Rail franchises are to be suspended for the next six months due to the coronavirus pandemic, with the train operating companies offered a London Overground style operating license.
Under the new arrangement, the operators will continue to run services day-to-day for a predetermined management fee. Terms and conditions of employment for rail workers will not change.
Under the franchise system, the train operating companies (TOCs) earned revenue from ticket sales, but with passenger numbers down by around 70%, most of them were facing deep losses and may have been unable to continue to operate.
Although there is always complaints about the franchise model, the rail operators tend to work on fairly low margins and the industry as a whole posted a loss last year, so the collapse in ticket sales over the past few weeks could be pushing some companies into collapse.
By switching to the license agreement, the government covers the running costs of the railways, and the operator is paid a management fee, regardless of passenger numbers. That system has been used with the London Overground and considered to be a good way of operating railway services.
It also ensures that the railways continue to run, regardless of how low passenger numbers fall.
Fees will be set at a maximum of 2% of the cost base of the franchise before the COVID-19 pandemic began, intended to incentivise operators to meet reliability, punctuality and other targets. In the event that an operator does not wish to accept an Emergency Measures Agreement, the Government’s Operator of Last Resort could take over instead. Companies entering into these agreements will see a temporary suspension of their existing franchise agreement’s financial mechanisms for an initial period of 6 months, with options for further extension or earlier cancellation as agreed.
The duration may be indefinite though — as it is widely thought that the long-delayed report into the railway industry, the Williams Report would be coming down in favour of the operating license model anyway.