Eversholt initiated its Renatus rebuild of Class 321s to market them to Greater Anglia bidders. Thirty of the fleet of 110 will be upgraded with air-conditioning, modern traction systems, AC motors and other improvements. The company’s fall-back position for the fleet would have been the lines DfT and Network Rail planned to electrify. Now it’s faced with the prospect of displacement from Greater Anglia and no future home, despite the improvement project.
Instead of cascades of EMUs bringing cost-effective trains to newly electrified lines, East Midlands bidders face the prospect of having to order new diesel trains or bi-mode trains. A new operator should be in place in Wales from autumn 2018, and will be looking for diesels to replace Pacers from 2020. But the market is very tight.
According to Andre: “You don’t really have a choice at the moment. CAF offers a product, Stadler can offer one, but it’s done it in bi-modes at the moment and it’s quite expensive. I think in time, people will have to buy some more - probably bi-modes rather than pure DMUs, because from a financing house point of view it doesn’t make sense to buy something that’s purely diesel. The orders are always quite small, so it’s difficult to get good pricing.”
Reading between the lines, expect such diesels to be expensive, because orders will be small and there’s not much competition. Some DMUs are being displaced, which should ease the market. TPE is casting aside part of its Class 185 fleet, and there should be Class 170s looking for new homes.
How might a DMU shortage affect the market? Or the reverberations from EMU changes?
According to RailReview’s financier: “What will most probably happen is that they will say ‘hold on, I’m losing something over here, I’m going to get you back next time somewhere else’. ‘So you say you want ten diesels, I’ve got ten diesels - the price may have been five, it’s now ten’. ‘Why is it ten? That’s really expensive!’ ‘Well, it’s because that’s now the market price, because our assumption under this lease is that they’re not going to last more than five years because of replacement risk going on’.”
The biggest longer-term factor will be the balance between diesel and electric stock. This depends on what DfT decides to do with electrification. For the past few years, the messages from DfT have pushed electrification as the future. So will there be more wires?
No, says Brown. Yes, says the TOC owner. He admits the DfT wouldn’t want to do more and that NR doesn’t want to do more, but argues that environmental concerns will insist on it. “People’s attitudes to air pollution have changed over the last few years,” he says.
In the motoring world, the Government has turned sharply away from diesels. Secretary of State for Transport Chris Grayling recently warned motorists to think long and hard before buying a diesel car. If that resonates with the public, they will wonder why he’s pushing rail down the diesel road by ditching electrification.
Noting that the Voyager fleet of diesel-electric multiple units is looking for a new owner, Brown said he’d looked at it but didn’t want to buy diesels. But he doesn’t want to buy electric either, because of the uncertainty over wiring. Yet with trains cheaper than ever, and with finance also cheap, now is surely the time to invest.
“I could buy now and wait for the market,” Brown muses. Then he recalls the warning that comes with every TV ad for financial services - the value of your investment may go up or down.
Would you buy stock speculatively, RailReview asks Andre at Porterbrook?
“We will see, again… at the moment, you’d have to be very brave,” he replies.
Andre explains Porterbrook’s last speculative build: “We did a speculative build in 2015 when we bought some ‘387s’ from Bombardier. That gave me sleepless nights because that was really, really speculative - there was no customer. It ended up well because they ended up at Great Western and the size went from 20 to 43, so that was all good.”
Some of those ‘387s’ are now working Great Northern services, and look set to displace Class 365s owned by Eversholt. Overall, there could be very little increase in overall fleet sizes as a result of all these new trains. Yet passengers complain about overcrowding. And there’s a prospect of passengers on busy trains glimpsing others stored in sidings (assuming there’s enough siding space). At face value, this will look crazy, but there’s little track capacity to use surplus stock. And capacity sits firmly with DfT and its subsidiary, Network Rail, rather than with the competitive market for rolling stock.
With NR pleading lack of funds, you’d not want to bet on major increases in capacity on today’s network (future capacity increases will come from projects such as HS2 in the middle of the next decade, together with a new fleet). But here’s a disconnect between network and fleet spending.
“raiding the sweet jar”
RailReview’s finance man notes: “What I don’t understand in this market place is you see Network Rail, which gets £35bn over a five-year period to spend on its infrastructure. It’s overspent it, and people have been told there’s no more for rail - it’s over! But for trains and franchising, under a franchising system - hey, let’s go wild!
“You have 6,000 vehicles being delivered over the next 44 months. That’s a tremendous amount, but I think people are raiding the sweet jar and this will come home to roost. People will want to see a stable market, but I don’t think it’s stable and I don’t think the DfT thinks it’s stable.”
With 13,000 vehicles in today’s UK rail passenger fleet, that 6,000 represents almost half the fleet. Yet Brown reckons the overall increase in size will only be around 2,000 - after spending billions of pounds, the fleet will only increase to 15,000.
That implies around 4,000 vehicles going for scrap. Some should certainly go - they’re old and past their prime. But others still have life, and at any other time would be refurbished, upgraded and given a new lease of life.
Such a flood of new trains looks set to kill the refurbishment market, which worries those RailReview interviewed for this article. They are concerned at the loss of skills and jobs from the market, and the potential loss of the players themselves from Britain - not least because they are also suppliers of new equipment to train builders.
Furthermore, several emphasise that refurbishment can be cheaper in environmental terms than building new, because you generally keep the major components of a train, the body and bogies.
“The DfT is putting more emphasis on sustainability. The carbon impact of refurbishing is quite significantly lower than new-build,” says Eversholt’s Burleigh.
Andre comments: “It is a lot more CO2 intensive to build new than to maintain something that exists. In operation, the new train will use less energy and be lighter, but the big expense in CO2 is when you actually build the train and make the extrusions. That’s not been taken into account by anyone.”
On jobs and skills, Andre continues: “DfT is part of a government which has published an industrial strategy. Having lots and lots of new trains is great from the DfT view of keeping passengers happy, but it has a broader impact on the industrial strategy.
“In times of Brexit, they need to have a very clear industrial strategy that is sustainable in the long-term. Having UK train manufacturing places churning out lots and lots of trains, but then having a cliff because of where do they go next, is not great to sustain jobs, skills and everything else.”
He adds: “If you take people like Wabtec and Knorr Bremse Rail Services, having lots and lots of new trains obviously kills their business pretty drastically, because it’s not viable financially to refurbish trains. But there are jobs attached to these companies - quite a large number of jobs, thousands of jobs.
“These companies also happen to be suppliers of OEM equipment on new trains (Knorr Bremse supplies brakes and doors, for example). But they are not made in the UK at the moment, so if we think that we need to increase the local content of trains then the big bits - the brakes and the doors - need to be made in the UK.
“If the companies that would potentially make them in the UK, like Wabtec and Knorr Bremse, have been killed off because their current market of refurbishment has been killed, then they will leave the UK.
“And there is no way to build the local content if these manufacturers are not here. In a way, keeping them going with the minimum of activity is actually, in the medium and long-term, quite good, because then they will invest in the UK to do new build at the right time and with the right level of local content.”
Recent refurbishments have concentrated on modernising trains introduced by BR. From a passenger’s perspective, the major change has been to fit air-conditioning. But when the trains ordered in the 20 years since privatisation need refurbishment, this will not include air-conditioning because it was fitted from new. Instead they might concentrate on improving computer hardware and software.
Doubtless needed, this sort of improvement will score less well in terms of quality scores in franchises, whereas a brand new train always comes with a quality premium - or at least the perception of it. Having seen new trains arrive elsewhere, how will passengers and stakeholders react when their franchise only receives refurbished carriages?
There’s another aspect to the cost of trains… and that’s maintaining them. Traditionally, railway companies maintained their own trains. Today, it’s common for manufacturers to maintain the stock they built - either directly or under contract from train operators.
Hitachi will be responsible for maintaining the IEPs it is building for East Coast and Great Western services. Siemens maintains the Class 185s that TransPennine Express uses at purpose-built depots in Manchester and York. It has done this since they were introduced a decade ago, so no train operator has any experience of keeping them in traffic.
This poses questions about where the trains will go when TPE hands back part of the fleet to its owner, Eversholt Rail. Can the railway as a whole afford another dedicated depot being built? Or does the new operator do a deal whereby it maintains the trains with Siemens providing technical support and spares?
RailReview’s finance expert has met the maintenance problem before. He explains: “My other big problem was maintenance pricing and the ability of the manufacturer to understand the whole-life cost of his asset.
“Every time we came round to doing a maintenance contract, they put the maintenance up. And you had no choice because you’re the owner, who else is going to do it, and you prefer the OEM because he built it and he should know, and all that good stuff. We’ve always found that if someone’s offering cheap maintenance they may be doing it to begin with, and the price goes up later. This is what you may see with some of the cheaper deals in the market place, and then someone says in 2023 that the rent’s going up and the maintenance is going up.”
So where does that leave rolling stock leasing? It’s no longer the preserve of the big three ROSCOs. New money has come into the market. But that money can leave just as easily, as pension funds switch investments to chase the best return almost as domestic consumers can switch utility companies. They will look to sell for a profit, but there remains a chance that someone will catch a cold if DfT chases short-term headlines over long-term costs.
CERTAINTY INTO ELECTRIFICATION
The DfT needs to inject certainty into electrification plans, by either committing to expansion or ruling it out. It cannot continue to hedge its bets without paying a price in terms of higher charges for rolling stock (which translate into lower premium payments or higher subsidies for franchises).
It will take a few more years before the railway knows whether fleet lives have been cut. Early disposal of Class 707s from South Western catches the headlines, but it looks more like an extreme than a new norm. That’s not to say that future franchises will not replace large parts of their inherited fleets, but it’s hard to see money or trains becoming markedly cheaper than they are today.
The market is approaching a turning point where new orders become more scarce as the pricing effect of cutting the lives of fleets appears in the bottom line of franchise bid projections. Most commentators expect passenger numbers to continue rising, although they argue about the rates of growth. This means that more stock will be needed. That stock will continue to provide a return for investors.
