In September, a week before Boris’ plea for those who could work from home to do so once again, Hoggett Bowers hosted an online discussion for board representatives from significant and diverse businesses across the transport sector. Some of our guests also hold positions very close to government and in other sectors, thus providing a rich, informed view from the passenger transport sector’s doyens on how we get the UK ‘Back on Board’ and using public transport once again.
BEYOND THE SECTOR
A view from several who hold positions on boards of organisations in different sectors; manufacturing, charity, education, bulk storage operator etc. acknowledged that they all have their challenges and each sectors’ challenges are different, but mass transit has been absolutely catastrophic. Like all businesses, it’s all about liquidity, supporting colleagues and making sure the shareholders are supportive and lenders are confident boards are doing the right thing.
In comparison to mass transit, our guest from the freight sector described their story as ‘pretty dull’, in that they have only lost about 20% of the revenue! That would be catastrophic in most scenarios but relatively good in these circumstances. Demand is still high as people have to eat and our consumption patterns have changed but not so much that containers don’t come through ports.
Intermodal traffic from Asia suffered a double hit when we weren’t consuming and China wasn’t producing, which happened in sequence. There was an extended period of reduction, but percentages are minimal compared to passenger transport.
AGILITY IS KEY
A big board theme has been ‘agility’, and how you manage the next day or week. One guest has insisted their board be more systematic about strategic planning, stating that “in a way it’s a hopeless time for strategic planning but that makes it the key time for strategic planning as well.”
Given that many believe you can’t see more than six months ahead, it is essential a range of scenarios are prepared for the long term. In the UK the other uncertainty is BREXIT and along with the COVID uncertainty, it’s another layer that has to be managed.
Many have taken a different approach to strategic business planning. The business or customer base of the different transportation systems our guests run, in the UK and across Europe, is varied. Some have experienced a large reduction in commuting and some in business trips, dictated by companies who will push their employees to make less journeys. There’s also those using transportation for leisure where the safety is the most important issue, so what will be the future of the transportation systems in the next few years?
Boards must remember that the external demand drivers are critical to the success of a business. As soon as the Scottish Government opened up self- catering, hospitality and stay away locations, Serco saw a complete reversal in demand for the Sleeper and were full every night for 2-3 weeks in July and August. Looking at the longer term, they see the advantage of the longer term 12 months booking horizon, and they can see people booking now for 2021. The most important thing is to get close to the people who are responsible for those demand drivers, be they national or local governments, and help them understand how important this is for the economy.
It was identified that there’s been a lack of clarity, consistency and listening from governments, particularly the UK government but they’re not alone as the same can be seen with at least two other European governments as well.
The three phases of ‘protect’, ‘recovery’ and ‘rebuild’ have been widely spoken about, however, in the airline industry they consider themselves to be still in ‘protect’ mode.
The three phases of ‘protect’, ‘recovery’ and ‘rebuild’ have been widely spoken about, however, in the airline industry they consider themselves to be still in ‘protect’ mode. A number of airports across Europe and the UK are 80% down and visibility is appalling over the next few weeks. In over 25 years, there’s always been a winter schedule which starts on the 1st November for the northern hemisphere, and there is no winter schedule being discussed this year. The airlines are taking a very tactical approach and will move their aircraft around on a week by week basis as to where they can make money. As an infrastructure investor, it’s all about cash and agility not recovery yet. It’s also about employee’s safety, passenger confidence around safety and getting them back on board. On one hand airports are supporting their staff but on the other they’re scaling back operations as they have no idea how many passengers they’re going to process through the airports in the next 6-12 months. That’s a different mindset which is why the word ‘agility’ is so key – there is no visibility, so you need to be able to adjust on a real time basis, which means investing in technology which comes at a cost.
From an aviation point of view, it’s been a disaster that’s never been seen before and even the strongest operators, with operations and assets across three continents, have been looking at liquidity. One business has raised €2bn in bonds since this crisis started and that’s unprecedented in such a business. They hoped to see recovery during the summer and in terms of consumer passenger behaviours, saw a very strong and swift recovery with passengers flowing back. They were very happy with the processes and procedures in other airports, so the fear factor generally disappeared which meant they saw good load factors and consequently there were green shoots. However, the haphazard approach made by European and UK governments to international quarantine, killed the momentum. Consequently, they’ve pushed back when they thought they’d see a return to 2019 levels of activity from 2024 to 2025.
Boards are looking at agility and flexibility and are re-casting capital investment programmes. Areas that are being invested in, are digitisation, the use of data, technology and the carbon agenda.
SAFETY AND THE FEAR FACTOR
There seems to be a ‘fear factor’ when people are now faced with travelling but if you look at leisure travel, by rail or air, when people want to go on holiday, they seem to easily conquer their fear. A very different attitude to the experience of travelling on a commuter train.
When it comes to transport systems, the deciding force will be government policy and messaging, and this has driven the public to behave as they have.
Fundamental to getting passengers back on public transport is rebuilding the trust with the customers, convincing the passengers that the train remains safe and continuing to offer them a service that is COVID-secure. This will not happen without support from governments.
Currently no business can get more than 30-35% staff back in their offices due to social distancing rules. As long as employers are implementing current health and safety legislation and the guidelines that have been set, then practically people are not coming back to work in offices en masse. Prior to the PMs second plea to ‘stay at home to work, if you can’, in late September, there was a fundamental difference between London and the rest of the country in how many people were getting back to the office. London being at c.30% and cities like Manchester, Doncaster and Stoke were between 65% and 110%. This distinct difference will continue until messaging starts to change.
Many businesses will be reviewing their P&Ls in terms of what they are spending on real estate when their staff don’t want to use it and similarly, households have examined their cash flow on their spend on commuting. Government clearly has an important role to play in this, but a division has been created between the landlord and tenant community and the tenants will look to reduce a major line item in their P&L, as will households.
Whether we end up at 80% or 90% utilisation of office space, it changes the financial model for commercial property in London and other major cities. This changes the financial model for transport by default too.
Most employers have been continually surveying their staff and the results show that many don’t want to come back to the office full time. It varies from wanting to spend 1 to 4 days a week working from home, and no one wants to do 5 days a week back in the office again. So, in office bound environments, we will not see the return to the office full time and that will reduce commuting congestion for those who do need to use transport, but this will impact revenues and prices.
Messaging from the government is absolutely critical in this. Civil Servants aren’t used to dealing with this type of critical decision making and taking risks. They need to be open to listening to suggestions from those in business who are used to taking managed risks. So, it is business that must help government in the message needed to rebuild people’s confidence in travelling again.
THE CARBON AGENDA
The carbon agenda won’t go away because of COVID and will only be reinforced by it. One train operating company, represented by our guests, still has diesel trains that should have been pensioned off years ago. Leasing more diesel trains for another 40 years, believing there will be a secondary market for them then, seems illogical. They will be pushing for more electrification of trains.
It’s critical for public transport to be at the heart of the green agenda. We’ve all enjoyed lack of congestion in our cities, bringing lower air pollution during this crisis. It gives people a vision of what the future could look like. We’ve seen an acceleration of trends that we’ve all been aware of over the years, one is electrification and a move away from diesel emissions
In many transport companies, however, there is no CAPEX spend, unless it’s for essential maintenance, so the green agenda hasn’t gone away but it’s on a short-term pause button. The green agenda will come back but more time is being spent on forward thinking strategy and how we can recover more quickly.
As for construction, the rail sector is blessed by HS2. The demand for it is a different argument and it’s happening. For freight ‘agility’ is everything. Freight overall has been resilient and effective during the crisis but perhaps rail, rather than road haulage, has felt more damage than the rest of the sector.
Freight trains have continued to run 85% full, construction broadly recovered and intermodal on the railways has also recovered. Diesel trains are under pressure, but they are still greener than road haulage.
The argument for hydrogen is also hotting up but it’s a long way to go for that to be an effective solution on commercial vehicles.
CUSTOMER EXPERIENCE AND DIGITALISATION
One guest observed that having come back to the sector after a few years away, he sees how inflexible and insular passenger transport is to use. There are many different ticket types and prices, and on the digital side of things the inability to get on and off mid-journey is hard. To attract people back to the railway you can’t give them an orange cardboard ticket with a magnetic strip, not now we’ve all got used to QR codes in the pubs, restaurants and even at your dentist’s surgery. The sector must do more – contactless and digitalisation is moving very fast and the railway is very slow.
On the digital agenda and customer experience, the younger generation is less accepting of bad service and want everything available instantaneously. They expect the industry to work together as a team to create a nationwide service which delivers up the right thing they want to do at any particular time. That’s a good thing as it sets an agenda and helps drive things forward.
There’s been an acceleration of digital, technology and data related initiatives at one of the UK’s nationwide bus companies, who’ve brought in contactless payment on their buses and made other technological investments this year. It’s proven to be a very good investment for passengers and the group as a whole.
LOOKING TO THE FUTURE
Transportation is a derived demand and the shape of that demand will change completely after this pandemic, even if we all go back to doing what we want, we won’t be going to offices in the way we used to. Although there’s a lot of uncertainty, we know it won’t look anything like it has done. We need to actively and proactively move toward what a new digital future will look like.
Hoggett Bowers are very grateful to all our guests and a special thank you to:
Sir John Armitt – Chair of National Express Group, National Infrastructure Commission and City & Guilds and Deputy Chair of the Berkeley Group
James Bilefield – Chair at SThree plc, Board Director at Stagecoach plc and NED at Moneysupermarket Group
Declan Collier – Chair of the Office of Rail and Road and NED of the Royal Schiphol Group and TCR International NV
James Cooper – Chair of GB Railfreight and NED at the Home Office
Robin Gisby – Chair of LNER and Northern Trains and is a Board Director of The Defence Infrastructure Organisation and Navigator Terminals
Sir Derek Jones – Chair of Keolis UK and The Prince’s Trust in Wales, Board Director of IQE plc and an Independent Adviser to Cardiff University
Catherine Mason – Chair Solent NHS Trust and Community Health Partnerships and Independent Member System Operator Advisory Board, Network Rail
David Noyes – Chair of Grays of Cambridge (International) Ltd, NED at Network Rail and Luton Airport Ernesto Sicilia – Chair and MD of Trenitalia UK
David Stanton – Deputy Chair of Copenhagen Airport, Board Member of Birmingham and London City Airport
Peter Strachan – Chair North East Ambulance Service NHS Foundation Trust, Serco Chair of Caledonian Sleeper and Merseyrail
Helen Wylde – NED at BBA, MD East Coast Trains Ltd