Risky business: train fleets in a state of flux

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. 

This article can be found in RailReview Q2 2017. If you would like to find out more or subscribe please go to https://www.railreview.com/subscribe