Recent developments in the pricing of local public transport services

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<ul><li><p>This article was downloaded by: [The University of Manchester Library]On: 18 December 2014, At: 20:13Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK</p><p>Transport Reviews: A TransnationalTransdisciplinary JournalPublication details, including instructions for authors andsubscription information:</p><p>Recent developments in the pricingof local public transport servicesPeter R. White aa Polytechnic of Central London , London, NW1 5LS, U.K.Published online: 13 Mar 2007.</p><p>To cite this article: Peter R. White (1981) Recent developments in the pricing of localpublic transport services, Transport Reviews: A Transnational Transdisciplinary Journal, 1:2,127-150, DOI: 10.1080/01441648108716455</p><p>To link to this article:</p><p>PLEASE SCROLL DOWN FOR ARTICLE</p><p>Taylor &amp; Francis makes every effort to ensure the accuracy of all the information(the Content) contained in the publications on our platform. However, Taylor&amp; Francis, our agents, and our licensors make no representations or warrantieswhatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions andviews of the authors, and are not the views of or endorsed by Taylor &amp; Francis. Theaccuracy of the Content should not be relied upon and should be independentlyverified with primary sources of information. Taylor and Francis shall not be liablefor any losses, actions, claims, proceedings, demands, costs, expenses, damages,and other liabilities whatsoever or howsoever caused arising directly or indirectlyin connection with, in relation to or arising out of the use of the Content.</p><p>This article may be used for research, teaching, and private study purposes.Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expresslyforbidden. Terms &amp; Conditions of access and use can be found at</p><p></p></li><li><p>Transpor t Reviews, 1981, Vol. 1, No. 2, 127-150</p><p>Recent developments in the pricing of localpublic transport services</p><p>By Peter R. Whi te</p><p>Polytechnic of Central London, London NW1 5LS, U.K.</p><p>AbstractThis review examines the pricing of public transport services, taking as its</p><p>starting point urban and short-distance bus services. Simple forms of average costpricing are discussed, and the implications of recent developments in costingtechniques (especially those related to peak capacity) are illustrated. An equitableand efficient approach will generally require charging different fares at differentperiods. Evidence of user elasticity of demand by price is then considered, relatedto journey length, and other factors. It is argued that the concept of user responseand perception is more meaningful than 'elasticity' as such, and that the case forsystems involving different methods of payment, such as flat fare and travelcard,may be stronger than generally assumed.</p><p>1. In t roduc t ionThis article is intended to provide a general review of public transport pricing for</p><p>local and short-distance servicesessentially those in and around urban areas, asdistinct from inter-city travel. After establishing definitions for terms used,objectives of operators are considered: their vagueness in many cases is itself anobstacle to rational pricing. Taking the situation in which an operator has to covercosts, factors affecting this total are discussed, and simple applications of flat andgraduated fares described. Time, rather than distance as such, emerges as a betterbasis for averaging. The importance of peak costs is then stressed, leading toarguments favouring peak/off-peak price differentials.</p><p>Having considered how prices may relate to costs, price elasticity (whichdetermines total revenue and patronage resulting from policy selected) is thendiscussed, taking degrees of substitutability as the starting point. Evidence is thenquoted to show that off-peak trips may be generally more elastic, as may beexceptionally short and longer-than-average trips. Patronage is maximized bycharging lower fares for the more elastic trips.</p><p>Some related 'background' issues are then raised. These include national farespolicies and structures, fare levels in relation to user incomes, concessionary fares,and aspects in which urban rail differs from bus pricing principles.</p><p>The final section of the paper takes a somewhat different view, reflecting somecurrent changes of opinion in Britain, whereby the need for simplicity is stressed,and scope for flat fares, travelcards, etc., outlined. User response to price increasesappears to be affected by the form of pricing, as well as the actual average fare level.Operators may take advantage of this by introducing simplified systems which giveoperational benefits, yet which, after an introductory period at low price, can bepriced at a higher level to give revenue comparable with that from more complexsystems.</p><p>0144-1647/81/0127 0101 $0200 1981 Taylor &amp; Francis Ltd</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>The</p><p> Uni</p><p>vers</p><p>ity o</p><p>f M</p><p>anch</p><p>este</p><p>r L</p><p>ibra</p><p>ry] </p><p>at 2</p><p>0:13</p><p> 18 </p><p>Dec</p><p>embe</p><p>r 20</p><p>14 </p></li><li><p>128 P. R. White</p><p>2. SOME BASIC CONCEPTS</p><p>The fare is the sum charged for a specific passenger journey, as determined bylength, time of day, passenger type, etc.</p><p>The average revenue yield is the sum received by the operator per passenger trip(or passenger-kilometre), being a function of fares charged and the 'mix' of traffic bytype (proportion of child to adult trips, trip lengths, etc.). It may thus vary without achange in the standard fare scale (for example, by the tendency of average trip lengthto rise over time, raising revenue per trip). Some operators refer to total revenue as'revenue yield' when considering fare increases (the revenue that would be gainedwere no traffic lost at a fare increase being termed 'gross', and that after allowing forpassenger 'resistance' (see 5.1), 'net'). This terminology is not used in this paper.</p><p>Revenue is that sum regarded as payment from passengers by the operator. Aswell as money actually paid by passengers, it may include compensatory paymentsfrom public funds (e.g. to make up the value of concessionary fares to normal levels),and thus exaggerate the sums actually perceived by passengers.</p><p>The total cost of service provision is that perceived by the operator, notnecessarily equal to resource costs, due to grants, taxes, etc. (see 4.1).</p><p>A passenger trip is usually taken to commence each time1 a passenger buys a ticket.For bus operators, this implies that each transfer between buses commences a newtrip, even though the passenger may be making only one 'journey', in the sense ofgoing from one activity to another (e.g. home to work). Conversely, on rail systems, athrough ticket is usually issued, even where interchange is involved (see theappendix).</p><p>A passenger-kilometre is a distance of one kilometre travelled (or paid for) by apassenger.</p><p>A concessionary fare is one charged at less than the standard rate, such as a child'sor pensioner's. In some respects the term is a misnomer (see 6.4).</p><p>Fare (or price) elasticity is the extent to which the number of trips (or passenger-km) changes in response to real changes in fares. For a more detailed description ofthe definitions of elasticity, see Grey (1975). Note that the definition will be affectedby the definition of 'trip' employed (see above), and that many studies actually assesschange in average revenue yield (above) rather than fares as such.</p><p>A flat fare is one charged irrespective of distance travelled, although usuallydifferentiated by person type.</p><p>A graduatedfare is one related to distance, the latter divided into fare stages. It isnot usually proportional to distance, but. tapered (i.e., falling rate per kilometre aslength rises).</p><p>3. OBJECTIVES OF THE OPERATOR</p><p>The objectives set for and by the operator will determine the optimal fares policy.A financial objective alone is not a sufficient guide: the same objective could be metwith a variety of fares and service levels. In many cases, an 'equity' objective may beset, i.e. that each passenger make a 'fair' (no pun) contribution to costs.Unfortunately, this is often associated with crude average cost concepts, leading toeither flat fares or graduated fares undifferentiated by time or person type. As arguedin 4 below, an equitable solution involves differentiating fares, and possibly usingtime instead of distance as a basis for averaging of costs.</p><p>Beyond this point, objectives become very, confused, operators working to-ageneral goal of providing an 'adequate service' within a financial constraint (e.g.</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>The</p><p> Uni</p><p>vers</p><p>ity o</p><p>f M</p><p>anch</p><p>este</p><p>r L</p><p>ibra</p><p>ry] </p><p>at 2</p><p>0:13</p><p> 18 </p><p>Dec</p><p>embe</p><p>r 20</p><p>14 </p></li><li><p>Pricing of local public transport 129</p><p>break even, or require not more than a budgeted amount of revenue support).However, little attention is paid to the effects of fares increases other than those ontotal revenue, irrespective of loss of trips.</p><p>A formalized objective aimed at maximizing passenger benefit can be seen inLondon Transport's 'passenger miles per ', i.e. for each \ in revenue support,fares and service levels should be adjusted so as to maximize the amount of travel (aproxy for passenger benefit). In considering fares, this leads not only to an analysis oftheir effect on patronage (as well as revenue), but also consideration of each marketsector. It becomes worthwhile to differentiate even where all the categoriesconcerned are relatively inelastic (i.e. elasticity between 0 and 1*0). For example, ifpeak traffic has an elasticity of 0-2 and off-peak one of 0-5, then a higher trafficlevel will be obtained by differential charging to obtain the same total revenue.</p><p>The proportion of costs covered by revenue support (i.e. payment from publicfunds) has risen substantially in recent years. This initially takes the form, asdescribed in 4.1, of altering cost structure by direct central government grants or taxrebates. Where concessionary fares are offered at the request of public authorities,compensation is paid to the operator. Beyond this point, two alternative approachesexist:</p><p>(i) Payment for specific services, on which the standard fare scale applies,whose traffic density is not such as to cover costs. This is common in ruralareas, such as British non-metropolitan counties,</p><p>(ii) Payment of a sum intended to keep the general level of fares below thatneeded to cover costs, and/or provide a more extensive network (mostcities).</p><p>In practice the distinction is somewhat artificial, since a rural network exists toprovide user mobility, not in its own right. Mobility might well be maximized byoffering lower fares on a less frequent network of services, for example, rather thanretaining high fares on poorly-loaded services (Higginson and White 1980). In thecase of London Transport, the trade-off is made explicit in the 'passenger miles per' criterion. In cities, where the average fare paid is relatively low (due to shorterdistances travelled than in rural areas), keeping fares down is not necessarily the bestmeans of maximizing traffic for a given sum of revenue support, and inertia indecision-making (an unwillingness to raise fares during an inflationary period), isresponsible for many real fare reductions, rather than a carefully-consideredstrategy. In some cases, the low fare strategy is more explicit. For example, in SouthYorkshire, fares have been kept constant at 1974 or 1976 levels, so that a sharp realfall has occurred and only about 30% of costs are now covered by user payments. Anumber of other European and American systems are at a similar level, such asAmsterdam, where only 20% of costs are covered.</p><p>Even where high revenue support is paid, there is still a good argument fordifferential pricing by time of day, person type, etc., since one achieves the equitablegoal of supporting users to a similar degree (in the LT case, the support paid to eachpassenger-mile being implicitly adjudged to give the same passenger benefit), and ofmaximizing system use for a given financial target.</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>The</p><p> Uni</p><p>vers</p><p>ity o</p><p>f M</p><p>anch</p><p>este</p><p>r L</p><p>ibra</p><p>ry] </p><p>at 2</p><p>0:13</p><p> 18 </p><p>Dec</p><p>embe</p><p>r 20</p><p>14 </p></li><li><p>130 P. R: White</p><p>4. COSTS AS A BASIS FOR PRICING</p><p>4.1. Definition of operator's 'total costs'I f we take as a starting point the case in which the operator is aiming to cover costs</p><p>from revenue, the relationship between cost structures and pricing can be illustratedmost easily.</p><p>A definition of 'total costs' is first required. Although this must clearly includewages and other payments connected with staff, fuel, purchase of spares, etc., theissue is complicated by varying treatment of capital costs and taxation. In some cases,past captial borrowings and their associated interest charges have been written offin London Transport, for example (Transport (London) Act 1969)while in othersa substantial burden remains (for example, the British National Bus Company isfinanced entirely from 'debt' capital, at fixed interest rates, which is to be repaid ininstalments (S.C. on Nationalized Industries 1978)). Rail and rapid transit systemsin particular have often benefited from outright capital grants, and their currentinterest charges relate to only a part of the capital employed. Where current capitalinvestment is also funded from grantsLondon Transport again being a goodexamplethen the 'costs' to be covered from revenue do not include depreciation.In other cases, this may be funded by the operator, but variation nonetheless arisesfrom the method of depreciation (historic or replacement cost), and alternativemethods of funding replacement (e.g. leasing versus outright purchase).</p><p>Taxation policies also affect an operator's definition of 'total cost'. Annual dutyper vehicle, fuel tax and passenger-related taxes vary substantially in their effect. Forexample, stage carriage bus services in Britain have the tax on their fuel rebated to theoperator, and only a small annual duty is paid. There are no passenger-related taxes.In other countries, general taxes such as Value Added Tax (VAT) may be levied onpublic transportf, raising the fare paid by the passenger, or taxes may be levied onthe operator related to the volume of traffic, as in India (Jacobs et al. 1979).</p><p>Cost structures may also be affected by automatic government grants paid inrespect of certain items which effectively reduce the net cost perceived by theoperator. For example, new bus grant paid in Britain at 50% of the cost of new busespurchased primarily for stage service (now being phased out) effectively halve...</p></li></ul>


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