Auckland Transport are making a few changes to public transport fares on 28 February and some of them are bound to result in howls of outrage. The changes are part of ATs annual fare review and they have said they are being influenced by a couple of key factors:
- The need to achieve the NZTAs farebox recovery policy of 50% of costs covered by fares by June 2018
- Changes to operating costs
- Changes in preparation for ATs Simplified Fares which they say are currently on track to roll out at the end of July
I’ll cover off these aspects before going into the fare changes.
Achieving the Farebox Recovery Policy
As I talked about on Friday, the NZTA require that 50% of all PT costs across NZ are met by the revenue from fares paid by PT users. As Auckland accounts for over 50% of all PT across the country it means the city is critical to the country meeting that target. Of course this doesn’t mean that the target is rational or provides the best economic and social outcome but it currently exists so AT has to work within that. The good news is we’re on the right track. Farebox Recovery has increased to 47.8% from 45.9% the year before.
Changes to operating costs
The way that contracting currently works for most services is that the operator gets the fare revenue and AT pay the net cost of providing the service. The amount that AT pay is adjusted based on a cost index determined by the NZTA which takes into account changes to aspects such as labour costs, fuel costs, RUC costs etc. There are two indices, one for bus/train and one for Ferries. AT say these are up 0.5 for bus/train and 0.1 for ferry in the September Quarter and the fare changes are to respond to that.
Out of interest the NZTA’s info on the indices say that fuel prices only make up about 15% of the operational costs for buses and just over 30% of the costs for ferries. But those indices also suggest that while prices are up in the September Quarter they are still down on a year on year basis. In other words, as of the September Quarter – which would have been used by AT for their fare review – AT were paying less for services than they were the same time the year before. On a YoY basis they are -0.4% for bus and -3.7% for ferry.
Changes for ATs Simplified Fares (aka integrated fares)
There are two main and significant changes being made by AT to better align fares in the lead up to AT rolling out Simplified fares at the end of July. They are also the ones that will likely get the most reaction – especially from the media. The changes were suggested as part of the consultation for simplified fares but that won’t make the changes any easier for those affected. Essentially it seems like they’re getting the bad news parts of the Simplified Fares out of the way now so that when they do roll out in July the positive aspects don’t get overshadowed.
The first change is that Orakei Train Station to Britomart will go from 1 stage to 2 stages. The reasons suggested are:
- As part of Simplified Fares there will be a City Zone which is based on roughly the same area as covered by the current 1 stage fare zone and which is effectively a circle the same distance from the centre of the city. Orakei is an anomaly sitting well outside of that. In addition, buses from Orakei pay a 2 stage fare so there needs to be consistency. Changing the area to 1 stage would be unfair on others who are travelling a similar distance.
- The park & ride is often full as a result of people driving from around the region to pay for the 1 stage fare. They are hoping that changing it to 2 stages eases pressure on the station and that passengers will instead go to closer stations to catch the train.
- Hobson Bay is a logical boundary for a fare stage/zone boundary.
- As the station data AT provided suggested, the number of people affected isn’t that high overall. There are ~300,000 trips a year to or from Orakei which is around 2% of all rail patronage across the region.
The second change also affects the city zone and will see the removal of the current CBD zone which was a separate price for those catching a bus purely within the CBD (and a little bit around the southern end of Symonds St as shown below with the lighter area. Again it’s so that there will be a single City Zone. Until the Simplified Fares roll out it means trips within the CBD will be a 1 stage fare however importantly this doesn’t affect the CityLink buses which will remain at $0.50 if you use HOP.
There is one other aspect is at play in the fare changes, AT say that compared to many other cities our short fares are often a bit cheaper while our longer distance fares are a bit higher. AT have decided to use these fare changes to try and balance that out slightly and so the fare changes are primarily for shorter trips.
Adult fares are below and there are no changes to child, accessible and tertiary fares with the exception of the child monthly train pass (which still uses the old cardboard tickets). As you can see stages 1 to 4 increase by $0.10 if you use HOP while other fares remain unchanged
There is a change to the Adult Monthly passes too with the 2-zone monthly pass (the one I use) going from $190 to $200. There are a few changes to child monthly train passes too as well as family passes – on those AT say they are still working out just what the future will be for family passes and hopefully will finalise that soon.
Ferries don’t escape the changes. They are splitting ferries into three zones which they say simplifies things and allows for better integration with the future integrated fares pricing structure – although they’re not quite ready to say how that integrates the approach they indicated to me sounded pretty reasonable. They’re working to align ferry fares within those zones over time and the new Adult HOP prices for them are below.
- Inner Harbour (Birkenhead to Devonport) – $4.50 – these prices are now aligned.
- Mid Harbour (Half Moon Bay, Hobsonville/Beach Haven, West Harbour) – $7.04 – $8
- Outer Harbour (Gulf Harbour, Pine Harbour, Waiheke etc.) – $11-$11.20
AT want more ferry customers using HOP and as such they’re making some changes including removing some pass options and increasing the price of some too.
Lastly as a quick update to Simplified Fares. As mentioned it is due to roll out in July this year and AT say the project remains on track and they are currently testing some of the new functionality. They have confirmed the zones that will exist but are still reviewing four of the zone boundaries based on feedback from the consultation. These are:
- Upper North Shore/Lower North Shore – There are a few school trips affected by the boundary on the map below.
- Huapai/Waitakere – how it integrates with the new Westgate/Massey North development
- Waitakere/Isthmus – again some school trips and short trips are affected but the boundary on the map below.
- Manukau North/Manukau South – impacts on trips around Manukau
So what do you think of the changes and how much will they impact you.
Public transport fares are often a contentious issue. Too high and they can put people off, too low and it may increase the subsides needed or you may need to cut services. So it’s interesting to think about fares in the current climate we have in Auckland. We know from the last AT board meeting that the annual fare review was up for a decision/approval in the closed session. Given this is the time of the year they usually announce the outcome of that fare review I expect we’ll be hearing soon what they’re going to do.
Over the last few years we’ve seen fares for most people (HOP users) stabilise quite a bit and even fall while fares for cash payers to increase to help encourage people to move to HOP. Given some of the trends we’re seeing and what’s planned it seems that other than perhaps a few small tweaks any substantial changes can’t really be justified – in fact possibly the opposite, reducing fares might be justified.
We know that later this year Auckland Transport will be implementing integrated fares which will see us move to a zone based system. It’s quite likely they’ll use the fare review to move towards what’s planned for integrated fares and that could see some interesting changes, one of these could be around Orakei train station which sits outside the City zone in the proposed map below.
The NZTA require that by mid-2018 public transport has a farebox recovery ratio of 50% – the percentage of costs that are covered by passenger fares. Auckland has traditionally hovered around 45% meaning that if we’re to meet the national goal then AT needs to do better – whether 50% is the right level to get the best economic outcome is for a different debate. Many of the current initiates such as electrification, the new bus network and PTOM contracts are all expected to improve Auckland’s performance through both reducing costs and increasing patronage and therefore revenue (AT’s farebox recovery policy is in the RPTP). For this year Auckland Transport and the Council set a formal target of 46-48% as part of their Statement of Intent.
The good news is that the surge in patronage that Auckland has been experiencing over the last year has had a noticeable impact on the farebox recovery ratio. The most recent data up to October last year show it sitting at top of the target range at 47.8%, that’s up from 45.9% the at the same time the year before. Does this suggest perhaps there’s some room to move on fares while still keeping the farebox recovery ratio within target?
In the past when they’ve raised fares AT have said that one consideration in setting fares is the cost compared to driving for an individual. We know that in recent months fuel prices have fallen (shown below) which obviously makes it cheaper to drive. The decrease
Diesel prices have fallen even more sharply and that will likely be having an impact on bus operational costs.
There are likely to be some other factors I’ve overlooked however it seems to me that given the broad factors we’re seeing that raising prices is about last thing we should be doing.
Inevitably when discussing fares many like to compare Auckland’s to those in other cities. In September I took a look at a number of Australian and Canadian cities. One thing that was clear from doing that activity is it’s incredibly difficult to say whether fares are too high in Auckland. Every city has very different fare structures and often who is cheapest depends on distance travelled and the mode used.
Lastly another topic people love to raise is fare evasion and suggest we should gate all stations immediately. To put some things in perspective the last I heard fare evasion – which I believe is based on how many passengers are found without a ticket by the ticket inspectors – sits at around 6-8%. The amount of lost revenue from those evading fares is the vicinity of $2.5 million. The reality is that if AT tried to eliminate fare evasion the amount of money they would need to spend on staff and infrastructure to enable it would dwarf the amount of money they end up collecting. The key is to get the right balance rather than an impossible attempt to stop all evasion (which still happens on systems fully gated)
In July, I started taking a look at the economics of public transport fare policies. In the first part of the series, I took a look at how traffic congestion can be a rationale for public transport fare subsidies. (Parts 2 and 3 dealt with different issues.) I observed that:
In the absence of congestion pricing (and in the presence of other subsidies for driving, such as minimum parking requirements), higher public transport fares can result in a perverse outcome – additional congestion and delays for existing road drivers. This is shown in the following diagram:
Effectively, a failure to price roads efficiently means that we have to provide subsidies for public transport to prevent car commutes from being even more painful than they currently are.
But how much congestion reduction can we attribute to public transport? How much slower would car commutes be if some people weren’t travelling by PT instead of clogging up the roads? And how much is that worth to us?
It’s not possible to test this experimentally – we can’t exactly build a bunch of cities that are identical except for their PT systems and see what happens. (Transport research budgets are not nearly large enough.) However, we can observe the outcomes from various “natural experiments” that disrupt public transport systems while leaving everything else unchanged, such as natural disasters and public transport strikes.
Stu Donovan pointed me towards a recent research paper that analysed traffic speeds during public transport strikes in the Dutch city of Rotterdam. The authors, Martin Adler and Jos van Ommeren, use detailed traffic flow and speed data to model how 13 PT strikes that occurred from 2001 to 2011 affected traffic speeds. Because strikes prevent people from using PT without impeding road traffic, the outcomes observed during strikes give us some indication of what would happen to congestion in the absence of PT.
If you’re interested in knowing a bit more about the topic or the methodology, I highly recommend you read the paper. (It’s an excellent paper!) Here, I’d like to focus on a few key findings from the analysis.
First, the authors found that PT helps to speed up car journeys by reducing the number of people driving:
We demonstrate that during a citywide strike, car speed within the city decreases by about 10%. For highways, strikes exhibit a much smaller speed reduction of about 3%. During rush hours, the reduction in speed is more pronounced. These results imply that during rush hours, public transit provision reduces car travel time on inner city roads by about 0.2 minutes per kilometer travelled, whereas it reduces car travel time on highways by 0.02 minutes per kilometer. Hence, for cities such as Rotterdam, travelers on inner city roads benefit much more from public transit provision than highway travelers.
Intuitively, these results make sense. The benefits of PT for drivers are much higher in busier areas, such as Rotterdam’s inner city roads. However, Rotterdam’s ring road highways still derive some benefits.
The second interesting finding is that the popularity and ease of cycling in Rotterdam – even though it’s not exactly leading by Dutch standards – cushioned against some of the negative impacts of PT strikes:
a full-day citywide strike increases bicycle flow by 24% implying that a large share of travelers switch to bicycle use (rather than car use), which presumably reduces the car flow increase and therefore the speed reduction of a strike. Bicycle ownership and use is much higher in the Netherlands than in other countries in the world, so this result is likely specific to the Netherlands.
In other words, the availability of multiple congestion-free networks – public transport and cycling – meant that the roads didn’t have to accommodate all of the people who couldn’t get on the bus on strike days. In other words, the availability of multiple transport choices enhanced network resilience.
Third, the authors calculated the value of congestion reduction benefits attributable to public transport in Rotterdam. Based on some plausible assumptions about journey lengths and the value of time, they estimate that:
The annual public transit congestion relief benefit is then about €95 million (assuming 252 working days), so about €79 per inhabitant. This excludes any benefits of public transit provision on weekends that we assume to be negligible, so this is likely an underestimate. Given 721 million public transit passenger kilometers (OVPRO, 2014), the congestion reduction benefit per public transit kilometer is €0.13. This benefit is substantial given that the cost per public transit kilometer is €0.46.
In addition to congestion welfare losses there are rescheduling costs to car travelers. [Note: only 55% of the reduction in PT trips on strike days was balanced out by the increase in car and bicycle trips, meaning that a large share of people chose not to travel.] We do not include these costs, nor do we include the loss to public transit ticket holders or any other external cost of car driving that are likely an order of magnitude smaller than the effect through congestion.
The costs of providing public transit in Rotterdam are partially covered by subsidies, about €0.28 per public transit kilometer. So, the congestion relief benefit is about 47% of subsidies.
This is a really interesting finding! It puts a monetary figure on the congestion relief delivered by PT. (For Rotterdam, at least.) And, interestingly, it’s a large enough figure to justify a good proportion of PT fare subsidies. There are also other rationales for fare subsidies that I haven’t discussed here, such as social equity for people without cars and various types of network effects in PT provision.
But even if we leave those aside, this finding suggests that drivers should be happy to spend some fuel tax revenues to subsidise public transport.
What do you think about congestion and public transport?
A few weeks ago the Auckland Transport board adopted an updated version of the Regional Public Transport Plan following consultation on a few areas. One of those areas AT’s Integrated Fares Policy or Simplified Fares as AT call them and which I looked at in more detail here. Core to the Simplified Fares are a move to a zone based system where you pay for how many zones you pass through not how many services you use.
The consultation also gave some indicative prices and future products that we can expect and many cases (not all) the changes will actually work out cheaper for people.
In addition they will move to a single monthly pass at $200-$210 which is a bit of a disappointment for me personally seeing as for me that would see my travel costs increase (my Zone AB monthly pass is currently $190). Lastly AT have suggested that after rolling out integrated fares they’re also going be looking at replacing daily and month passes with daily and weekly fare caps for HOP uses so they become something that just happen automatically rather than something you have to plan in advance for.
I wanted to look at how do AT’s proposed zones and prices compare to some of the cities we frequently compare ourselves against.
Sydney has easily the most confusing fare systems of the cities I’ve looked at, a great example of what not to do. Fares are effectively banded in to stages based on the distance you travel and confusingly vary depending on mode you use – although this is likely made worse by being poorly laid out. Below is the standard adult price (in Australian dollars) if using the Opal Smartcard. Cash prices are higher.
Trains – trains also have an off peak fare discount of 30% with peak defined as trips starting between 7am-9am and 4pm-6:30pm.
- 0-10km – $3.38 (NZ $3.70)
- 10-20km – $4.20 (NZ $4.60)
- 20-35km – $4.82 (NZ $5.30)
- 35-65km – $6.46 (NZ $7.10)
- Over 65km – $8.30 (NZ $9.10)
Buses and light rail – there are no off peak fares.
- 0-3km – $2.10 (NZ $2.30)
- 3-8km – $3.50 (NZ $3.9)
- Over 8km (buses only) – $4.50 (NZ $5.00)
Ferry – there are no off peak fares.
- 0-9km – $5.74 (NZ $6.30)
- Over 9km – $7.18 (NZ $7.90)
There are no pass options in Sydney but they do have a weekly cap of $60. However many people don’t even need to pay that. Another feature of the fare system is what they call the Weekly Travel Reward where get unlimited travel after taking 8 trips in a week. There is no limit on how long those trips have to be so I understand it’s not uncommon to see long distance commuters taking short trips in the middle of the day to get their trip numbers up. It is explained below.
Melbourne uses a zone based system having two zones within the metropolitan area although in reality the system is more of a hybrid between a zone and flat fare system. The inner zone extends roughly 10-15km from the city centre and applies to both trains and trams. Most tram stops are within zone 1 although a few sit outside it. In addition to this trams within the central city are free. The train map is below.
As metioned Melbourne has a bit of a hybrid system. Trips to the central city are actually just a single flat fare as the Zone 1+2 pass is priced the same as a Zone 1 pass. The difference is that travel only within Zone 2 is at a cheaper rate. I understand this wasn’t always the case but was effectively an election bribe to keep the far flung suburbs happy.
In addition to these fares there are daily caps on weekends and public holidays. Weekly passes are available for the price of 10 trips and if you want a longer pass you can purchase passes from 28 to 365 days for discounted rates. That makes an annual pass just over $1,500 (~NZ$1,650)
Brisbane – or more accurately South East Queensland – uses a zone based system with zones roughly 5km wide radiating out from the centre of Brisbane, although the exact distance varies.
Fares are calculated based on the number of zones you travel though and are charged at the prices below (I’ve only shown the top 10 as that more than covers trips across what would be trips across Auckland). You can see that there are discounts for off peak travel. This is defined as being from 8.30am to 3.30pm, after 7pm weekdays until 3am the following day and all day weekends and state-wide Queensland gazetted public holidays.
Perth uses a zone based system with zones 8-10km wide radiating from the city centre. To put things in perspective, in Auckland the Lower North Shore and Isthmus zones reach about 10km out from the city centre while Papakura would be in Zone 3.
The prices for the zones are shown below and there are a few things worth noting.
- The prices are obviously in Australian dollars and when converted to NZ Dollars the cash price in Perth seems to work out fairly similar to what AT are proposing for the HOP price in Auckland. Users get a discount off the cash price of 15% discount for using their smartcard however it is also possible to get a 25% discount if you have set your card up to automatically top up.
- If your journey is less than four zones there is a two hour time limit (like Auckland) however if it covers five or more zones you have three hours.
- A 2 Sections ticket is available and how Perth caters for short trips such as those which just start and end either side of a boundary. It is applied for trips of less than 3.2km and is only available on a single service i.e. no transfers.
- In addition to the standard fares there are concession fares for various groups and time limits for when the daily and family passes can be purchased. There are no weekly or monthly passes.
Vancouver is another city which uses zones although unlike Perth they aren’t concentric but tied to local government boundaries. Zone 1 would be similar in size to the City Centre and Isthmus zones.
Vancouver is in the middle of rolling out a smartcard system called Compass Card and it is expected to be completed by November. Current cash fares are shown below and as you can see there is a single adult price and also a concession price.
There are 10 trip tickets which can be bought which offer over a 20% saving on the ticket prices and when the Compass Card rolls out these will be withdrawn and replaced with stored value system with tickets working out as equivalent value – much like AT did with HOP. These prices are shown below.
To put things in perspective the compass card cost for each zone in NZ Dollars is roughly $2.50, $3.8 and $5.
As you can see Vancouver also has a price difference for evenings and weekends. They also have monthly passes available for each zone which work out with a break-even of about 40 trips per month. The most expensive monthly pass works out at around NZ$200.
Calgary keeps things very simple with flat fare allowing journeys on as many services as needed for up to 90 minutes of travel across the entire system. This means it can be very cheap for those living out on the edges of the city to the disadvantage of those taking just short journeys.
An adult cash fare is around NZ$3.80. There are also day and monthly passes available – the latter work out with a break-even of around 31 trips per month.
The inevitable question many will ask is if we’re paying too much in Auckland. That unfortunately is something that is much harder to answer as there are many other factors at play. At a quick glance Auckland’s fares will be cheaper than many of the Australian cities I’ve compared but that isn’t the case for all journeys. We’re generally more expensive than the Canadian cities who also tend to do well in areas such as farebox recovery due to solid good patronage and fairly well designed PT networks – like Auckland is moving to. There also other issues that need to be considered such as the balance between fares and subsidies and the elasticity between fares and patronage – some of which Peter looked at in some recent posts.
From looking at these different systems the things that stand out to me are how important issues such simplicity, fairness and integration of the system is. In this regard I think that both Perth and Vancouver seem to strike a good balance. The exercise has also highlighted some interesting outcomes around pass options. I’ll look to do a more detailed post about those in the future.
Lastly there are many more cities and fare structures that just what I’ve covered here but haven’t in the interest of time and space. If there’s one that you really like or dislike add it to the comments.
Back in May Auckland Transport launched a short consultation to update their Regional Public Transport Plan (RPTP) on four specific areas to reflect the work and thinking they’ve undertaken since the RPTP was released in 2013. The consultation was limited to four areas:
- The proposed introduction of simplified zone fares
- Proposals for a new light rail transit (LRT) network on some major arterial routes
- Service and infrastructure changes arising from the Ferry Development Plan which was approved by the AT Board in December 2014
- Revised service descriptions arising from community consultation on the new bus network
AT haven’t formally announced the outcomes of that consultation however a paper on them went to the confidential session of the AT board and that has quietly been released publicly. In total they say 1,251 submissions were received however over 1,000 of those were about SuperGold concessions. Below are the main issues and some of the key recommendations staff have made.
Simplified zone fares
AT say there were 107 submissions referring to the simplified zone fares and that people were mostly supportive of the proposal. There was some concern about specific aspects though such the exact boundaries and what happens for short trips that cross them. One example they give is Orakei where some people want it in the city zone. In addition people wanted a number of other areas considered including
- integrating ferries into the zone system
- the time available for transfers along with the number of transfers allowed.
- improved education and work to get HOP n the hands of more people,
- fare caps
In response AT have made minor changes to the document or are undertaking more research. They note that it is desirable to have ferries also integrated but that they are limited in their ability to do so due to the current exempt services that are enshrined in legislation. In the case of fare caps AT say they will look at them once the new zonal system has settled in.
There were 97 submissions about light rail and AT say the majority were positive however five key groups have said there isn’t enough information yet for AT to be including it now. Of these the big and most interesting one is the NZTA who I would have thought AT would have been talking to about it much more. Others with a similar view were AA, NZCID, Bus & Coach Association and the Mangere-Otahuhu local board.
One aspect I predicted would happen with Light Rail has come through with a number of submitters and local boards now also wanting Light Rail in their areas. This includes
- replacement for the Inner Link bus route
- connections to the North Shore
- along the North-western Motorway
- Tamaki Drive
- Pakuranga Highway to Howick
The main recommendation is to start releasing more intimation about the project.
Ferry development plan
AT say that overall the majority of people supported their ferry development plan although some people were also calling for new services. Other than a few wording changes, it doesn’t appear this will change much which seems reasonable.
New Network service descriptions
Most of the feedback related to the new network was actually about issues such as the SuperGold card concessions for which AT say they will improve the wording to make it clearer nothing is changing.
For the actual topic of the new network service descriptions it was raised that there is no set span of times services will run from/to. In response AT say they will add a policy looking at the issue of span of services and in the next version of the RPTP look at developing that in more detail. The policy the hearings panel recommended be included now is below.
For those that don’t read Transportblog on a daily basis, this is the third part of a series I’m writing on the economics of public transport fare policies. Part 1 discussed a key rationale for public transport subsidies – lower fares keep people from clogging up already-congested roads. Part 2 considered the case for distance- or zone-based fares to ensure that people taking longer (and hence more expensive) trips pay more.
In the comments on those posts, several sharp readers asked about the relationship between fare levels and ridership, and whether there are any opportunities to improve outcomes by targeting lower fares to highly price-sensitive groups. These are excellent questions to ask!
In this post, I’ll take a look at the first question: In the aggregate, how does ridership respond to changes in fares? Hopefully, this will give us the theoretical tools to take a look at the second question in the next installment of the series.
In economic terms, we are asking about the “price elasticity of demand” for public transport. Fare elasticities measure how responsive people are to higher (or lower) prices. They’re usually estimated empirically by analysing data on changes in fares, patronage, and other control variables (e.g. per capita income or GDP) over time.
There are many studies on fare elasticities from around the world, some of which are summarised in the Australia BITRE elasticities database and this useful summary paper by Todd Litman. NZTA has also commissioned research into the structure of demand for public transport – see e.g. Wang (2011) and Allison, Lupton and Wallis (2013).
These studies don’t always arrive at precisely the same result, but they agree on one key thing: Demand for public transport is relatively “inelastic”. All else being equal, a 10% reduction in fares will increase ridership by less than 10% in the short and long run.
The implication of this is that if a public transport agency reduces fares, it will tend to collect a smaller amount of money from users and hence require a larger subsidy. And, conversely, raising fares can increase overall revenue, albeit at the cost of unintended consequences for increased traffic congestion.
Here’s Litman’s best-guess estimates of elasticities for public transport. The key figures are in the first row – “transit ridership with respect to transit fares” for the overall market. Litman’s estimates a long-run fare elasticity between -0.6 and -0.9. This means that a 10% increase in fares would be expected to reduce ridership by 6-9% in the long run.
Notice that short-run elasticities tend to be smaller, indicating that people take a while to fully respond to changes in prices. For example, if someone’s fares for their bus to work went up significantly, they may tolerate it for a little while but choose to buy a car (or rent a parking space) six months down the line.
Personally, I wonder if Litman’s estimates are a bit on the high side. Figures from Wang (2011) suggest that long-run fare elasticities (in the second row of the following table) are -0.46 in Wellington and -0.34 in Christchurch. This would indicate that a 10% increase in fares would reduce ridership by 3.4-4.6%.
Both of these tables also contain information on how people’s demand for public transport changes in response to other price changes and service changes, which is another interesting topic. Without going into a great deal of depth, I’d note two things:
- First, increasing petrol prices do tend to increase public transport demand, but this effect may be relatively modest. Car ownership, on the other hand, can have a big impact, as people who have already paid the fixed costs to own a car have strong incentives to get as much use out of it as possible.
- Second, improved service quality – meaning better frequency and reliability of buses and trains – has a stronger impact on ridership than lower fares. This has important implications for transport agencies, who are often better off putting their marginal dollar towards upping frequencies.
Lastly, it’s worth considering how this might play out in practice. Let’s assume, for a moment, that fare elasticities of demand are at the low end of Litman’s range, i.e.:
- Short-run fare elasticity = -0.2
- Long-run fare elasticity = -0.6.
Now, let’s consider a hypothetical scenario in which public transport fares are $2 and there are 1,000 daily riders on a given bus route. The public transport agency collects $2,000 in fares every day ($2*1,000 riders).
Now let’s consider what would happen if the agency chose to reduce fares by 10%, from $2 to $1.80. This is obviously great for people who are already on the bus, as they can pay less to get the same service. Daily revenue collected from them drops to $1,800 ($1.80*1,000 riders).
However, the lower fares also attract new riders. In the short run (0-2 years), we predict that a 10% reduction in fares will lead to a 2% increase in ridership (-10%*-0.2). This means that an additional 20 people (1,000 riders*2%) will take the bus and pay a total of $36 in fares every day ($1.80*20).
So far, this is not looking great from a financial perspective. The transport agency has lost $200 in fare revenue from existing riders and gained only $36 from new riders.
Things aren’t much better in the long run, where a 10% reduction in fares is expected to lead to a 6% increase in ridership (-10%*-0.6). This means an added 60 riders who pay $108 in fares every day. Again, this is not enough to cover the loss in revenue from existing riders.
Does this mean that fare reductions are never worth it? Not necessarily – if the reductions in congestion from fewer people driving are sufficiently large, then we should be willing to pay a bit more in subsidies.
A second factor is that different people and different types of journeys respond to higher prices in different ways. In principle, we may be able to increase patronage at a relatively low cost by targeting fare discounts to price-sensitive people. But that is a topic for next time!
What do you make of the data on fare elasticities of demand?
The announcement of Auckland Transport’s new fare policy made me curious about the economics of fare policies, so I’m taking a quick look at them. In part 1 of this series, I argued that 100% cost-recovery isn’t a realistic goal for public transport. While charging public transport users for the full costs of their journey may seem appealing, it will result in the perverse outcome of increased congestion on the roads. In the absence of congestion pricing, subsidising public transport can be a useful “second best policy” to improve the efficiency of roads.
In other words, if you like driving, you should also like public transport subsidies, as they make your life a little bit easier.
However, this principle doesn’t tell us much about how we should price different types of public transport trips. For example, should people pay more to take longer journeys on public transport? Some public transport agencies, like the New York Subway or the Los Angeles PT system, don’t think so – they allow you to ride as far as you want for a flat fare. Others, like the San Francisco BART system and most transport agencies in New Zealand, charge higher prices for longer trips.
To give another example, should people pay more to travel at certain times of the day? Most transport agencies in New Zealand don’t think so – Auckland Transport charges users the same price during peak times and the middle of the day. But other agencies, such as the Wellington’s rail system and the Brisbane public transport agency, do raise their prices during peak times.
So we have some choices available to us. What principles should we use to choose relative fares for different routes, once we’ve decided on an overall level of public transport subsidy?
In my view, it’s appropriate to charge a fare that accounts for the marginal cost of using the network at different times and in different locations. For example, if it costs twice as much to get people between points A and B as it does to get them between points A and C, then the trip between A and B should cost twice as much as the trip between A and C.
If we didn’t do that – i.e. if we set fares at the same level for those two trips – we’d expect people to demand more trips between A and B, which are expensive to provide, and fewer cheap trips between A and C. This can in turn make the whole system less efficient.
Similarly, there may be a case to vary prices by time of day. It tends to be more costly to provide public transport capacity to meet peak demands. This is because it’s necessary to buy buses (or trains) and hire drivers that run for two hours in the morning and evening and sit idle the rest of the time. But it might not be possible to go too far in this direction – after all, putting up peak fares too high means pushing more people back onto congested roads.
So if we set aside time-of-use pricing for the moment, we’re left looking at varying charges for different types of trips. In most cases, this means charging more for longer journeys than for shorter journeys. How can we do this?
One option is to use zone-based fares. This is what Auckland Transport has traditionally done, and what it’s proposing in its Simplified Fares policy. The advantage of zones is their simplicity and transparency. You can pinpoint your origin and destination on a map, and know exactly how much you will pay:
However, zone-based fares can result in some odd outcomes near boundaries. For example, under the zones above, if I travelled from Henderson to New Lynn – a four station journey – I’d pay for a single stage. But if I travelled from Fruitvale Road to Avondale – only two stations – I’d have to pay for two stages. Does it really make sense to pay more for a shorter journey just because it crosses a line on a map?
Perhaps it doesn’t. So one alternative would be to move to a fully distance-based fare structure. In effect, you’d pay based on the number of kilometres travelled, regardless of where you were going or how many transfers you made in the process. This has advantages – it eliminates boundary effects, for one – but it’s administratively complex and potentially confusing for users. For example: what happens to paper tickets, which are important for visitors and casual users?
How do you think that we should set prices for different types of public transport trips?
A few months back, Auckland Transport put out its new fare policy for consultation. The draft policy, which they call Simplified Fares, has two main elements:
- Standardised fare zones that ensure that journeys within or between zones cost the same regardless of whether you’re travelling by bus or rail [ferries are excluded]
- No transfer penalties between services, which is a key element in enabling a frequent connective network.
Those are indeed simple principles, but developing and implementing a fare policy is seldom simple. So the whole thing got me thinking: Why do public transport fares work the way they do? And could we do things differently?
As I’m curious, I figured that I should take a quick look at the economics of fare policies. Part one of the series looks at the biggest-picture question: Why do we subsidise public transport?
First, some background. In most developed-world cities, public transport systems are subsidised by taxpayers. Users pay some of the operating costs – ranging from as low as 10% to as high as 80% – but seldom all. In New Zealand, the national farebox recovery policy requires all regional transport agencies to cover 50% of their public transport costs from fares. However, data from the Ministry of Transport suggests that some agencies are closer than others to this target:
Is 50% the right number for all regions? I don’t know – and the answer depends in part on what other goals we’re trying to accomplish with public transport pricing. But it’s clear that some level of subsidy must be provided in order for the entire transport system to work efficiently.
To see why, we need to take a look at what economists call “second-best pricing”. According to Wikipedia, it can be desirable to impose a subsidy to “offset” for an uncorrected market failure elsewhere:
In an economy with some uncorrectable market failure in one sector, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In theory, at least, it may be better to let two market imperfections cancel each other out rather than making an effort to fix either one.
In transport, we have a situation where people have multiple options for getting around. They can drive, take the bus (or train), cycle, etc. In this situation, a price change in one market – say, a fare increase for public transport – can encourage people to switch to another mode instead of paying more.
As I argued in a recent post on congestion pricing, road space is usually not priced “efficiently”. All road users pay fuel taxes or road user charges based on the total number of kilometres driven or litres of petrol used. But they don’t pay more to drive on busy roads, where they impose delays on other drivers. As this diagram from a 2012 UK study on the external costs of driving shows, the last 10-20% of car trips impose significant costs on society.
Public transport can play a useful role in smoothing off the big spike at the right hand side of that chart, by providing a more space-efficient option for travelling on popular, congested routes. Another way of saying that is that in the absence of congestion pricing (and in the presence of other subsidies for driving, such as minimum parking requirements), higher public transport fares can result in a perverse outcome – additional congestion and delays for existing road drivers. This is shown in the following diagram:
Effectively, a failure to price roads efficiently means that we have to provide subsidies for public transport to prevent car commutes from being even more painful than they currently are. Public transport subsidies are, in that sense, subsidies for drivers. By making your neighbor’s bus fare cheaper, they in turn make your drive to work a bit easier.
Finally, it’s worth considering how we got into this situation. 80 or 100 years ago, public transport systems tended to cover their operating costs with fares. For example, Auckland’s tram system was profitable, if in need of maintenance and refurbishment, up until its removal in the mid-1950s. (Mees ref?) This changed, in large part, due to the introduction of subsidised motorways.
This article by Joseph Stomberg at Vox describes how the US interstate highway system was developed in the 1950s as an explicitly subsidised – i.e. not tolled – transport mode:
The first step was changing how roads were funded. In the 1930s, there were already privately owned toll roads in the East, and some public toll highways, like the Pennsylvania Turnpike, were under construction. But auto groups recognized that funding public roads through taxes on gasoline would allow highways to expand much more quickly.
They also decided to call these roads “free roads,” a term that was later replaced by “freeways.” Norton argues that this naming shift was essential in persuading the federal government — and the public — to shift away from tolls. “It started with calling the roads drivers pay for ‘toll roads,’ and calling the ones that taxpayers pay for ‘free roads,'” he says. “Of course, there’s no such thing as a free road.”
In other words, the “original sin” of transport subsidies was the construction of non-tolled highways paid for out of general tax revenues. This choice led in turn to a situation in which we must adopt “second best pricing” in public transport, and offer an offsetting subsidy. I’m not necessarily opposed to this… but it does mean that I am skeptical to complaints that buses and trains are subsidised.
What do you think we should do about public transport pricing?
If you haven’t already make sure you submit of AT’s simplified fare proposal. It’s a nice, quick and easy form to fill in so doesn’t take long. I’ve talked about it here and in general I think the changes are good although there are a few little improvements I think are needed.
I think the boundaries suggested are good although the overlap areas need to be larger to help address the issue of short trips over a boundary being very expensive. Another option – although one that is likely to be more complex to explain is a short distance fare.
I think the standard HOP fares proposed are good and will see prices reduce for most people which is a pleasant surprise. Public Transport getting cheaper and more useful is bound to see huge increases in usage.
I think more work is needed on the pass options for which AT say one will be available. This is ok for the likes of myself who travels on PT a lot and over long distances but the changes work against those who only do shorter trips. In addition I’m disappointed that the monthly pass is going up in price when almost all other fare options are decreasing.
I like how AT have said that in the future they will move to daily and weekly caps however again I’m concerned the same issue will exist of the cap being very high and only benefiting a few people. AT say they are also planning a Family Weekend pass which is good.
I would also like to see more done to integrate ferries into the fare structure. I realise AT are a bit hamstrung in this due to Fullers running the Devonport, Stanley Bay and Waiheke services commercially however as a monthly pass user I find it absurd that I can take unlimited trips on buses and trains but that it doesn’t cover me if I want to use a ferry – which is the option I have if I want to go home via the city with my bike.
So if you haven’t already go to the AT site and fill in the form to give your feedback. It closes at 4pm today.
On Monday Auckland Transport launched consultation for an amended Regional Public Transport Plan and that included a large section on integrated fares – or Simplified Fares as AT call them. Since writing the post AT have released a lot more information about their Simplified fares proposal so I thought I was worth while addressing the topic in more detail.
A key point on simplified fares is that you are charged based on your journey, not what services you use – with the exception of ferries. They define a journey as
- up to 3 trips on buses or trains,
- up to two transfers, as long as you tag on within 30 minutes of tagging off your previous service,
- complete your travel within 2 hours.
And example they give is someone who might travel from Albany to Newmarket taking a bus and a train. Currently it would be treated as two trips and be charged two sets of fares – albeit with a 50c transfer discount. Under Simplified Fares it would be a single journey and only charged a single fare.
Following the introduction of Simplified Fares it will be interesting to see is how they report on patronage and if they change to reporting journeys or if they just keep reporting boardings – preferably they’ll report both.
The zones AT are proposed are as I showed the other day.
As mentioned at the time I think a little more work is needed on the zone boundaries, perhaps having all of them them overlap by 1-1.5km on all boundary lines to help address the issue of short journeys across a boundary being penalised heavily. As an example (below) the 195 and 209 services currently travel down Godley Rd in Green bay and then on and through Blockhouse Bay. If someone was to get on the bus on Godley Rd and travel to Blockhouse Bay they would have to pay a two zone fare.
Another alternative would be for AT to introduce a short journey fare which is how the issue is dealt with in some other cities – such as Perth.
There’s one other feature on the map that’s bound to cause some concern and complaint and that is the boundary of the city zone compared to the current stage one zone. This appears to affect just south of Mt Eden and Orakei train station and is indicated on the map below with a black dotted circle. It means trips from those locations to the city will now pay a two zone fare whereas they current pay just a single stage fare. Depending on the fare levels AT set that could see costs for those users almost double.
One aspect of the information that has surprised me is that AT have given an indication as to the prices they’ll charge for the zones. The indicative fare table is below.
It seems most passengers will be better off with the changes – or at least pay roughly the same as they do now which is a good result from AT. They describe the main impact of the changes as:
- Commuters to and from the city to pay similar fares
- Longer distance trips to be cheaper
- Trips across zones to be substantially cheaper
- A small increase for short trips
For me a trip to town using HOP would drop from 5-stages for $6 to 3-zones for $5. Many other journeys I randomly checked – other than those mentioned above – seem to be in similar situation of becoming cheaper than they are today providing the person is using HOP. Those savings also get much larger compared to today if your trip involves a transfer. AT have a couple of example journeys here including the Albany to Newmarket one mentioned earlier.
It’s a different story if cash is being used and so as I’ve mentioned before, it will be critical that AT look for more ways to get HOP into peoples hands. One suggestion I’ve made in the past would be having bus drivers keep a stash of cards pre-loaded with regular the regular note denominations. If a note is presented they quickly hand over the pre-loaded card and tell the person to tag on and their change will be on the card.
AT have given some more detail about their plans for other fare products such as daily/monthly passes. There will be a single daily and monthly pass priced at $18 and $200 respectively. By comparison currently those passes have a zone based element to them which means there are some lower priced monthly pass options if you aren’t travelling as far. It would be a shame to see those lower priced monthly passes disappear so perhaps AT should look at something like a two-zone pass which as the name suggests is restricted to travelling through two zones.
The issues with ferry fares sitting outside of the rest of the fare system are not new however as happens now AT say ferry travel will be included in the future daily pass. That’s good but it seems that at the at the very least AT should also include ferry travel in the monthly passes. AT have also said they want to introduce ferry monthly passes and family passes.
Overall I think the changes are positive and for most will be cheaper and easier than what exists today. That should be useful for further growing patronage. It’s just a shame they we won’t see them implemented till mid-2016.