Rail franchising is being suspended “for a limited period, initially six months,” said the Department for Transport. Are you sure? It seems more likely the whole franchising model, as understood since privatisation in the 1990s, is now finished for good.
Who, after all, will want to revive a system that the government’s own adviser, the former British Airways boss Keith Williams, last year described as unfit for purpose even in happier times? Train operators themselves surely won’t be lobbying for the return of their franchises on the same financial terms.
For starters, many were making losses on high-profile routes – witness FirstGroup on its South Western Railway operation. More significantly, revenue assumptions that underpinned even profitable routes will now be blown to pieces. The pace of economic recovery, and thus the volume of passengers, will be one huge unknown. Then there’s the impact on commuter routes from the current enforced experiment in working from home. Behaviour will change; fewer £3,000-a-year season tickets will be sold.
From the government’s point of view, rail franchising was already heading into the sidings, shunted there by unhappy passengers, over-complexity and an evaporation of bidders. Williams’ review may now never be published, but its direction was clear. Management contracts, in which private sector firms shoulder fewer revenue risks and accept low-margin fixed fees, seemed to be one preferred way forward.
This is the model, in rough form, that has been adopted now in emergency, thereby disproving the notion that old-style franchising could only be dismantled gradually. The task, it turns out, could be achieved over a weekend.
Those screaming about how train operators have been let off the hook, and how losses will be dumped on the state, should calm down. The government had little choice. With the collapse in passenger numbers, train operators would soon have been handing back their franchises anyway, as they’re entitled to do by forfeiting bonds. Sudden failure would have caused chaos. The DfT doesn’t have a crew of “operators of last resort” on standby. Previous outright nationalisations, such as East Coast and Northern rail, were organised affairs.
The medium-term ambition should be to replace rail franchising with a more flexible system that is better connected to infrastructure upgrades. Management contracts won’t be the only useful model. Local commuter routes can be better controlled by local transports bodies, for example. The DfT should start planning immediately. Old-style franchising is finished.
Boardrooms, take note: when announcing job losses and pay squeezes, remember to state what the directors are doing by way of solidarity. Well done Stagecoach, then, for saying board members will halve their salaries and fees “for a period of time”, which presumably means the duration of the crisis.
A few other companies have made similar noises in the past week, but such announcements are not yet the norm. They need to become so.
The Treasury will soon be underwriting the payroll costs of a lot of companies, at enormous long-term cost to the public purse. Public opinion is not going to tolerate public company directors paying themselves as if nothing has changed.
Shell famously hasn’t cut dividend to shareholders since the second world war and, even with a global recession looming and the price of a barrel of Brent at $30, management still isn’t ready to throw in the towel on a payment that cost $15bn last year.
Monday’s statement on measures “to reinforce business resilience and financial strength” was filled with cuts to capital spending and operating costs plus a halt to share buybacks. None of that is surprising given that Shell’s financial plans had been based on oil being about $65 a barrel. Yet the dividend, it seems, will be defended until all other options are exhausted.
The fight seems doomed to end in defeat, however, which is why Shell’s shares stand at their lowest level since the mid-1990s. The 14% notional dividend yield signals the market’s view that a cut is inevitable.
This prospect will be terrifying to many income-seeking pension funds. They were sure of Shell. Even a halved dividend will have been mentally filed as a low-probability risk. Given the mass of missed dividends piling up elsewhere, this sudden loss of income is going to be yet another problem.