Willy Hutton\’s economics

Quite remarkable really:

Yet the British have rediscovered the urge to travel by rail. If the parameters are not changed and demand for rail travel doubles over the next 20 years, as is forecast, the subsidy and public debts of the rail industry will become unsustainable. Something must change.

I think we\’re beginning to understand why the Work Foundation went so gloriously bust (has that liqudator\’s report come out yet?).

Willy\’s telling us that when sales at a company, when revenues from the customers, go up, so does the requirement for subsidies. Quite remarkable.

The economics of railways are odd but quite simple. You\’ve got monstrously high fixed costs. Not just the track, the rolling stock, but you\’ve got to run the trains whether they\’re full or not. You can\’t just cancel the last late night service because there\’s only three people on it: that would mean that your train and carriages are in the wrong place to start the whole thing off in the morning.

Not much point in running the Plymouth to Edinburgh cross country train if as a result of cutting the late train means that your engine and carriages are actually in Edinburgh not Plymouth.

So for any particular structure and timetable, you\’ve got huge fixed costs.

Your variable costs are by comparison almost trivial. Bit of staff, bit of fuel and that\’s pretty much it.

So what happens to the need for subsidy in such a system as passenger levels rise?

That\’s right, we\’re getting more revenue with almost no increase in costs. So each extra ticket sold reduces, not increases, the subsidy required.

If rail\’s economics worked the other way around, that variable costs are greater than the revenue from each extra ticket then Willy would have a point. But not even the British Railways are that screwed up are they?

At the time, it was clear to the non-devout that the rail system could no more be successfully fragmented as the price of privatisation than the armed services or the National Trust could be broken up successfully to compete with former parts of the integrated whole.

You what? Please, can anyone give me even a smidgeon of a reason as to why looking after old houses is a natural monopoly? Or even would function best as a created monopoly?

6 comments on “Willy Hutton\’s economics

  1. All the evidence- not least the constant need for subsidy- suggests that there is simply no market for rail travel. If it can’t make a profit, it’s destroying value.

    Pull all the subsidy and let the railways close. Victorian relic.

  2. I think Hutton is probably right on this one. Rail really is that expensive.

    Sure, tracks, signalling equipment etc. are big fixed costs, but the busy lines into London are at capacity — increasing that capacity means a lot more of those “fixed” costs (meaning, of course, that they aren’t really fixed at all).

    Ian B above may well be right, but of course driving into & parking in London is expensive or impossible also, so the right conclusion may well be that these busy services are severely underpriced, though, as a user of them to the tune of about four grand a year, I hate to say it.

  3. Without the subsidised railways subsidising the mass transportation of human cattle into London on a daily basis, the market would come up with some other solution.

    Like, realising that you don’t actually need to be in the City to diddle with a spreadsheet.

    Basically the services are severely underpriced. Without the subsidy, the market would rapidly drive businesses to free market locations instead of persuading them to huddle together as if for mutual warmth.

  4. Let’s start with at least a partial answer to Tim’s question:
    Because the National Trust enables comparatively wealthy people to continue enjoying living in grand houses well beyond their ability to afford by getting much poorer people to subsidise them.
    That’s a similar system to subsidising rail travel to a level where comparatively wealthy people can afford to travel in comfort from Plymouth to Edinburgh whilst the poorer take the coach.

    IanB’s point has merit.
    It’s perfectly arguable that transport facilities to cities enable the market in skillsthere to function much better. There’s more people able to compete in the market. On the other hand, it’s hard to see why the beneficiaries of that market are expecting the rest of us to help pay for them. Particularly, as in practice, the greatest beneficiaries tend to get the greatest subsidy. When I worked in the City, years ago we had people commuting from Norwich in ,one direction & the Hampshire coast in the other. Needless to say, both individuals were at the top of the earnings scale because no-one else could have afforded even the subsidised ticket. Generally the lower paid travelled a few stops on the Tube or a suburban commuter line where the subsidy per journey was much smaller.
    Conversely, we do need to be able to travel around at a cost that’s reasonably affordable to most. But is rail the best way to do that? If we actually spent some of the revenue raised from road transport on roads maybe we’d be better off with decent coach services

  5. Bloke: the 6am ferry from the Isle of Wight (Ryde/Portsmouth Harbour) was always packed with commuters. Then you’d spot the same weary individuals making the return trip on the 20.30 boat (this would be when I went up to London with my parents to visit a museum or see a show). I felt so sorry for the poor slaves and wondered how they had a life or kept a marriage together. It must have been a nightmare.

  6. I bet you a million dollars that if the number of journeys doubles, so will the losses, fixed costs nature of the business notwithstanding .

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