Here are some of our findings from a recent survey around a lack of sector alignment and incentivisation to deliver change in the rail industry.
Phil Bulman is a Partner and Transport & Infrastructure sector specialist at Vendigital. He recently recounted a journey on the new electric rail service, Lumo, with Rail Professional.
In an industry with such a history and heritage as the railway, finding ways to modernise Britain’s rail network has been a challenge, particularly when passenger numbers nose-dived during the pandemic. However, new-look open access rail services, run by licensed operators such as Lumo, are beginning to break the mould.
To find out what makes Lumo’s services different and discuss next steps for the rail industry’s evolution, a group of cross-sector experts recently boarded a train at London’s King’s Cross, bound for Newcastle-upon-Tyne. The group included Jason Holt, former chief executive Swissport Western Europe and head of operational strategy at EasyJet plc, Andrew Mellors, managing director of
non-franchised businesses for FirstGroup’s Rail Division, the parent organisation of open-access operator, Lumo, and sector specialists from management consultancy, Vendigital.
Lumo currently operates ten services daily between London, Newcastle-upon-Tyne, Morpeth and Edinburgh, with some also stopping at Stevenage in a bid to attract people who might otherwise choose to fly from Luton or Stansted to Newcastle or the Scottish capital. Despite some of these services only starting this year, demand for tickets is high. The cross-sector experts booked in advance, paying just £25 for a single ticket, and the train was fully booked right through to Edinburgh. While attractive ticket pricing is obviously a key reason for popularity of Lumo’s services, it isn’t the only point of difference.
Learning lessons from aviation
Reminiscent of the low-cost revolution in the aviation sector in the 1990s, the UK’s rail industry is embarking on its own transformational journey, led by a small but growing band of open access disruptors, including Lumo. Lasting industry change is unlikely to come quickly however and not without a significant shift in approach to people management in the sector. The two-year lead time for new trains can make it difficult for new operators to scale up quickly, particularly if second-hand trains are also in short supply. In addition, licences for open access operators require new services to focus on attracting new customers to the railway, such as those who would normally travel by air or coach.
The sense of achievement that comes from doing things differently in order to create services that are more efficient and offer customers better value for money, was palpable onboard the train.
Andrew Mellors commented: ‘Despite preparing and launching services during Covid, customer take-up has been fantastic and the performance of the Hitachi Class 803 trains has given the business the best possible start, proving that the approach we’ve taken really has legs.’
There are some interesting parallels to be drawn with the UK’s aviation industry, in particular the market disruption caused by the arrival of low-cost carriers. When operators such as Ryanair and EasyJet arrived on the scene in the 1990s, they quickly stole market share away from the legacy carriers, which were unable to compete on price. At Lumo, low ticket prices are a core element of their market proposition, but rather than pull passengers away from other rail services, the objective is to win new rail customers by enticing passengers away from air and long-distance coach travel instead. By encouraging modal shift from aviation and roads, Lumo is also helping to support the UK’s decarbonisation agenda.
Reflecting on Lumo’s low-cost approach, Jason Holt commented: “The liberal nature of the airline market in the UK allowed changes to be introduced relatively quickly and legacy carriers had little choice but to adopt low-cost strategies and processes. While things are happening more slowly in the rail sector, Lumo’s path is closely aligned with the approach taken by low-cost operators in the aviation sector – a path which led to the successful rise of several low-cost airlines and brought benefits for the travelling public.”
Out-of-sector thinking in action
A key difference at Lumo is that the business has been built from scratch, complete with its own culture and assets. Having boarded the train at King’s Cross, the industry experts discovered that there were just three crew members on board, half the number that would normally be expected, and coincidentally, all were ex-British Airways. Two were ‘ambassadors’, responsible for a host of duties including checking tickets, looking after the safety of passengers, providing catering services and onboard cleaning. The other was the train driver, whose official title is ‘customer driver’. Lumo’s managers aim to recruit people from customer-focused roles outside the sector – specifically from the airline, hospitality and retail sectors – because of their commitment to optimising passenger experience. Staff benefit from an attractive employment package. Train drivers, for example, can expect to earn upwards of £60,000 per annum, and while about half have prior rail industry experience, the other half join as apprentices. Importantly, the entire workforce is based at a facility in Newcastle-upon-Tyne, which helps to support a great culture of inclusion, with all levels in the business sharing the same space.
The trains operated are differently too. As well as being fully electric, Lumo’s trains are manufactured by Hitachi according to a standard design, which makes it possible to achieve synergies in project mobilisation, cost and maintenance. A custom seat design has been utilised to allow more space for seating and extra leg room for customers. Removing first-class carriages and buffet cars created an opportunity to reconfigure the onboard space; allowing more room for seating, which has in turn helped to drive revenues. Inspired by aircraft seating, the seats developed for Lumo’s trains are lightweight, easy to clean and come with their own functional features, including a reading light.
Phil Cameron, Managing Director at Lumo, said: ‘Our partnership with Hitachi has been critical to our success. By working together during the pandemic, we were able to develop an industry leading, all-electric fleet, which was ready to utilise as soon as passenger numbers started to recover.’
While Lumo’s services are already ahead of plan, there may still be room for improvement. Based on other learnings from the airline industry, dynamic revenue management could be used to increase margins and improve profitability. Commonly used by low-cost airlines, most flyers realise that the later they leave it to book their seat, the more they are likely to pay. Price rises are usually triggered when the volume of ticket sales indicates that the breakeven point for the flight is nearing, which means subsequent sales deliver more value to the bottom line. With most train operating companies selling tickets via multiple platforms, achieving dynamic revenue management will be more challenging in the rail sector. Introducing loyalty schemes and incentivising customers to use a dedicated app to purchase their tickets, could make it possible for open access operators to introduce dynamic revenue management in the future.
Data brings ‘load’ understanding
For any transport operator, access to accurate and reliable data is key. As relative newcomers however, open access operators may not have access to historical data about passenger numbers and there may be a general lack of understanding about the ‘load’ required to operate specific services at a profit. As more open access operators start up, it will become even more important for them to understand the breakeven load factor of each service they operate, based on unit costs and unit revenues.
With greater knowledge of customers’ preferences, operators could introduce more ancillary services and perks, to drive their profitability further. In the airline industry, for example, customers are happy to pay more for the privilege of sitting in a seat with more leg room, or superior functionality. In the rail industry, customers on long journeys may be willing to pay more for help with luggage, premium entertainment services or help with making inward or onward connections.
A recent report published by the ORR has highlighted the opportunity that exists for open access operators to improve service levels, drive revenues and boost passenger numbers. Through its relentless focus on delivering passenger value and encouraging modal shift, Lumo’s out-of-sector thinking is key to its success. It is not yet clear whether other rail operators will follow their open access example, on the way to a more efficient, low-cost future.
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Analysis of ORR figures show staff represent 35% of the costs of running the UK’s railways. Implementing efficient staffing strategies is key to unlocking cost savings and securing a sustainable future for the industry.