The rail franchise model has high fixed costs and low profit margins. The Department for Transport’s (DfT) net income from letting franchises fell significantly from 2016-17, becoming a net government subsidy in 2019-20.
As passenger numbers dropped in the COVID-19 pandemic, rail industry income fell dramatically. It is unclear how far or when it will recover. In March 2020 the DfT announced emergency support arrangements for train operating companies, which transferred all income and cost risks to DfT, in return for operators continuing to run passenger services.
Government is now paying operators a fixed fee for operating services, with potential performance payments. From April 2021, the Department plans to transition rail operators to new arrangements, to replace the franchising system.
The delayed, wider Williams Rail Review is also expected to recommend new ways of organising the rail system, and wider reforms to prioritise passengers’ and taxpayers’ interests.