Study of Cost Issues in Transport Operation: Phase One: Understanding the Trends and Drivers in Cost Inflation: Task Note 2: The Bus Industry

Transcription

1 Study of Cost Issues in Transport Operation: Phase One: Understanding the Trends and Drivers in Cost Inflation: Task Note 2: The Bus Industry Commission for Integrated Transport November 07 Final

2 Quality Assurance DOCUMENT INFORMATION Document Title First Draft Created On Last Revision Saved On Name of File File Size Version (Revision) Number Total Prep & Editing Time (Minutes) To Date Study of Cost Issues in Transport Operation: Phase One: Understanding the Trends and Drivers in Cost Inflation: Task Note 2: The Bus Industry 28/02/ :41:00 01/11/ :24: TN2 Study of Cost Issues in Transport Operation Bus Industry FINAL APPROVED kb 8 32 QUALITY ASSURANCE Revision Final Prepared by Checked by Approved by Date 01/11/2007 ER/PT/SW SW CC Freedom of Information Act 2000 The TAS Partnership Limited regards the daily and hourly rates that are charged to clients, and the terms of engagement under which any projects are undertaken, as trade secrets, and therefore exempt from disclosure under the Act. In many of the Reports and Task Notes we produce, The TAS Partnership Limited uses commercially or personally sensitive data provided under confidentiality agreements by third parties to inform projects, and disclosure of this information could constitute an actionable breach of confidence. The detailed content of such Reports and Task Notes is therefore likely to be exempt from disclosure under the Act. Consequently, The TAS Partnership Limited will expect to be consulted before any content of our Reports and Task Notes is released under a Freedom of Information Act 2000 request. Copyright The contents of this document are copyright The TAS Partnership Ltd., with the exceptions set out below. Reproduction in any form, in part or in whole, is expressly forbidden without the written consent of a Director of The TAS Partnership Ltd. Cartography derived from Ordnance Survey mapping is reproduced by permission of Ordnance Survey on behalf of the Controller of HMSO under licence number WL6576 and is Crown Copyright all rights reserved. Other Crown Copyright material, including census data and mapping, policy guidance and official reports, is reproduced with the permission of the Controller of HMSO and the Queen s Printer for Scotland under licence number C02W

3 Contents Executive Summary Introduction and Objectives Understanding the Trends and Drivers in Cost Inflation - Introduction Structure Objectives Projected Outcomes Key Elements of Cost for the Bus Industry Information Supply Identifying Cost and Revenue Trends A Dilemma Proportion of Costs Labour Costs Pensions Fuel Spares and Materials Insurance Costs Finance, Capital and Tax Overheads The Community Transport Sector Comparison of Costs for Public and Private Transport Modes Motoring Costs Public Transport Fares Fare Structure Perceptions of Travel Cost versus True Cost Fares Comparisons between Public Transport Modes Light Rail Taxis Household Transport Expenditure Core Cost Key Performance Indicators...45 Inflation: Task Note 2: The Bus Industry Contents 1

4 4.1 Cost Headings Establishing KPIs Core Sensitivities and Cost Drivers Wage Levels The Effect of Traffic Congestion Legislation Corporate Costs Spares and Materials Fuel and Utilities Growth Disparities in Current and Forecast Costs Compared to Other Sectors Trends in Wage Costs The Effect upon Bus Drivers Trends in Weekly Earnings Regional Comparisons Paid Hours Productivity Comparisons with Wages in other Transport Sectors Comparisons with Other Sectors Sample Data Custom and Practice The Workforce Barriers to Employment Recruitment and Retention Other Issues Trends in Service Provision Depot and Crew Change Locations Opportunities for Cost Control Tender Preparation Costs Public Support for Buses Effect of Pension Issues and Additional Social Legislation in Labour Intensive Industries Pensions Inflation: Task Note 2: The Bus Industry Contents 2

5 7.2 Potential Impact of the EU Working Time Directive National Insurance Social Legislation- Maternity, Paternity and Parental Leave Child and Working Tax Credit Limits Overall Impact Compliance Costs and Legislative Change Disability Compliance Issues Environmental Legislation Traffic Commissioners Changes to Drivers Hours Regulations Contract Compliance Quality Contracts The EU Driver Training Directive Trends in Fuel and Fuel Consumption Fuel and Fuel Duty Vehicle Specification Euro Engine Standards Trends in Accident and Insurance Costs Insurance Issues The Predominant Approach Insurance Premium Increases Insurance Costs Containment Employers Liability Insurance Base Composition of Apparently Fixed Costs Fixed Costs Trends in Capital Costs New Vehicle Cost Vehicle Depreciation Coaches The Second-Hand Market Buy or Lease? Inflation: Task Note 2: The Bus Industry Contents 3

6 12.6 Motoring Comparisons Cost Increases in Highway Infrastructure Projects Cost of Capital Current Investment Climate Cost and Types of Capital Rates of Return Is this Achievable? Effect on Financial Outputs within the Various Scenarios Future Modelling Effect of Operators Restoring Eroded Margins by more than Cost Recovery Fare Increases Historical Fares Policy Fares Trends Since Effects of Fare Increases and Other Factors TAS Fares Model The Sheffield Experience Is There a Better Way? Alternative Approaches to Fares Summary and Conclusions Scenario Summary Inflation: Task Note 2: The Bus Industry Contents 4

7 Executive Summary Trends in Cost in the Bus Industry Above inflation cost increases in the bus industry have been of some concern for a few years. Operators are seeing decreasing profit margins, local authorities are faced with further deregistrations of services and increasing tender prices, while the passenger faces more frequent and significant fare increases. This exercise set out to establish the main drivers of this level of increased cost. Wages are the main item of expenditure for bus operators, accounting for just under 70% of all costs. Thus any increase in wages has a significant effect. Wages in the wider economy have been rising above the level of inflation for several years and this is equally true of the bus industry. We have established that drivers in London have received pay rises well above inflation year on year, yet outside London drivers have received increases in line with general wage rises, although there has been a reduction in their working week (hence more drivers for the same work). In one region the North West bus drivers are now worse off in real terms than in There have also been additional add-on costs to wage bills caused by social legislation and EU regulations. Maintaining funding for pension schemes has been problematical. The major groups have used reserves or proceeds of sale to top up pension funds. The industry has been exposed to significant fuel price rises (particularly in 2005). As modern vehicles are less fuel efficient than their predecessors the level of consumption has increased too. Traffic congestion and the need to schedule reliable services in the face of it, has imposed additional cost on bus operators. In areas where there is day - long congestion operators are forced to increase resources to maintain the same level of service, or look at widening headways or removing sections of route in order to implement an achievable timetable. Local authority support for bus services has grown significantly, but almost all of the extra expenditure has been in London. Budgets outside London have just about kept pace with inflation and hence can support fewer services. Local authority budgets are also under pressure to maintain funding for the continuation of challenge-funded services when that funding expires. Overhead costs are an increasing proportion of bus company cost, be they additional management or supervisory staff, or headquarters overheads passed down to the operating companies. This is despite the closure of many depot and bus station facilities. Inflation: Task Note 2: The Bus Industry 5

8 Insurance and accident costs have been escalating in recent years, largely due to the increasing claims culture. Companies have been able to stem the increase in motor insurance, but the area of major concern is Employers Liability insurance, for which a doubling or trebling of premium over five years is not unknown. Whilst passengers have undoubtedly faced some significant fare increases, we believe that the level of these increases has not been as steep as official figures show. Moreover, the highest fare increases have applied only to single or return fares, which are purchased by a decreasing proportion of passengers. Multi-journey tickets, conversely, seem to have largely increased at or below the rate of inflation. The industry faces significant future costs with the introduction of the EU Driver Training Directive from 2008 and full DDA compliance between 2015 and Inflation: Task Note 2: The Bus Industry 6

9 Introduction and Objectives Understanding the Trends and Drivers in Cost Inflation - Introduction The problems of cost escalation and cost pressures within the passenger transport industry are well documented and are of major concern for transport co-ordinators and operators Bus operating costs are currently rising well ahead of RPI. This is despite the bus industry operating in a competitive market with relatively low entry barriers. Labour is a major proportion of the industry s costs and competition within the job market has intensified. The industry has faced staff shortages in recent years resulting in steep increases in wages in order to recruit and retain adequate personnel. Rapid expansion in bus provision in London has exacerbated the problem in the capital Above-inflation cost increases impact upon commercial services in a number of ways. Operators can raise fares or reduce services in order to maintain profit levels. Core commercial services are affected by increasing wages, higher cost of new vehicles, rising fuel costs and ever-increasing traffic congestion Marginal services may become unprofitable requiring the local authority to step in if it wishes services to remain. Budgets also face pressures from increasing cost for existing supported services. This is set against a general decline in local authority bus service support budgets as councils face pressures to fund other activities. Tender prices are also related in many cases to the level of revenue taken. Evening trade for the bus industry has all but evaporated in many areas, leading to further increases in cost This leads local authorities to prioritise supported services in order to maintain those which either fulfil the greatest social need or offer the best value for money. In some cases marginal services have simply been lost, while the local authorities have continued to support more poorly patronised services. This approach leads to increased costs per tendered journey as the passenger base on the remaining secured journeys is so much lower Cost escalation poses a serious threat to continued spending on the transport network as it raises the question of public value for money. Many local authorities have some measure of VFM in terms of subsidy per passenger and this threshold can be breached in the face of continuing price increases. It is vital that costs are controlled so that the industry can reinvest in expanding and strengthening the network at an affordable cost and not by additional public expenditure. Inflation: Task Note 2: The Bus Industry 7

10 1.1.7 Infrastructure investment is also called into question as local authorities have suffered significant cost increases in highway infrastructure and also have reservations about the continuation of services for which bus priorities are being designed. Conversely, the continuation of the levels of service may depend upon the priorities offered by the infrastructure provision Although not within the remit of this work, it must be acknowledged that overall the bus industry remains in the decline which started in the late 1950 s. The whole subject of bus regulation or deregulation has risen up the political agenda. But statistics clearly show that deregulation was not the cause of this decline, though there is some evidence that it may have slowed it down It is against this background that the Commission for Integrated Transport (CfIT) is looking to conduct an analysis of cost trends within the bus and rail industry and possible mitigating strategies. 1.2 Structure This Task Note is arranged into a series of sections with each devoted to a question as asked by CfIT in the original brief. At the head of each section of this Task Note the questions asked by CfIT are reproduced verbatim in red and the issues raised are addressed within the section There is some overlap in subject headings within the questions. To avoid repetition of subject matter and disjointed discussion of subjects, reference is made to key sections, such as section 9, which deals with all matters related to fuel, for example. 1.3 Objectives This project has three objectives specified by CfIT: To understand the trends in cost inflation in the transport sector, and the reasons for it; To examine the impacts of these trends on behaviour of operators, financiers, local authorities, government; hence on transport policy objectives (congestion, pollution, accessibility); and To identify possible solutions (and their impacts) The first phase of the project, researching and understanding the trends and drivers in cost inflation, will be dealt with in a series of Task Notes covering the key modes of bus, rail, tube / light rail, air and road / rail freight This first Task Note considers the bus industry: Inflation: Task Note 2: The Bus Industry 8

11 Key elements of cost for buses and how they are changing. How public and private transport modes compare in their costs. Core cost Key Performance Indicators. Core sensitivities and cost drivers. Growth disparities in current and forecast costs compared to other sectors. Effect of pension issues and additional social legislation in labour intensive industries Existing and forthcoming compliance costs and legislative change. Trends in fuel and fuel consumption. Trends in accident and insurance costs. Base composition of apparently fixed costs. Trends in capital costs. Cost of capital. Effect on financial outputs within the various scenarios. 1.4 Projected Outcomes The research will provide a policy response to cost escalation within the transport industry and strategies available to minimise or control costs. It is hoped the report will provide a useful stimulus for engagement between Government, local authorities and operators on industry costs. The research will also add to the scientific evidence base, of which there is little published analysis of trends and mitigating strategies. Inflation: Task Note 2: The Bus Industry 9

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13 Key Elements of Cost for the Bus Industry 2 CfIT Question 8: What are the key elements of costs for key modes - rail, bus, tube, air, freight (road and rail); and how are they changing? Labour Pensions Fuel Materials Finance Capital Tax. 2.1 Information Supply Within this Task Note we have tried to be as representative as possible, given the available data. However, we do acknowledge that it is much easier to obtain information from larger operators, and particularly the five big groups than it is to gather equivalent information from smaller operators. In particular, many of the statistics on bus usage, extent of operations and income are chiefly derived from DfT sources, gathered from those larger operators which complete the annual Stats100 form Information from small operators is difficult to obtain. Many such companies are family firms and even when they are constituted as limited companies, only submit abbreviated accounts to Companies House, which allow little financial analysis. The breakdown of costs and those key cost drivers may well be totally different for an operator surviving on school and private hire work GoSkills has calculated that around 75% of bus companies have ten or fewer vehicles, but conversely that 80% of bus drivers and a slightly higher proportion of local bus service mileage form part of or are provided by the major groups We acknowledge, therefore, that this Task Note s findings will under-represent the small operators and the coaching sector and this must be borne in mind when interpreting the results. Inflation: Task Note 2: The Bus Industry 11

14 2.2 Identifying Cost and Revenue Trends A Dilemma Figure A below shows trends in costs over the last ten years taken from DfT s Bus, Coach and Light Rail Statistics bulletin, adjusted to 2004/5 prices. There is a clear distinction between London and non-london operations both in terms of costs and revenue From these figures it can be seen clearly that the major escalation of cost has taken place in London up over 20% since 1999/2000. This has been matched by real term falls in London revenue, although it did grow again in 2004/5 nonetheless leaving a substantial gap. Outside London the industry appears to have much better control of its costs these were slightly below the 1994/5 level in 2004/5, while revenue has continued to grow and has effectively recovered to 1994/5 levels But, these figures go against received wisdom that costs are continuing to grow substantially ahead of inflation and that operators profit margins are being squeezed. Inspection of any of the major groups accounts or mid-year progress statements reinforces this assumption beyond doubt. Yet the DfT figures have their origins in annual returns provided (mainly) by the same groups operating subsidiaries. One feature of this Task Note will get behind these general statistics and investigate the true course of cost progression DfT figures do support the view that revenue outside London is being maintained in the face of declining ridership by raising fares. Figure B illustrates the change in revenue per passenger for London and the rest of the UK, adjusted to 2004/5 prices. This shows a sharp divergence, with revenue per passenger declining in London (in the face of increased ridership) and rising in the rest of the UK so that the average revenue per passenger outside London is now almost double that in the capital There are significant variations between parts of the UK for example, the average revenue per passenger in the English Shires is well over 1, whilst in PTE areas it is 78 pence, as summarised below in Table 1. Table 1: Changes in Average Income 1 per Passenger 1994/5 2004/5 Area Average Income 1994/5 Average Income 2004/5 % Change London 55.2p 48.9p -11.4% English PTEs 63.7p 78.1p +22.6% English Other 84.2p 112.3p +33.4% Scotland 74.3p 81.9p +10.2% Wales 76.5p 97.3p +27.2% 1 Includes concessionary fare payments. Inflation: Task Note 2: The Bus Industry 12

15 Figure A: Trends in Bus Industry Costs and Revenue Cost or Revenue (pence) / / / / / / / / / / /05 London Cost per km Non London Cost per km London Rev per km Non London Rev per km Figure B: Trends in Revenue per Passenger Pence per Pasenger / / / / / / / / / / /05 London Outside London 2 Source 3 At 2005 prices Inflation: Task Note 2: The Bus Industry 13

16 2.3 Proportion of Costs Figure C shows the breakdown of bus industry costs for 2006 whilst a similar breakdown for 1978 is shown in Figure D. It is notable that despite labour costs being significantly lower (in real terms) than in 1978 they are broadly the same proportion of the total costs The proportion of industry expenditure devoted to maintenance has declined by about 50% since the late 1970s whilst the proportion of costs devoted to overheads has roughly doubled. However both of these categories of cost have fallen in real terms. Figure C: Breakdown of Bus Industry Costs Overheads 10% Depreciation 4% Fuel 9% Bus Maintenance 9% Labour 68% Figure D: Breakdown of Bus Industry Costs National Bus Company, Fuel 6% Overheads 5% Depreciation 3% Bus Maintenance 17% Labour 69% 4 Source Bus Industry Monitor Source National Bus Company Annual Report for Inflation: Task Note 2: The Bus Industry 14

17 2.4 Labour Costs The major influence on costs is labour, this accounts for over two thirds of bus operating costs, as illustrated in Figure C. Labour costs are now significantly lower in real terms than in 1978 although recent years have seen above inflation increases Driver recruitment and retention continues to be an issue in some areas, particularly where unemployment is low. Substantial pay increases have affected the viability of commercial bus services, resulting in greater pressure on the local authorities subsidised bus service budgets. Despite initial optimism, some driver shortages remain. A full investigation of wage trends and comparisons with other sectors is included in section Pensions Pensions have become a major issue in all industries, and particularly affect labour-intensive industries such as the bus industry. The pension situation is discussed fully in section Fuel Large increases in fuel cost have driven many operators to introduce multiple fare rises in The cost of fuel is internationally influenced and users of fuel suffer price fluctuations as a result. Despite increasing world demand and an acknowledgement of supplies of oil being finite, the cost of fuel has not followed a uniformly upward curve. There are signs that 2005 s severe increases are not being followed through into 2006 reflected in price competition by the major supermarkets The current government has imposed only one increase in the level of fuel duty since 2000, thus the major driver of fuel cost is the cost of the fuel itself. Trends in fuel costs and fuel consumption are discussed fully in section Spares and Materials The prime components of materials (engineering) costs are spare parts and labour. Evidence from the analysis of industry costs suggests that expenditure on spares and materials has remained roughly constant in real-terms since the early 1990s 6, although the industry periodically has supply problems with particular spares and particular suppliers. None of the company reports we examined raised increases in costs for spare parts as a particular issue, although some increases in wages for engineering staff were apparent. 6 TAS Bus Industry Monitor 1991 to date. Inflation: Task Note 2: The Bus Industry 15

18 2.7.2 Real price increases have been offset by reductions in fleet size, the elimination of older, more maintenance-intensive vehicle types and improved designs. However, early low floor designs are now showing higher maintenance costs as they reach mid-life. There are signs that tyres, especially, are increasing in price well ahead of RPI. Further discussion of trends in spares and materials is contained in section Insurance Costs Insurance costs for bus operation have increased very substantially in the last few years. This would appear to have resulted from a number of pressures on the insurance industry such as some high profile international incidents, an increasing claims culture in the UK and a reduction in the number of insurers willing to offer policies in respect of bus operation. The motor insurance industry has also become extremely competitive to the point that claims have exceeded premiums, which is obviously unsustainable Existing bus operators are finding that all premiums have been increasing substantially year on year, although there is evidence that motor insurance premiums are now levelling out. Operators are also expected to take on policies with higher levels of excess, so that their level of effective selfinsurance has risen substantially New entrants to the industry are finding that without a low / no claims record, they are unable to find any insurer willing to take their risk without a disproportionately high initial premium Employers and Public Liability (EL) Insurance, however, continues to rise significantly. Premia have risen by up to three times in five years and EL insurance is now exceeding motor insurance costs significantly at many companies. The cost of EL insurance is particularly onerous for small to medium concerns. A fuller discussion of insurance issues is contained in section Finance, Capital and Tax The raising of finance is an area of major difference between large and small operators, with the big groups able to borrow capital at just above the base rate, while smaller companies pay market rates of interest. Finance and capital issues are discussed fully in section Overheads The immediate post-privatisation period saw huge reductions in company overheads, with central works facilities closed, bus depots and bus station sites sold off and layers of management and administrative staff removed. Inflation: Task Note 2: The Bus Industry 16

19 However, recent trends have reversed the reduction in overhead costs. A detailed analysis of overheads is contained in section The Community Transport Sector There has been significant growth in the Community Transport (CT) sector over the last fifteen years. However, the sector has a very different breakdown of cost from that of the mainstream public transport industry, despite a general CT sector trend to develop away from the traditional volunteer-led organisational structure to more professional, business-led approaches Figure E shows a breakdown of costs for a typical mid-sized, 11-vehicle CT operator, taken from its annual accounts. Note that labour costs and vehicle running costs are reduced to around 30% of costs each, maintenance becomes a very unimportant cost heading as CT vehicles are generally operating low mileages and not subject to the degree of wear and tear suffered by buses in the mainstream Depreciation constitutes roughly five times the proportion of costs in the mainstream CT vehicles are major items of expenditure but tend to have much shorter operating lives, and overheads account for 17% of all costs, much higher proportionally than the bus industry. There is logic to this as a CT organisation typically has premises, management and some sort of booking agency supported by only a small number of vehicles Figure F shows the five year trend in costs for the same organisation at outturn prices. It is difficult to identify any particular trends other than increases in both labour costs and running costs (principally fuel) It can be fairly safely assumed that the CT sector will experience similar levels of cost increases to the mainstream sector, but in different proportions, thus, for example, labour cost increases are less critical to the CT sector while the effect of a significant increase in new vehicle cost becomes more critical. Inflation: Task Note 2: The Bus Industry 17

20 Figure E: Breakdown of Industry Costs Community Transport Sector Repairs and Maintenance 3% Labour 29% Vehicle Running Costs 31% Depreciation 20% Overheads 17% Figure F: Five Year Trends in Costs Community Transport Sector 60,000 50,000 40,000 Spent Per Year 30,000 20,000 10, Vehicle Running Costs Overheads Depreciation Labour Repairs and Maintenance Inflation: Task Note 2: The Bus Industry 18

21 Comparison of Costs for Public and Private Transport Modes 3 CfIT Question 9: How do public and private transport modes compare in their costs and would we expect the divergence between the cost of motoring and public transport fares to continue? 3.1 Motoring Costs Figure G below illustrates trends in indices for various aspects of motoring costs in addition to a total cost index and RPI since Total motoring cost has followed RPI closely, although there is wide divergence in the factors making up total cost. Motoring costs and public transport fares followed the same general trend until 2001 since when public transport fares have continued to rise at the same level while increases in RPI and motoring costs have levelled off since The purchase cost of vehicles (both new and secondhand) has continued to decline in real terms since 1996 and is now only 11% above the 1987 base level, despite the increased sophistication of cars. Fuel costs grew significantly in the late 1990s as did tax and insurance although both levelled off in more recent years. The one area of motoring cost which has consistently climbed at a rate much higher than RPI is maintenance (parts, accessories, labour costs and roadside recovery) and there is little evidence of any alteration to this trend Recent evidence 7, however, indicates that the running costs of a car are set to increase significantly due to fuel price increases above 10% in one year and with one of the major insurers increasing premiums by an average of 16% due principally to the increase in personal injury claims and increased liability due to the number of uninsured drivers on the road. The impact of new pay-asyou-drive car insurance schemes is likely to be another significant factor as this will de-fix another substantial element of motoring costs Parking charges can be a significant element of the cost of journeys by car. There is some evidence to suggest that parking charges are increasing significantly, both as a result of real increases in charges for existing car parks and the introduction of charges in areas which once offered free parking, including hospitals, colleges and some major businesses. In West Yorkshire, for example, parking in the district council controlled car parks increased by between 18 and 38% in the four years between 1997 and However, a 7 Report from Sainsbury s Bank detailed on BBC News website and insurance details on Source: West Yorkshire Local Transport Plan Inflation: Task Note 2: The Bus Industry 19

22 study of car-borne commuters by the RAC in showed that at that time some 51% still had free parking provided by their employers at their place of work. Figure G: Trends in Aspects of Motoring Costs 9 Cost Index Vehicle tax and insurance Petrol and oil All motoring expenditure Maintenance Purchase of vehicles RPI In order to demonstrate the relative importance of each of the cost headings shown in Figure G, a sample breakdown of motoring cost is shown in Figure H. This is prepared from RAC data from 2005 with the fuel price per litre updated to April It can be seen that for new cars at least, depreciation takes up the major share of car costs at 40%, followed by fuel which accounts for 32% of motoring costs. Despite experiencing the highest rises in cost over the years since 1987, insurance and maintenance together make up only around 20% of running costs. On its own, tax (excluding fuel duty) accounts for a small proportion, just under 3%, of the total costs Evidence from a Motor Insurance report by BW-Deloitte-Touche 10 indicates a growing gap between new car purchase price and secondhand prices, with prices for used cars falling at a greater rate in real terms than the trend in new car prices. 9 Data taken from ONS Social Trends Report, Inflation: Task Note 2: The Bus Industry 20

23 3.1.8 Figure I then breaks down the motoring costs to the average family by category 11 (although in this case purchase and finance are included under the same heading). It is notable how the effect of multiple car ownership within households shifts the proportions of expenditure so that insurance and maintenance become much more significant items of expenditure Figure J relates these categories to their effect on average household expenditure over time. Although the biggest proportionate increase has been in the insurance and tax category, it is notable that the average household now spends around 80% more on vehicle purchase than in 1981, despite real terms drops in car prices. This has reflected the growing trend toward multiple car households and an increased tendency to purchase new cars The percentage of households owning two or more cars grew from 17% in 1981 to 30% by Over the same period households that previously had no access to a car have acquired a car for the first time. Consequently the proportion of households owning a single car has remained broadly constant since 1967 at around 43-44%. Figure H: Sample Breakdown of Annual Motoring Costs (2005) 12 Maintenance & Breakdown Cover 9% Finance 6% Depreciation 40% Insurance & Tax 13% Fuel 32% 11 Source Social Trends 36, April 2006, Office of National Statistics 12 Sample data taken from RAC cost of motoring index quarter three Figures based on VW Golf 1.6 over four year life at 12,000 miles per annum, fuel price updated to 93 pence per litre and fuel consumption at 41.5 miles per gallon. Inflation: Task Note 2: The Bus Industry 21

24 Figure I: Breakdown of Household Motoring Expenditure Fuel 27.0% Purchase 41.8% Insurance and tax 18.4% Repairs and servicing 12.8% Figure J: Index of Average Household Expenditure on Motoring Costs Expenditure Index (1981=100) / / /05 Purchase Repairs and servicing Insurance and tax Fuel Inflation: Task Note 2: The Bus Industry 22

25 Trends in the total amount of fuel (petrol) consumed by cars show some remarkable variations, illustrated in Figure K. This does not show any real trend in total consumption although there is a distinct fall in the last two years for which there is data The rate of fuel consumed by cars in terms of kilometres per litre is illustrated in Figure L. This shows clearly that cars have become considerably more fuel efficient over the ten year period being examined, with average fuel consumption improving by two kilometres per litre (5.6 miles per gallon) over ten years. This overall figure for improvements in fuel consumption probably masks even better performance by standard cars as it will be affected by significantly worse fuel consumption figures produced by the growing numbers of MPVs and 4x4s. Figure K: Total Fuel Used by Cars Million Litres Inflation: Task Note 2: The Bus Industry 23

26 Figure L: Trends in Fuel Consumption by Cars Kilometres per Litre Public Transport Fares Figure M, taken from the Social Trends report shows how DfT calculates that public transport fares, and more specifically bus and rail fares, have increased consistently ahead of RPI since Increases in bus and rail fares are now some 30% ahead of RPI. It is not a new development for bus fares to grow ahead of RPI. Between 1976 and 1985 fares grew by around 15% above RPI 14. Other fares, (taxi, ferry and air travel), have generally followed RPI, as have motoring costs, as demonstrated in Figure G above Although rail fares have consistently increased above RPI since 1987, bus fares remained in line with RPI until 1991, since which time they have risen consistently ahead of RPI. 13 Fuel Consumed: - Transport Statistics GB, Energy and Efficiency tables Kilometres Travelled: - Transport Trends Transport Statistics Great Britain Inflation: Task Note 2: The Bus Industry 24

27 Figure M: Public Transport Fare Trends Cost Index Bus and coach fares Other Retail prices index Rail fares All fares and other travel We have calculated our own fare index based upon the simple calculation of revenue (including payments for concessionary travel) divided by the number of passengers taken from DfT figures, with all figures adjusted to current prices and using 1994/95 as the base year with an index of 100. Figure N and Figure O show our estimates of how fares have risen in real terms since 1994/95. This period should have eliminated the deregulation effect and therefore illustrates the general ongoing trend in fare levels. Other than in Wales, income per passenger has grown around 10% above RPI The DfT s own bus fare index does not include revenue in its calculation. The DfT figures generally show a higher increase than that indicated by our calculation, with a very wide difference shown in London. It must be noted, however, that the fares do not all relate to the same base level of income per passenger in 1994/ (which may reflect different journey lengths) Table 2 below shows the actual income per passenger (adjusted to current prices) in each area. Note that the highest average income per passenger in 1994/95 was in English non-pte areas and that these areas have suffered the highest percentage fare increases in subsequent years. 15 See Figure B Inflation: Task Note 2: The Bus Industry 25

28 3.2.6 Figures for each country show that fares have risen in England and Scotland by around 10% in real terms over ten years, while Wales has seen a larger increase of 26% following significant progressive increases after the turn of the century. The Welsh figure may reflect changes in travel habits after the introduction of free concessionary travel, but there has been no equivalent shift in Scotland. Breaking England s figures down by area type in Figure O shows that there is considerable variation within the English results. While the non-pte areas have increased by over 30% in real terms, PTE areas have incurred an increase just over 20% while London has seen a fall of just over 10% Table 3 goes on to show that this general pattern of fares increases by area type above does not apply uniformly as it compares changes in fares over ten years in a PTE area (South Yorkshire) and a shire area (County Durham). Overall there has been a lower level of increase in the shire area. RPI increased by around 52% in this period thus all single fares have increased well above RPI. At the foot of Table 3 the prices of weekly season tickets are shown it is notable how the prices of these have increased at or below the level of RPI. This is discussed further in section 3.3. Table 2: Average Income per Passenger 1994/1995 and 2004/2005 Year / Area London English PTE areas English non- PTE areas England Scotland Wales 1994/ / Change -10.9% +21.9% +33.3% +10.3% +10.8% +26.0% Inflation: Task Note 2: The Bus Industry 26

29 Table 3: Comparison of Fare Changes over 10 Years PTE and Shire Fare in 1996 First Week 16 Go n Save 16 First South Yorkshire Fare 2006 % Change since 1996 Go Northern County Durham Fare 2006 % Change since % % % % % % % % % % % % % % Figure N: Indices of Bus Fares in the UK (Current Prices) since Indices / / / / / / / / / / /05 England Scotland Wales Great Britain 16 In both cases the prices for the all routes versions bought on-bus is shown. Inflation: Task Note 2: The Bus Industry 27

30 Figure O: Indices of Bus Fares in England (Current Prices) since Indices / / / / / / / / / / /05 London English PTE areas English non-pte areas Great Britain 3.3 Fare Structure One aspect of fares for bus journeys which has changed in many areas is the structure of ticketing. Prior to deregulation bus fare structures focussed principally upon single (and sometimes return) fares with a limited range of multi-journey tickets, which usually required some sort of photocard and a visit to a travel office to carry out each renewal. This approach has now changed radically. The majority of larger companies now offer day and weekly tickets which are bought on the bus. Initially, most of these were introduced (or relaunched) at very attractive prices to retain patronage and market share in competitive situations. It is perhaps worth noting that such tickets have an influence on the accuracy of passenger counts, since there is always a tendency to under-record non-fare-paying passengers In many urban areas and particularly in PTE areas - the predominance of these tickets means that fewer than 25% of passengers now travel by purchasing single tickets and in many areas the day ticket acts as a default maximum value for a return ticket. A particular case in point exists in south Manchester, where Stagecoach s day ticket at 2.70 is cheaper than two single fares for all but the shortest journeys Thus the significance of single fare levels can be significantly overstated and the importance of the pricing of day tickets overlooked. For example, in South Inflation: Task Note 2: The Bus Industry 28

31 Yorkshire First implemented three fare increases in 2005 which led to criticism from the PTE, press and local elected representatives. The headline figures all related to the effects upon single fare values, which had indeed increased significantly, but this focus masked some very large increases and structural changes to day and weekly tickets which potentially affected far more users. In particular, the previous users of off-peak day tickets priced at 2.20 at the beginning of 2005, found their only alternative (other than reverting to single fares) at the end of the year to be a 3.50 day ticket, or a 59% increase in one year. Conversely, those who continued to purchase the all-routes weekly ticket saw only a small price rise across the year The chart shown in Figure P illustrates changes to single fares over a range of distances and weekly ticket 17 prices for First South Yorkshire since 1995, including the Retail Price Index for comparison, with all values scaled to 100 in 1995 for comparative purposes. Single fares are shown for one, two, three and seven mile journeys This shows clearly that there has been a steady rate of increase above RPI in all of the single fares, with fares for shorter distances increasing by the greatest proportion (equivalent to 9½% per year for the one mile fare) and longer journeys by a lower proportion (around 7½% per year). In the intervening period RPI has grown by an average of 2½% per year. It is notable, however, that the price growth of weekly tickets has remained at or below the rate of increase in RPI throughout this period It is perhaps unfair to concentrate on one company in one area. Some operators have applied significant price increases to multi-journey tickets with every price increase applied to single fares and there are also those who have not imposed the same level of single fare increases as the case above. But there does appear to be an overlying trend for single fares to rise well above the level of RPI while the cost of multi-journey tickets has risen roughly in line with RPI A similar exercise was performed using data for Go Northern s operations in County Durham. The single fares which ranged between 50p and 180p at November 1996 have once again been scaled to 100 for comparative purposes. Figure Q shows a much lower rate of increase to single fares, except for the low-value short distance fares and once again its weekly Go n Save (GNS) season ticket has roughly followed RPI. There is one significant similarity to the First data in that fares in County Durham took a major upward divergence from RPI in 2005, again in response to fuel price increases To look at another range of multi journey tickets, Figure R illustrates the price trend of Lothian Buses day and weekly tickets since After an initial 17 The price for the all day network-wide FirstDay ticket is shown here Inflation: Task Note 2: The Bus Industry 29

32 period of above-inflation increases, prices have generally followed the trend of RPI since 1996 until 2005 when there was a significant increase in weekly ticket price but the day ticket price is now below the rate of growth of RPI The figures from both County Durham and Lothian support our findings from South Yorkshire that the price of multi journey tickets generally follows RPI much more closely. This also helps to explain why shire areas have shown a higher rate of overall increase in fares (expressed in terms of revenue per passenger) than the PTE areas. Shire areas tend to have lower availability of multi-journey tickets and a greater dependency upon off-peak passengers who are less likely to purchase multi-journey tickets. The level of single fares is therefore much more germane to shire areas. Figure P: Trends in Bus Fares for First South Yorkshire Fares Index (1995=100) Dec-95 Apr-96 Aug-96 Dec-96 Apr-97 Aug-97 Dec-97 Apr-98 Aug-98 Dec-98 Apr-99 Aug-99 Dec-99 Apr-00 Aug-00 Dec-00 Apr-01 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 1 mile 2 miles 3 miles 7 miles Weekly RPI Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Inflation: Task Note 2: The Bus Industry 30

33 Figure Q: Trends in Fares since 1996 Go Northern, County Durham Index (Base 1996 = 100) Nov-96 Mar-97 Jul-97 Nov-97 Mar-98 Jul-98 Nov-98 Mar-99 Jul-99 Nov GNS RPI Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Figure R: Trends in Day and Weekly Ticket Prices at Lothian Buses Index (1991 = 100) May-91 Nov-91 May-92 Nov-92 May-93 Nov-93 May-94 Nov-94 May-95 Nov-95 May-96 Nov-96 May-97 Nov-97 All Day One Week RPI May-98 Nov-98 May-99 Nov-99 May-00 Nov-00 May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 Inflation: Task Note 2: The Bus Industry 31

34 3.4 Perceptions of Travel Cost versus True Cost Motorists owning their own cars ostensibly face the same types of costs as bus operators: Overheads purchase cost of the car, tax, insurance, MOT. Depreciation this can be translated as an allowance against the purchase price of the next car or, more likely, finance costs against the existing vehicle. New cars can depreciate by around 40% as soon as they are driven from the garage forecourt. Semi-variable Cost repairs, replacement tyres etc. Labour Costs but in this case a value of the owner s time spent driving. Marginal Costs the marginal cost of fuel plus parking charges However, most motorists in calculating the cost of a journey consider only the marginal cost of such journeys typically fuel at around 10 pence per mile. The true cost per mile of motoring has been shown to vary considerably dependent upon the owner s annual mileage and the period of intended ownership. Using figures for a mid-range new car (Vauxhall Astra 1.4) the average cost per mile excluding parking charges - varies between 23 pence for an owner driving 40,000 miles per year and the vehicle having a four year life to 76 pence per mile for an owner driving 10,000 miles per year and selling the car in year one Source Glass s Whole Life Costs Inflation: Task Note 2: The Bus Industry 32

35 Figure S: Comparisons of Whole Life Average Mileage Cost Based on Vauxhall Astra 1.4 new in Life Cost - Pence per Mile Year 2 Years 3 Years 4 Years Vehicle Life mpa mpa mpa mpa The range of whole life average mileage costs is shown above in Figure S. Note that for a motorist driving 10,000 miles per year the average cost is never below 47 pence per mile. 10,000 miles per year equates to around 32 miles per day over six days per week. The RAC has recently reported that a significant proportion of motorists make daily journeys of five miles and under 20 - these people will therefore incur average mileage costs exceeding those shown for the 10,000 miles per annum category above as the overhead cost of owning the car must be spread over fewer miles driven. Conversely, it is clear from the above figures that for high mileage drivers covering 40,000 miles per year, the average mileage cost varies little between a three or four year vehicle life The costs above reduce for second-hand cars, with a three year old car costing 7,000 spreading the reduced purchase cost over the life of the vehicle. Over a four year life this reduces the average cost per mile by between 17.5 pence (10,000 miles per annum) and 4.4 pence (40,000 miles per annum) but this must be set against the increased maintenance cost as the vehicle grows older Thus the motorist s perceived cost of motoring of around 10 pence per mile for fuel fails by some margin to reflect the true costs of motoring. One true advantage perceived by the motorist, however, is that additional passengers 20 RAC 2006 Annual Report at Inflation: Task Note 2: The Bus Industry 33