Train operators have been told to find ways to cut hundreds of millions of pounds from the railway’s operating costs next year, in a move that is likely to result in fewer services and worse stations for passengers.
The Department for Transport seeks to cut spending by 10% after the chancellor Rishi Sunak’s autumn budget.
With the Treasury anxious to limit spending on rail, which increased massively during the pandemic, letters from the DfT’s managing director of passenger services, Peter Wilkinson, have been sent to individual operators setting out the swingeing cuts needed across the industry.
While train operators expected cuts – the Williams-Shapps plan for rail, which was published in May, set out a target of saving £1.5bn over the next five years – the immediacy and scale of the financial demands has come as a surprise. Government sources said there were no finalised decisions, and denied that individual operators were being asked to deliver cuts of 10% or more to expenditure.
Operators have been under direct government contract since the abolition of franchising at the start of the pandemic in March 2020. Under the emergency recovery contracts, they are paid a fixed fee to deliver services with the revenue and cost risk taken by the government.
Even if, as DfT sources suggest, the latest call for savings are a “routine business planning process” to maintain efficiency and reduce the cost to taxpayers, alarm bells are ringing through the industry. While the effects of the pandemic on rail travel patterns and revenue are clear to all, a division has grown between those who believe it is essential to maintain services and lower fares to attract passengers and those who favour cutting costs and maximising current income.
According to figures released by the Office of Rail and Road on Wednesday, the Treasury spent an additional £6.5bn on running the railway in 2020-21, to cover lost revenues as passenger numbers dropped 78% overall.
The shortfall will be substantially less this financial year, with weekly rail demand having risen steadily to about 70% of pre-Covid levels by November – although the discovery of the Omicron variant and the reintroduction of mandatory mask wearing is expected to depress numbers. Provisional DfT figures showed a 10% drop in train travel last Monday, although the impact of storms would have played a part.
In October, train operators announced a voluntary severance programme to try to reduce staff costs. However, further budget constraints could mean mandatory job cuts, with many of the fixed costs in rail, such as rolling stock and track access charges, impossible to reduce quickly.
Operators fear the reputational damage, and financial hit, of managing decline and likely industrial action. Under the new contracts, at least 20% of the potential profit will be linked to performance measures including customer satisfaction. One insider said: “If you’re setting the budget at a point where customers and staff are going to be unhappy, it looks pretty hard to get those fees.”
Forced redundancies would spell certain strike action, with even the scale of voluntary departures – many thousands applying at Network Rail alone – yet to be agreed after months of talks with the unions.
The unions have in the interim geared up for battle over proposed cuts to services that operators had already prepared before the latest DfT costcutting demands. South Western Railway, which has been badly affected by a drop in daily commuters to London from the stockbroker belt, has consulted on long-term timetable cuts to be introduced next December. A SWR spokesperson said it would still have 93% of pre-Covid capacity, adding that it was “appropriate and responsible that we right-size our services to match demand in the new normal”.
Meanwhile, LNER, which is run by the government’s own operator of last resort since the collapse of Virgin, has been consulting on cutting ticket offices; protests against the cuts are due on Monday in stations in the north-east.
Demands for savings have been compounding industry gloom after the HS2’s northeastern leg and the new Leeds-Manchester line were scrapped last month in the government’s integrated rail plan.
Enthusiasm in some parts of government for building new rail infrastructure and improving services – a key tool for both “levelling up” the regions and decarbonising transport – has come up against Treasury unwillingness to spend more now.
Christian Wolmar, the author of the forthcoming History of British Railways, argued that the £96bn plan was actually “a vote of confidence in the long-term future of the railways, however mis-sold”.
But, he said: “In the short-term, they are being completely squeezed. It’s incoherent. And it’s going to have a real impacts.”
Timetables are likely to be thinned out and late-night services withdrawn to cut costs, he predicted: “It’s back to the old days of British Rail when they squeezed services and then said no one is using trains because the service is rubbish.
“In a rational world they would just cut the branch lines – but they can’t do that politically because ministers have said they are reversing Beeching.”
Meanwhile, the depth of Treasury control is also raising questions about the future plans for Great British Railways, the arms-length “guiding mind” supposedly taking charge under the Williams-Shapps plan to improve the railways.
Six months after publication, progress has been slow, with legislation now unlikely to bring any new body into effect before 2024 or 2025. Its designate leaders – Network Rail’s chief executive, Andrew Haines, and its chair, Peter Hendy – were kept at bay as government departments tussled over the cuts to the integrated rail plan.
As one industry veteran put it: “Network Rail can’t paint a station fence without asking the Treasury now.”
Industry leaders and unions alike believe that the Treasury wants to target working conditions. According to one senior rail figure: “The single biggest thing is workplace reform, they believe productivity is low.”
Mick Lynch, the RMT general secretary, sees it as “cynically exploiting the Covid crisis”, at a time when the government has talked up the value of rail as a green mode of transport and a way to level up. “What they really want to do is cut back on the existing workforce and start rehiring on inferior terms and conditions when demand returns,” he said.
A DfT spokesperson said it was “demonstrably false” to suggest the government was delivering cuts to the railway, given the current levels of investment, the £96bn rail plan and the restoration of lines such as Okehampton.
They added: “With passenger numbers significantly down, it would be reckless and irresponsible not to ensure that the railway is more efficient and reducing its costs to the taxpayer.
“As taxpayers would expect, we have asked operators to provide credible and sustainable business plans which ensure taxpayer money is used efficiently, to deliver exceptional services, promote recovery to reset the balance in financial support and ensure the railway has a bright future.”