average cost of operating a bus per year in Tyne and Wear at 140,596, an increase of 4.0% on our previous calculation and broadly 3K less than our accounts-based estimates (2.2% variation). 2 Others includes Arriva Durham County, Arriva Teesside and Stagecoach Cumberland 2012.doc Network Costing 2012 (Revised) 13 of 17

14 Table 14: Calculated Average Operating Costs in Tyne & Wear Unit Calculated Cost Hourly Based Costs Labour Fuel and tyres 4.73 Variable Maintenance 1.45 Total Hours-based Costs PVR-Based Costs Depreciation 9,845 Fixed Maintenance 8,039 Supervisory & Other Overheads 22,634 Total PVR-Based Costs 40, Driver Rates The base driver pay rate is increasingly difficult to establish. In 2009 we had publicly available information on pay rates for Go North East and Stagecoach Busways but the 2011 situation is rather different and only Go North East publishes any pay rates and even these are only new starter rates for depots at which it is currently recruiting Even with knowledge of all base pay rates an average pay rate is difficult to establish due to significant variations in pay by depot location, length of service and overtime premia. As examples from 2009: At Go North East rates of pay varied from a flat rate of 6.78 per hour to an upper rate of 9.13 per hour with overtime enhancement. At Stagecoach pay rates varied from 7.91 per hour to 9.58 per hour dependent on length of service and all had an overtime rate of an additional 60 pence per hour. Testing Sensitivity With average driver pay rate such a key variable we have investigated sensitivity of the overall cost rates here to changes in the driver pay rate. Using average costs, 71% of hours-based costs are directly related to the drivers pay rate The result of our calculation of the effect of a ten per cent upward lift in the base pay rate is shown in Table 15. Our conclusion from this is that each one per cent change in the assumed drivers pay rate changes overall costs by per hour except for Washington at 8.66 per hour. Available from: doc Network Costing 2012 (Revised) 14 of 17

15 per cent. This sensitivity does not apply to the top-down costing as we then work with known, reported labour costs. Table 15: The Effect of Changes to Drivers Pay Rates Using Base 9.43 Pay Rate 10% Increase in Pay Rate Average hourly rate Average hourly based cost per year 100, ,010 PVR cost per year 40,456 40,456 Total Cost per year 140, ,465 Percentage Increase 7.1% 1.12 BSOG Reduction From 1 st April 2012, the base rate at which Bus Service Operators Grant (BSOG) was paid to operators decreased by 20% from 43.21p/litre to 34.57p/litre for most fuel types, which translated into a roughly 14% increase in fuel costs to operators. If we apply a general assumption that the network remains in status quo, the effect of BSOG on costs is shown in Table 16. We suggest that the reduction in BSOG will have resulted in an overall increase in costs of 2.2% p.a., equivalent to an average of 67 pence per operating hour. This will vary by vehicle type as each has different rates of fuel consumption. Table 16: The Effect of BSOG Reduction to Fuel Costs 2011 BSOG Rates (43.21ppl) 2012 BSOG Rates (34.57ppl) Average fuel cost per hour Average hourly rate Average hourly based cost per year 100, ,224 PVR cost per year 40,517 40,517 Total Cost per year 140, ,741 Percentage Increase 2.2% 1.13 Comparison of Costing Methods Comparison of the calculated average operating cost is shown in Table 17. Note that the calculated net annual estimated costs for operating an average bus are very similar using both methods, within 2% of each other, although the Bottom-up method weights PVR-based costs more heavily Direct comparison of cost headings between the two methods cannot be made readily. For example, the accounts-based data uses total labour costs, 2012.doc Network Costing 2012 (Revised) 15 of 17

16 whereas the bottom-up method is built up based principally on drivers labour costs and some other known unit costs. The accounts-based process includes all depreciation and leasing whereas the bottom-up costing only explicitly calculates vehicle depreciation, although other categories of depreciation would be included in overhead A variance in cost of 2% may be seen as significant where costing is critical. In many ways we have more confidence in total top down costs as these are actual reported costs. To achieve a match requires an adjustment equivalent to raising the base pay rate to Table 17: Comparison of Cost Calculations Top Down Bottom up Average charge per hour Average annual cost per PVR 38,946 40,517 Estimated annual operating cost 143, ,596 % variance 2.2% 1.14 The Quality Contract Effect These costing figures assume the status quo in relation to drivers pay and conditions and fleet composition. A Quality Contract regime might alter these in a material fashion. Nexus may decide to raise vehicle standards and/or impose age limits and the 2008 Act legislation makes it clear that TUPE rules will apply in the event of the introduction of a QC. This is likely to result in a move upwards in wage-related costs over time, as has happened in the London regime Recommendation Given the similarity in cost estimates we feel that application of the bottom-up cost rates to the current and proposed networks will give the most useful comparative figures, primarily because we can then reflect variation in cost for different vehicle types. Whereas accounts-based figures allow allocation of cost by operator, the operator is only known for the current network and we cannot assume anything with regard to operators of individual services in the new network. Table 18: Average Cost Rates for Vehicle Types Type Artic Double Single Small SD (Dart) Per Hour Per PVR 49,653 43,029 39,668 39,154 38,884 Midi 2012.doc Network Costing 2012 (Revised) 16 of 17

17 The change to BSOG is a known cost change which will apply to the current network and proposed in equal measure. We therefore recommend adopting standard rates applying after the BSOG reduction as detailed below in Table 19. Table 19: Average Cost Rates for Vehicle Types from April 2012 Type Artic Double Single Small SD (Dart) Per Hour Per PVR 49,653 43,029 39,668 39,154 38,884 Midi 2012.doc Network Costing 2012 (Revised) 17 of 17