Description of the UK rail and bus market
The UK government privatised the railways in 1993. Since this time the UK franchising bodies such as the British Department for Transport (DfT) award contracts for the operations of UK rail franchises to private operators (Train Operating Companies, TOCs) for a specified period of time, typically eight to ten years. As at December 2019, there are 20 franchised TOCs operating passenger rail services in the UK. Five of the franchised operations are managed by Abellio. 13 of these franchises are let by DfT, however some franchises – including ScotRail and Merseyrail – are let by national/ regional franchising authorities.
Rail infrastructure in the UK is maintained by Network Rail which was brought back into public sector ownership in 2013. The TOCs work closely together with Network Rail to deliver safe and efficient operations. Abellio operates ScotRail under an Alliance Agreement with Network Rail Scotland, which means that the management teams work in close partnership. The purpose of the alliance is to work on specified initiatives and align priorities for both ScotRail and Network Rail in such a way that this benefits the quality of public transport in Scotland, is cost effective, and improves services for passengers.
In 1985 the UK Government removed all regulations governing bus transport outside London. This led to the privatisation of local council owned bus companies and the majority of regional bus services are now operated by the ‘Big Five’ (Arriva, FirstGroup, Go-Ahead Group, National Express, and Stagecoach Group). Abellio operates bus services in London, where Transport for London (TfL) is responsible for revenue, marketing and ticketing and awards concessions to operate specified bus routes to operators. Whilst passenger numbers have grown in London, there has been a dramatic reduction in bus usage across the rest of the country.
Current market context
There has been a huge increase in demand for rail, with a doubling of passenger numbers since privatisation whilst the infrastructure is not everywhere suitable to cope with this. Many routes have been engaged in large infrastructure enhancements in the past years and continued investment in new trains with over 1,000 additional vehicles being introduced during 2019 and 2020. This investment is allowing new trains, with additional services and capacity but has resulted in timetable changes with disruption for many customers as the increased use of the tracks could not be sufficiently dealt with in all areas.
Calls for radical change of the UK rail industry, have been driven by customers’ frustration at poor performance of the railway system and perceived high fares. The annual fare increases are set by the UK Government, linked to the retail price index. This process reflects the political decision taken years ago to shift the balance of the UK’s rail network costs onto passengers rather than general taxpayers.
A significant proportion of punctuality issues are down to Network Rail, the already publicly owned UK infrastructure operator, with their regulator -the Office for Rail and Road – taking enforcement action in November 2018 following a decline in performance since 2015. The new CEO of Network Rail introduced a “putting passengers and freight users first” initiative that is having a positive impact on performance. During 2018 and 2019, there was also significant change in the UK Rail market with the Government taking back control of the East Coast Mainline franchise and recently of the Northern franchise, legal challenges from rail owning groups to franchise obligations in relation to pension contributions and the exit of significant operators from UK rail. The Department for Transport cancelled the franchise process for the South Eastern franchise. Industrial action impacted rail operations throughout the UK in 2019, in particular focused around the issue of driver only operation of the train doors and the role of the conductor.
Given the challenges facing UK Rail, with major shifts in customers’ travelling patterns, and general customer dissatisfaction with performance following the introduction of poorly executed time table changes in certain franchises in 2018, the UK Government commissioned a ‘root and branch’ review of the UK rail industry, chaired by an independent business leader Keith Williams.
In calling the Williams review, the governing Conservative Party reaffirmed its support for the principle of private sector involvement in running the railway, positioning the exercise as a practical response to challenges like fragmentation between track and train, the continued underperformance of the railway system and the impact of industrial relations issues. Abellio has made submissions to the Williams Review based on our own experience in the UK market.
It is expected that the Williams Review’s findings and recommendations will be published in a Government white paper in March 2020 alongside plans for increased devolution of transport powers to Metropolitan authorities and consultation on minimum service obligations during industrial action. These reforms may re-open opportunities to bid for railway business across the UK.
In 2017, the UK Government passed the Bus Services Act, which gives some city regions the opportunity to regulate bus routes, fares and operations. Greater Manchester and other regions are consulting on moving to a bus operating model based on Transport for London’s concession system. Abellio UK has developed a strategy to pursue opportunities to bid to run bus operations in a number of these city regions in England based on its experience in the London bus market.
Demand for Rail and Bus services is likely to increase as the UK Government, and devolved regional and country Governments, all pursue policies to reduce dependence on cars. A series of targets to achieve net zero carbon emissions have been set and this will likely drive demand for public transport.
Following the UK Parliament’s inability to break the deadlock over the Brexit process an early general election was called for December 2019, which the Conservative Party won with a significant majority. Following the election, the Government passed legislation to ensure that the UK could formally leave the European Union with a withdrawal deal on 31 January 2020. During the subsequent transition period, expected to be until 31 December 2020, Britain will effectively remain in the EU’s customs union and single market but it will be outside of the political institutions and there will be no British members of the European Parliament.
British Government negotiators have until year-end 2020 to agree and ratify a trade deal with the EU, after which the UK will either begin a new relationship with the EU, or exit the transition period without a trade deal in which case the UK would be faced paying tariffs on exports to the EU.
Abellio UK is active only in the UK and does not provide any international cross-border passenger rail services. All necessary licenses to operate (such as licenses from the ORR, homologation of trains) are in place and will remain in place. Brexit does not have any direct impact on Abellio UK’s operations from a legal point of view, and a ‘no-deal’ situation will not impact the necessary licenses.
The British Pound (GBP) has fallen in value against the Euro since the Brexit vote from 1.31 in June 2016 down to 1.18 at year-end 2019, a decline of 10%. Abellio UK does not have any material exposure to foreign currencies, and so the only impact of this is the translation risk to NS. This translation risk has an impact on the translation of invested capital, balance sheet items and results into Euros.
There are potential implications from Brexit for the smooth import of new trains and spare parts and a decline in economic growth having an impact on passenger revenue and profitability. In the event of a ‘no-deal’ Brexit at the end of 2020 economic growth could diminish further. Contractual and other measures are in place to mitigate risk. Abellio UK is confident of achieving its ambitions through all Brexit outcomes, although a ‘no deal’ Brexit may hamper the growth in revenue and will have an impact on results of Abellio UK.
Abellio UK rail and bus franchises
Abellio operates 5 UK rail franchises and around 8% of London bus services with a combined revenue of € 3.15bn (including Merseyrail). Abellio UK operates East Midlands Railway, ScotRail, Greater Anglia as a 60:40 venture with Mitsui, West Midlands as a 70:15:15 venture with Mitsui and JR East and Merseyrail as a joint venture with Serco, as well as a profitable bus business. In addition to serving the Transport for London market, the bus business provides complementary travel expertise, including a rail replacement service in case of disruption for Abellio TOCs and also for the Caledonian Sleeper franchise.
Key figures for UK rail franchise and bus companies
Revenue (€ million)
Number of stations
Number of trains/buses
Number of employees
Abellio London Bus
Abellio UK head office
Intercompany and Merseyrail (JV) elimination
Consolidated (excl. Merseyrail)
Passenger revenues (€ million)
Government contribution (€ million)
Other income (€ million)
Revenue (€ million)
Abellio London Bus
Consolidated (incl. head office, excl. JVs)
- * Greater Anglia pays a franchise fee of € 205.2m rather than receiving subsidy from the government.