Fare Freezes Constrain the Capital
The Mayor of London has announced a surprise fares freeze for the year ahead. Though pounds in pockets are always nice, could that money have been better spent elsewhere?
Earlier this month, the Mayor of London, Sadiq Khan, made a surprise announcement that single-journey fares in London will be frozen at the current prices for the next year1. With inflation of 9% last July2, the Mayor has in effect handed a roughly 8% fare cut to Londoners, or a roughly 5% cut if compared to the National Rail increase of 4.9%.
Better than expected public finances in the city over the past few months, have enabled the Mayor to find the £123 million needed to mitigate the revenue reduction from the back of the sofa. The most interesting thing about the freeze, aside from the fact that we’re now in an election year (quelle surprise), is that it comes just a few weeks after TfL restructured their budget and business plan for the next few years, after not receiving the capital investment that they had requested from Government.
Despite a request of £500m over the coming year and commitments on funding for the years beyond, the eventual grant from the DfT was just £250m, with no assurances beyond the initial fiscal year3. The resultant gap means that development funding for investments such as the Bakerloo Line Extension on Old Kent Road, DLR Extension to Thamesmead, and the replacement of the Piccadilly Line’s signalling to make the most of the new rolling stock it is receiving, are likely to be put on ice. Even the rolling stock procurement has had to be amended, with a rephasing of payments and delivery, no doubt increasing the overall cost and risk of the programme, so that TfL can stay within its budget envelope4.
£123 million would have closed half of that shortfall, and given Mayoral precept rises to plug gaps in other parts of the Greater London Authority’s budgets5, it’s surprising to see this fare freeze take place. Again, TfL were not previously planning for this freeze, and if it didn’t go ahead, that money would have been available for capital investment projects that have been cut or deferred in the pipeline over the past few months. The decision is no different to the Government cutting capital investment in rail to pay for a backlog of road repairs as part of Network North, or for tax cuts to be prioritised over funding increases for public services.
The tension between fares and capital investment, a microcosm of the wider balance between taxes and public services, is a big one. Khan has now frozen fares in five separate years since entering office, meaning transport users have received a real-terms fare cut of 21% against inflation, and a 14% discount compared to National Rail fares [https://www.london.gov.uk/mayor-steps-and-announces-hell-freeze-tfl-fares-year-easing-cost-millions-londoners].
Without a detailed breakdown of transport usage and fare types, it’s hard to total the effective recurring cost of such a cut, but we can wager a guess by extrapolating from this year’s figures.
Previously forecast fare increase, and cost of latest freeze in 2024
4 % £123 million
Effective real-terms fare cut, and cost of latest freeze in 2024
~3.85% £123 million
2024 fare cut relative to Inflation since 2016
21 % £672 million
2024 fare discount relative to National Rail since 2016
14 % £448 million
Figures calculated by author with source data from Mayoral Press Release:
https://www.london.gov.uk/mayor-steps-and-announces-hell-freeze-tfl-fares-year-easing-cost-millions-londonersIf TfL had matched National Rail fare increases since 2016, it could have potential additional revenue of around £450 million every year, and if it had matched inflation (which would have been a real-terms fare freeze), it could have a whopping £672 million available for investment every year. If the Mayor wishes to prioritise fare freezes over capital investment of that scale, it is of course his prerogative, but we need to keep the opportunity cost of such a decision at the forefront of our minds: central line trains that are taken out of service for emergency repairs due to their age; station closures due to understaffing; lifts that have had deferred maintenance, and; cancelled investments that could have grown the London economy, connected deprived communities, and provided new revenue for TfL, whether Crossrail 2, the West London Orbital, the Bakerloo and DLR extensions, or the Tram to Sutton.
The counterpoint to prioritising investment is that fare revenue covers a greater share of network expenditure in London than in any other city in Europe, and that fares should as such be lowered where they can. But London doesn’t have the same amount of grant funding from central Government forthcoming to cover any gap, doesn’t have dedicated transport-fenced taxes that cities like Paris levy, and is making cuts rather than stabilising fares in real-terms.
Fair Freezes?
The fare freeze might be trumpeted as putting money back into the pockets of all Londoners, but the reality is more nuanced, as travelcards and weekly and monthly caps have still tracked up with the National Rail rates, as these cover the cost of all transport in London, rather than being exclusively for TfL fares.
To give an example, a City receptionist living in Zone 6 might take a bus from home to the station, and then the tube into town during peak hours, and the reverse during the evening.
£ 1.75 AM Bus Fare
£ 5.60 AM Peak Z1-6 Fare
£ 5.60 PM Peak Z1-6 Fare
£ 1.75 PM Bus Fare
=============================
£ 14.70 Total Daily Cost
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£285.70 Z1-6 Month Travelcard With today’s fares, said receptionist would be spending £14.70 a day on the commute alone. The monthly travelcard for that would cost £285.70 and thus they would hit the cap before working 20 days. Add on any additional weekend or leisure journeys on top, and they would easily blow the cap. For them, the fare freeze is irrelevant, as their transport spend is governed by the travelcards and caps, which have gone up every year despite the fare freezes that were put in place. Despite the freeze then, they’ll be paying £299.60 a month come April6.
The fare freeze then acts as a subsidy geared towards more infrequent users of the network, paid for by those who are heavily reliant on it. It may also capitalise into higher land values adjacent to stations within the London area.
Passenger Peaks
The second fare announcement by the Mayor concerns travel on Fridays, with a three month trial where peak fares are withdrawn, with the off-peak rate to be charged all day7. The trial has been created in response to the lower relative passenger numbers on Fridays relative to midweek. Whereas weekend travel has almost recovered to pre-Covid levels, and mid-week travel is at around 85%, Fridays languish behind at just 73% of historic usage.
As a trial, there is no long-term commitment that the peak-time fare cut, which is forecast to cost £24m8, will be maintained.
One of the benefits of devolution in the UK has always been that local leaders and authorities are able to experiment with different policies to maximise outcomes, and alongside fare reform trials in Scotland9 and on LNER10, we should get some interesting data on how passenger demand changes in relation to fares.
Any decision on whether the trial continues beyond the three month period, is likely to be driven by whether the increased footfall from lower fares drives revenue up by enough to create a net-gain, and given TfL’s financial state, I’d strongly encourage that if it doesn’t, then Friday peaks should be restored.
With TfL now self-reliant for most of its funding and capital means, it will be interesting to see if any other fare experiments are forthcoming; dynamic pricing, busy station surcharges, a wider variation between peak and off-peak pricing, or perhaps a new third tier alongside.
In any case, a real-life experiment of peak pricing changes should produce a trove of passenger data to help inform wider fare strategy across the UK, and how to maximise passengers and revenue within the network capacity available. Fare prices, and capital investment levels are both political choices, and both the public and our leaders should be grateful for transparency and data on their impact.
Rail fare increases are usually set in line with the RPI figure from July in the preceding year.
MD3221 - March 2024 fare changes - https://www.london.gov.uk/media/104143/download