Transport Operations PDF

PD03
Transport Operations
AO/QUA/0227– V2.2
Open University of Mauritius - Centre Resource Copy - March 2017
Acknowledgements
We are grateful to the following contributors for their authorship of the material contained
in this document.
Author: Kieran Goddard (FCILT)
Verifier: Tim Polkinghorne (FCILT)
© Chartered Institute of Logistics and Transport (UK)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of The
Chartered Institute of Logistics and Transport (UK).
AO/QUA/0227 – V2.2 II
Introduction to Study
Welcome to the study guide for the Unit PD03 Transport Operations, which is intended to
assist learners in successfully completing the CILT(UK), Level 5 Professional Diploma in
Logistics and Transport.
These icons represent key activities to be undertaken – specific activities have been set to
assist learning and references are made to the recommended textbook. Keywords and
important information are reinforced, where appropriate. The aims are clearly set out at the
beginning of each section and key benchmarks are listed on completion of these sections
to enable you (the learner) to monitor your own progress.
Key to icons:
 Tasks/Distance learning essays
 Case study
 Suggested reading
 Reading List
Key Text Books:

Atrill, P., (2011). Financial Management for Decision Makers. 4th ed. Prentice Hall, ISBN:
9780273702498.
Banister, D., et al, (2000). European Transport Policy and Sustainable Mobility. London:
Spon Press. ISBN: 9780415231893.
Brigham, E. F. & Ehrhardt, M. C., (2010). Financial Management: Theory and Practice.
Harlow: South Western. ISBN: 9780538746625.
Button, K., (2010). Transport Economics. 3rd ed. UK, Edward Elgar. ISBN:
9781840641899.
Emmett, S. & Wright, P., (2011). Excellence in Public Sector Procurement. UK, Cambridge
Academic. ISBN 9781903499665.
AO/QUA/0227 – V2.2 III

Study Techniques:
You should manage your time and set realistic targets for each element of the
specification. This unit consists of 90 guided learning hours. This figure is only a guide and
learners must be aware that more time may be needed in some circumstances.
Work in quiet areas, with minimal distractions.
Make clear notes and bullet points where appropriate – make use of the highlighted
sections and icons within the course manual to guide you to the key information. Refer to
the recommended reading as directed. Develop all core information with wider reading.
Always remember that you will learn better when you have support available and that you
follow the learning process of reflecting, reconstructing alternative ways and then revising
what is done or thought about the subject. Support can be available via the Institute’s
Knowledge Centre as well as from colleagues and friends. Learning skills are important
also, more information is available in the bibliography at the end of this unit.
Contact the Knowledge Centre at the Institute’s Corby UK head office for a
comprehensive source of logistics and transport information that will help and
support you throughout your learning.
Opening Times: 09.00 to 17.00hrs (Monday – Friday)
Tel: +44(0)1536 740167
Fax:+44(0)1536 740102
E-mail: knowledge@ciltuk.org.uk
Web-Site: www.ciltuk.org.uk
AO/QUA/0227 – V2.2 IV
Contents
Introduction to Study ........................................................................................................... III
Key Text Books:.................................................................................................................. III
Study Techniques: ............................................................................................................. IV
Contents ............................................................................................................................. V
List of Tables/Figures ........................................................................................................ VI
Abbreviations .................................................................................................................... VII
Course Overview ............................................................................................................... XI
1. The Nature of Transport ....................................................................................... 13
1.1 Introduction ........................................................................................................... 14
1.2 Contribution to Socio-economic Development ...................................................... 15
1.3 Nature of Transport and Supply and Demand ...................................................... 19
1.4 Transport Modes .................................................................................................. 29
1.5 The Seamless Journey ......................................................................................... 35
1.6 Transport Industry - Structure and Ownership ...................................................... 38
2. The Regulation of Transport ................................................................................. 65
2.1 Regulatory Bodies ................................................................................................ 65
2.2 Economic De-regulation and Regulation .............................................................. 72
2.3 Quality Regulations and Requirements ................................................................ 82
2.4 Monopolies and Cartels ........................................................................................ 90
2.5 International Transport Requirements ................................................................ 103
3. Operation of Transport........................................................................................ 109
3.1 Efficient and Effective Utilisation ......................................................................... 109
3.2 Replacement and Investment Appraisal ............................................................. 129
3.3 Costing and Pricing ............................................................................................ 132
3.4 Routeing and Scheduling.................................................................................... 139
3.5 Different Services ............................................................................................... 144
4. Resourcing Transport ......................................................................................... 149
4.1 Outsourcing ........................................................................................................ 149
Distance-learning essays ................................................................................................. 160
Financial Calculations ...................................................................................................... 162
Bibliography ..................................................................................................................... 164
AO/QUA/0227 – V2.2 V
List of Tables/Figures
Table 1.1 Registered Company and Partnership ........................................................... 43
Table 1.2 Public and Private Limited Companies........................................................... 46
Table 2.1 Tendering ..................................................................................................... 100
AO/QUA/0227 – V2.2 VI
Abbreviations
AIL Abnormal Indivisible Load
AM Assembly Member (National Assembly for Wales)
BA British Airways
BAA formerly British Airports Authority
BOSG Bus Operators Subsidy Grant
BR formerly British Rail
BS British Standards Institute
BTC British Transport Commission
CAA Civil Aviation Authority

CC Competition Commission (Former Monopolies & Merger Commission)
CIF Certificate of Initial Fitness
COF Certificate of Conformity
CTA Community Transport Association
DDA Disability Discrimination Act (1995)

DfT Department for Transport (UK)
DiPTAC Disabled Persons Transport Advisory Committee
DTI Department of Trade and Industry
DVA Driver & Vehicle Agency (NI)
DVLA Driver & Vehicle Licensing Agency
DVSA Driver and Vehicle Standards Agency
EA Enterprise Act (2002)

EA Equality Act (2010)
EFTA European Free Trade Area
ESOP Employee Share Ownership Plan
EU European Union
FRND Fair, Reasonable & Non-discriminatory

FTA Freight Transport Association
AO/QUA/0227 – V2.2 VII

HGV Heavy Goods Vehicle
HMRC Her Majesties Revenue and Customs
IMO International Maritime Organisation

ISO International Standards Organisation
ITT Invitation to Tender
JAUPT Joint Approvals Unit for Periodic Training
KPI Key Performance Indicator
LA Local Authority
LEA Local Education Authority
LGV Large Goods Vehicle
LTD Private Limited Company
LTP Local Transport Plan
MCA Maritime & Coastguard Agency

MEBO Management Employee Buy-Out
MEAT Most Economically Advantageous Tender
MLA Member of the Legislative Assembly (Northern Ireland)
MOT Ministry of Transport
MSP Member of Scottish Parliament
NATS National Air Traffic Services
“O” licence Operator's licence (road freight/road passenger)

OFT Office of Fair Trading
OPRAF Office of Passenger Rail Franchising
ORR Office of the Rail Regulator
P&R Park and Ride

PCV Passenger Carrying Vehicle
PEL Protected Expenditure Limit
PI Public Inquiry
AO/QUA/0227 – V2.2 VIII

PLC Public Limited Company
PPG Planning Policy Guidance
PQQ Pre-Qualification Questionnaire
PSV Public Service Vehicle
PTA Passenger Transport Authority
PTC Public Transport Company
PTE Passenger Transport Executive
PTP Public Transport Plan
PVS Passenger Views Scotland
OJEU Official Journal of the European Union

QP Quality Partnership
RDC Rural Development Commission

RHA Road Haulage Association
RSG Revenue Support Grant
RTDF Rural Transport Development Fund
RTA Road Traffic Act
RTI Rural Transport Innovation / Rural Transport Initiative
RTP Regional Transport Partnership
RTP Restrictive Trade Practices Act (1976)
RTPC Restrictive Trade Practices Court
RUCC Rail Users' Consultative Committee
SAD Single Administrative Document

SLC Substantial Lessening of Competition
SQP Statutory Quality Partnership
SSA Standard Spending Assessment
STGO Special Type General Order
TAN Transit Advice Note

TC Traffic Commissioners
TDG Transport Development Group
TfL Transport for London
THC Transport Holding Company
AO/QUA/0227 – V2.2 IX
TOC Train Operating Company
TPP Transport Policies and Programme
TSG Transport Supplementary Grant
TT Transport Tribunal (Upper Appeals Tribunal)
TUPE Transfer of Undertakings (Protection of Employment) Regulations 2006
UK United Kingdom of Britain and Northern Ireland

UKBA UK Border Agency
UN United Nations
VI Vehicle Inspectorate
Visegrad A preferential trade area of countries adjacent to the EU
VQP Voluntary Quality Partnership
AO/QUA/0227 – V2.2 X
Course Overview
This unit presents the key generic aspects of transport operations. It
provides the basis for professionals in the transport industry to understand
the principles of effective, safe and legal movement of goods and people
by the principal modes in a national and international context. The unit
covers the nature of transport, an appreciation of its supply and demand
characteristics and the different ways in which the transport product can
be delivered effectively and efficiently.
The Unit consists of these elements:
1.0 The Nature of Transport

2.0 Regulation of Transport
3.0 Operation of Transport
4.0 Resourcing Transport
AO/QUA/0227 – V2.2 XI
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AO/QUA/0227 – V2.2 XII

1. The Nature of Transport
Learning Outcomes
After studying this element you will be able to:
 Understand the relationship between transport and economic

development.
 Understand the role of government in transport.
 Understand the nature of supply and demand in transport.
 Understand the product of transport and how it is delivered by the

different modes.
 Understand the concept of market segmentation in the transport of

goods and people.
 Know the characteristics of modes of transport used for the carriage of

goods and people.
 Understand the level of integration and the interchange requirements

needed to produce a “seamless journey”.
AO/QUA/0227 – V2.2 13
1.1 Introduction
Before considering the theory and
practice of managing transport
operations, it is necessary to
consider the characteristics of
transport provision itself as these
obviously have a direct bearing on
its operations. Transport provision
has developed as a necessary
element of economic development which has, in itself brought the need.
Without transport acting as the link between social and cultural groups and
peoples social interaction and thus social development could not have
taken place in the way in which it has. Transport has allowed the
movement of goods and people, and with that movement has also allowed
the exchange of ideas and technologies, both essential in the socio-
economic evolutionary process.
Because of the nature of transport, we examine first all the implications of

the fact that transport is a service industry, i.e. it provides a service and
not a physical product to its customers. The characteristics of a service
organisation create certain demands upon its management. All forms of
transport share these characteristics. Other examples of service industries
are banking, insurance, health care, catering (restaurants and hotels), and
the legal profession.
Within the transport industry, for instance, a passenger airline is in the

business of meeting (serving) its customers' needs by transporting them
from place to place by air, and while doing so, meeting their physical
needs. Likewise, haulage companies are in the business of providing the
service of moving consignments, be they raw materials, components, or
finished products.
14 AO/QUA/0227 – V2.2
1.2 Contribution to Socio-economic Development
1.2.1 Economic sensitivity

Service companies lie at the end of the economic chain which runs from
primary raw material and agricultural production through manufacturing
and construction, to the final product. As service companies are so much
dependent upon the actions of others, usually beyond their control, there
is simply more chance of things going wrong somewhere along the line.
With so many business factors being beyond a service company's control,
it is imperative that those factors which are within it are used to optimal
effect.
In addition, in recent years, as the service sector has diversified and

grown, it has become more important to the economy. As a result, there is
greater awareness of levels of quality within different parts of the service
sector. With this growth in awareness has come increased expectations
and demands from consumers, and a tendency to compare one sector
with another in terms of quality.
This consumer driven sensitivity is ever present in an industry where

demand is derived, and a vast array of variables are able to influence both
supply and demand levels, and where technological advances in recent
years have ensured that the evolution of logistics and transport suppliers
has been rapid and radical.
1.2.2 The producer/supplier-consumer gap

Transport is the essential bridge of the producer-consumer gap, and is as
relevant to people and services as it is to goods.
With the development of canals, railways, and motorised road transport,

people no longer had to live close to their workplace. Equally,
manufacturers no longer had to restrict their output to products that could
be made just from local resources, or their distribution just to the
immediate vicinity.
AO/QUA/0227 – V2.2 15
As far as people are concerned, an employee is a supplier (of skills). His
employer is the consumer of those skills. The employee will use transport
to get to his workplace, and to "bridge the gap" between where he lives
and where he needs to be to do his work. Similarly, when someone needs
to go to, say, the supermarket, a dentist or the nightclub, some form of
transport is likely to be used to bridge the gap between where the
consumer is, and the supplier.
There may also be gaps in relation to social requirements. This includes

access to affordable shopping, health care, leisure, education and
employment. Where this is missing, the gap is often referred to as ‘social
exclusion’.
As far as goods are concerned, these days, manufacturers can obtain

both their raw materials and components from a variety of often quite
remote sources for use at their main production site. In turn, the finished
goods may need to be distributed far and wide. Transport provides the
link, bridging the gap between where raw materials are found and where
they are needed, and between where goods are produced and where they
will be used.
1.2.3 Professional expertise

All organisations depend upon the expertise of their employees to stay in
business. However, the level of training and professionalism of those
employees will depend upon and reflect the organisation’s own input into
developing that expertise. In addition, the high level of expertise of many
employees in the service sector means they also feel they belong to a
profession rather than "the workforce". People having high levels of
expertise, usually have higher levels of expectations, a greater awareness
of circumstances around them, and a certain pride in the job. In turn, this
often leads to a greater readiness to question management decisions and
to higher levels of dissatisfaction and disenchantment if things go wrong
due to circumstances beyond their control or because of the actions of
others.
16 AO/QUA/0227 – V2.2
Today, we see an ever more mobile workforce of professionals who are
prepared to travel further and move between companies more readily in
order to gain experience and to enhance their professional portfolio. The
advent of many third party operations carried out under 3-5 year contracts
has also brought about an understanding that no position is for life any
longer and a professional must be prepared to accept change and
relatively short term positions if they are to be successful logisticians or
transport professional in what is a very aggressive and competitive
market. However, legislation, such as, Transfer of Undertakings
(Protection of Employment) Regulations 2006 (TUPE) will give protection
to some employees.
1.2.4 Monitored professional standards

The sensitivity of products and services offered by many industries and
organisations requires that standards be set and monitored. This is done
either internally, or externally by the professional bodies or government
agencies, and is undertaken either voluntarily or as required by law. The
law for example, has the Health and Safety Executive, and the
Department for Transport (DfT) to enforce the law in respect of vehicle
safety through its Driver and Vehicle Standards Agency (DVSA), a part of
which was formerly known as the Vehicle Inspectorate.
In addition, certain professional organisations set standards for their

industry, through codes of professional conduct and the criteria by which
they accept members. The Chartered Institute of Logistics and Transport
(UK), for example, promote educational standards among supervisors and
managers employed in all aspects of logistics and logistics planning and
for all modes of freight and passenger transport.
Without professional standards to enhance provision and ensure levels of

supply quality transport would be unable to develop in a structured way
and would simply become a servant to market forces without essential
standards and controls. Over the centuries, and even as recently as the
1960s, prior to the 1968 Road Traffic Act, it may be argued that transport,
particularly roads transport, was uncontrolled and subject to market forces
alone where profit was the driver and quality controls did not exist for fleet
operators.
AO/QUA/0227 – V2.2 17
Since the 1960s, there has been an explosion in third party transport
provision which has brought the customer and the customer needs into
play as factors to be considered when operating transport.
EU directives relating to procurement has also introduced standards that

are more stringent for a supplier to the public sector. A supplier tendering
for public contracts will be bound with ‘conditions of contract’ and will need
to demonstrate they have a quality assurance policy before they can even
tender for the contract. This may also be the case in the private sector.
1.2.5 Growing importance of customer opinions

No organisation can succeed without developing products or services
which take account of the tastes, needs, wants, and income of its targeted
customers. As customers themselves become more knowledgeable, and
discerning, they have higher expectations of the product/service.
The large retail chains rely upon third party transport providers not only to
deliver and distribute goods but to represent the high street brand and to
become synonymous with the brand, or brands, they are contracted to
carry. The public rarely appreciate that many of the vehicles travelling in
high street retail livery are not owned by the retail outlet or organisation
but are operated on their behalf by a third party transport provider.
Because of this, any poor practice, action or act committed by the driver of
a liveried vehicle will reflect adversely upon the brand and not necessarily
the transport operator. This leads to exceptionally stringent service level
agreements being put in place in order that the customer is able to protect
the brand to the maximum extent, to safeguard sales and
image/reputation.
Transport is particularly susceptible to the consequences of these growing

expectations. Increasingly, in recent years, market research has been
used to develop transport services to meet customer expectations
alongside the already mentioned ever-more demanding contract
conditions.
18 AO/QUA/0227 – V2.2
 Task 1.1
Should a service provider simply respond to market forces or are there

other areas where they can add value through innovation? Discuss this
statement, and how will it benefit the wider social and economic
environment?
1.3 Nature of Transport and Supply and Demand

As transport is essentially a service industry, let us consider what features
are especially associated with service companies which make them
different from other industry sectors.
1.3.1 Intangible
The product of a service industry is both intangible and perishable. It
cannot be transported, weighed, held or stored, nor measured by its
appearance, weight, length, taste or feel; nor can it be resold, unlike a
manufactured product. However, customers will still judge, value, criticise,
and compare that product with those of the competition. They will make
their judgements on the attitude and performance of the staff who deliver
the service.
The intangible product in a service industry is made up of a combination of

processes, for example, the movement by sea of a container of goods
from the UK to Hong Kong will involve the following:
 the customer contacting the freight forwarder

 the forwarder arranging delivery of a container to the customer's
premises
 collection of the loaded container
 delivery to the container terminal
 loading on board ship
 clearance through customs
 receipt, clearance and delivery in Hong Kong.
The product of the freight forwarder is, therefore, a process consisting of

several interactions, anyone of which could disrupt the operation.
AO/QUA/0227 – V2.2 19
Throughout this process, the customer dispatching the goods will rely on
all the intermediate stages between his premises and the customer in
Hong Kong to be dealt with efficiently, and for the goods to arrive safely,
on time, and undamaged.
As you can appreciate in such a process, there are in fact a number of

customer/ supplier relationships (the dispatching manufacturer/freight
forwarder, freight forwarder/shipping line, shipping line/forwarder/customs,
etc.). However, as far as the dispatching manufacturer is concerned, the
product (service) is provided solely by the forwarder; he is not interested in
the many subsequent interactions.
The collection .and delivery of a consignment is either as promised at the

time the task was booked or not, i.e. the collection is when promised and
the delivery is on time and undamaged. There is no second chance.
1.3.2 Simultaneous production and consumption

Purchasers of consumer products,
e.g. cars, televisions, etc., usually
have no influence on the
production process. However, the
product of a service industry can
only be produced at the very
moment it is consumed and often it
also involves participation in a
social interaction. For example, a
stay at a hotel, a meal in a restaurant or a journey by rail, can only be
consumed while the customer is actually staying at the hotel, eating, or
travelling.
In a manufacturing industry, if substandard goods are stopped through

quality checks, they can be reworked, or rejected (scrapped). They will
not then reach the customer, and that customer need never know or
experience that inferior product, or even know of its existence. The
service company enjoys no such luxury, as the act of serving the customer
is simultaneous with consumption; there is no second chance to get things
right. When a person stays at a hotel, for example, he can only be
provided with that hotel's service while he is actually staying there.
20 AO/QUA/0227 – V2.2
1.3.3 Derived demand
As mentioned earlier, in order to see the role of transport in its real
perspective, we need to consider why we have it. Most of us use the
various modes because we want to achieve something else, i.e., to move
someone or something to another place in order to fulfil some specific
purpose there. Only occasionally is the activity of using transport
important in itself, for instance it is an integral part of the tourism industry
(see below).
Thus a very important characteristic of the demand for transport is that it is

almost always linked to other demands" i.e. it is derived from them. If the
other demand drops, or rises, the associated demand for transport is also
affected.
However, even though the demand for transport is derived, this does not
mean that it is not itself important. In fact, it is very important indeed to the
economy.
It is very labour intensive. That is to say, it requires a very high number of

people, uses massive amounts of energy and accounts for about 10% of
the UK’s GDP. Compared to other industries, the uses and rewards need
to be on grand scales in order that transport, in all its forms, is able to
function properly.
1.3.4 Supply and demand

Some characteristics, with regard to the supply of and demand for
transport, are common to all the modes. Other special characteristics are
often unique to an individual mode. We shall consider here the common
aspects and then go on to look at each mode to see what distinguishes it
from the others.
Demand characteristics
The nature of transport as a derived demand is common to all modes and

causes particular problems for transport operators and the providers of
associated "support services".
AO/QUA/0227 – V2.2 21
Few goods and services are needed on a regular or even basis. When
demand is high, it is referred to as being at a "peak"; when it is low, it is in
a "trough". The most obvious example of this is the pattern of passenger
movement in towns and cities. The peaks in demand for vehicles, use of
road or track space and all forms of associated services occur when
people are travelling between their home and workplace, and back again.
Outside these peak times, the demand is in a trough.
Supply characteristics
Fluctuation
You will have noted that freight transport is indeed also subject to peaks
and troughs in demand. These are linked to the variations in demand for
goods, which do not cause difficulty for manufacturers, as their production
facilities are matched to the average demand for their products. In
periods of trough, they can put the additional output (over-supply) into
storage ready for use in the periods of peak demand.
Things are not so simple, though, for the provider of transport. There are
two characteristics which apply, in whatever mode.
Non-storability
A particular problem with transport supply is that it cannot be stored; it is

instantly perishable or "non-storable".
If a bus or train is provided for a particular trip but not all the tickets are
sold, the operator has only two choices. Either the trip is cancelled, which
is bad for the company's image, or the vehicle departs with some empty
seats (excess capacity), which means lower revenue (income) for the
operator as there is none from an unsold ticket. For example, bus
operators will provide double deck vehicles that they anticipate will meet
‘peak’ demand. For much of the remainder of the time, they will run with
few passengers on board but incur high operational costs because the
service cannot be stored.
22 AO/QUA/0227 – V2.2
This basic fact of transport supply applies equally to freight services. The
owner of a container vessel cannot cancel its passage simply because it
does not have a full cargo load. It must go with that empty, non-earning
space (excess capacity), or potentially lose the goodwill and future
business of the shippers who have booked space. Furthermore, the
return journey may be carried out with little or no cargo.
Indivisibility
The problem of non-storability is linked to the "indivisibility" of transport

supply. Transport comes in "fixed capacity units", in other words all
vehicles have a set amount of space or seats (a limited payload). If there
is additional demand but the vehicle is full, its operator again has only two
choices: ignore it, and lose the extra business to a competitor, or put on
another vehicle which will probably then run with less than a full load.
The interaction of demand and supply
As we have seen earlier, all transport organisations react to market trends.

This is regardless of the fact, that some private companies receive public
money to run their freight and passenger services (e.g. some Scottish
Islands ferry and air services) whilst others do not. That is to say, that
transport companies recognise consumer needs and supply what people
want. They respond to demand. The state, as already mentioned,
provides some services that the market is unable or unwilling to provide.
However, the transport undertaking may introduce some form of subsidy

themselves to loss making services in order to protect their overall market.
This is often referred to as a ‘Loss Leader’. For example, a bus operator
may find it unprofitable to operate a service during the evening and
weekends, but still provide the service because if a competitor was
awarded a public contract to operate the service, it may give them some
leverage into a new market place through loyalty and market knowledge.
AO/QUA/0227 – V2.2 23
The basis of the market system is the interaction of the forces of demand
and supply:
 Demand is the willingness and ability of consumers to purchase goods

and services they want. This implies that consumers not only desire the
product, but also that they have the money to be able to buy it.
 Supply is the willingness and ability of producers to meet these
demands. Again, this implies that suppliers not only want to produce
the goods and services, but also have the necessary combination of
resources including finance, and an appropriately skilled workforce, to
ensure that production is feasible.
When suppliers and consumers transact they do so by entering into legally

enforceable agreements, or simple contracts.
The market is based on the belief that individuals will seek to maximise
their personal satisfaction by demanding the combination or products and
services that will give them the greatest level of satisfaction for the money
they have.
The market system is based on the following ideas:
 It gives freedom to the individual consumer to spend money as they

wish.
 It indicates consumers’ demands, needs to producers, and so ensures
production of what consumers actually want. In transport terms, this
mean providing the services demanded.
 It encourages competition between producers and so leads to a greater
level of efficiency in the production of goods and services.
 It adequately rewards the most efficient organizations, through high
profits and the best workers through high wages.
The market mechanism is not only relevant to the private sector of the
economy; it has also become an increasingly important concept for the
public sector. The market mechanism has assumed a more important role
through the public sector as public companies have been made to act as
both suppliers and consumers. This is where the phrases external and
internal customers originate, where individual departments treat each
other as suppliers and consumers.
24 AO/QUA/0227 – V2.2
1.3.5 Transport supply and demand
Supply and demand are described in terms of elasticities. This means the
amount of flexibility (hence elasticities) people have in demanding or
supplying a particular good or service. For example, demand is said to be
inelastic when price alters by a greater proportion than the proportion of
people who cease to demand that product. This is a very important
concept for transport companies.
An application of this can be found in the pricing policy adopted by many

Train Operating Companies (TOCs). Take for instance a person who
needs to travel on a peak time service from the north of England or
Scotland to arrive in London by a certain time. If that customer had no
alternative but to travel on that train, he would be compelled to pay a
standard fare rather than a saver or super-saver fare. In this way, the
TOC is maximizing its revenue at times when people are forced to pay a
high fare. This concept also applies to commuters. If, however, a person
can choose when to travel because the arrival time is not critical, or they
can accurately predict their required times of travel, they are more likely to
travel off-peak and pay a saver/apex or super-saver/super-apex fare.
Concerning supply, in London, commuter trains are normally at maximum

capacity at peak times. At off-peak, frequency and capacity are often
reduced. Peak time operation is the most expensive time for transport
operators to supply capacity, normally because it is one-way traffic, i.e.
inbound during the morning and outbound during the evening peak. At
off-peak, demand reduces considerably, which is reflected in less capacity
being supplied and discounted fares offered as a way of attracting
customers.
A transport manager’s role is to identify what the demand is for his

services and to supply capacity in accordance with that demand. It is
easier to talk in terms of passengers but the same rules apply to the
movement of freight. Seasonality is a big problem, harvest time for
agriculture, religious festivals for the movement of goods, e.g. at
Christmas and at Easter to a limited extent. If demand exceeds supply,
prices will rise; if there is over supply, i.e. too much capacity, prices will be
reduced. It is the balance of the two called the equilibrium in economics,
AO/QUA/0227 – V2.2 25
that transport operators try to achieve.
1.3.6 Consumer expectations

In a manufacturing company, usually, only the sales force deal directly
with customers. However, in many cases even the sales force of the
manufacturer does not deal directly with the actual consumer. For
example, most electrical consumer goods (washing machines, televisions
etc.) are sold by high street stores, which are independent of the
manufacturer.
However, in a service industry, the majority of the productive workforce will

have direct contact with customers. In fact, research shows that 70-90%
of service companies' workforces come into direct contact with their
company's customers. This is because the process of providing the
service is one in which the employee and customer play interdependent
roles.
The importance of customer contact staff cannot be understated.

Customers develop perceptions of a company from their contact with staff.
Will that contact imply efficiency, friendliness, helpfulness or the opposite?
In service interactions, questions of price, and the exact specification of
the service can be secondary.
1.3.7 Customer satisfaction

Having total customer
satisfaction is, first, impossible
and, second, the quickest road
to insolvency for the
organization which tries to
achieve it. This does not mean
there should be a lack of
customer awareness but rather
a pragmatic approach to achieving maximum customer satisfaction given
the restraints and constraints of business.
To illustrate the difficulty of satisfying customer needs consider the

following distribution problem.
26 AO/QUA/0227 – V2.2
 Case study
A village shop, selling a whole range of different products, is supplied by a

reputable national wholesaler. The shop keeper, concerned that money
tied up in excessive stock cannot generate profit for the business, devises
his own inventory control system. Having over time analysed customer
demand and sales of his products, choose which products to continue to
sell and which to discard, and decides on a daily ordering and delivery
system, a kind of “just in time” (JIT) policy. This is based on keeping a
minimum stock level and hoping that the wholesaler will always have
available what he requires.
He contacts his supplier, who delivers to the village once a week, and
informs him that he wants a daily delivery and that the quantities (and thus
their value) will be a lot less that the present weekly delivery. Without
hesitation, and much to the shop keeper’s surprise, the wholesaler turns
down the request but advises him to consider collecting his own products
on a “cash and carry” basis using his own transport. On contacting an
alternative supplier with the same request, the shop keeper gets the same
response.
Why is the wholesaler unwilling to cooperate? Believe it or not, this

problem is very familiar. The shop keeper has quite rightly diagnosed a
problem: he has too much money tied up in the stock. His attempt at a
solution is to reduce his stock levels and then invest the surplus cash that
this would surely result. However, he has failed to appreciate the
economics of his idea from the supplier's point of view.
No doubt, the wholesaler could have met his request but only if the shop
keeper were prepared to pay the extra transport costs. This would have
defeated the original purpose of the exercise, though; instead of making
extra profits, the shop keeper would incur additional expenses.
Alternatively, he might have been lucky because it just so happens that
the wholesaler's vehicle passes his door every day on the way to make
other deliveries.
In reality, a compromise is normally reached. Retailers want frequent but

small quantities delivered and wholesalers want to deliver infrequent but
AO/QUA/0227 – V2.2 27
large quantities of goods. You can see where the profit element lies. Any
organisation which can deliver at maximum capacity will, providing it is
properly costed, make maximum revenue at minimum cost.
In the example above, we have to assume that the quantities ordered for
delivery daily were less than "unit load", this means that there would be
spare capacity on the vehicles. Spare capacity means that revenue is
not maximised. Costs for the transport, assuming that no other deliveries
with that vehicle could have been made, would have increased five times,
i.e. there would now be five deliveries a week rather than one. If the total
amount of goods delivered daily was less than the previous total weekly
delivery before (remember the shopkeeper reduced the range of stock
held), not only would costs have increased five times but total revenue
would have reduced as well. No wonder the wholesaler refused the
request!
Compare the range of products on the shelves in supermarkets today with

the goods available 20 years ago; there is a remarkable difference.
There may be fewer sizes of the same product, but there are many more
different products today which were simply not available 20 years ago, or
only according to season. Much of this is to do with distribution
companies maximising their loads at minimum cost. In real terms the
goods on supermarket shelves have never been cheaper than they are
today, which is also partly due to the amount of competition within the
market.
So what is the solution? As far as our examples is concerned, there are

three options.
 Continue with the weekly deliveries.

 Collect goods on a daily basis using own transport and cash and carry.
 Try to find five wholesalers who will deliver goods on five different days
of the week!
28 AO/QUA/0227 – V2.2
Economically speaking, no customer can expect to receive small
quantities delivered on a frequent basis and not expect to pay extra for the
service. Obviously, the answer is generalising because it might have been
feasible for a daily delivery to be made provided that the wholesaler could
maximize vehicle capacity b delivering to other customers. It really
depends upon the local prevailing conditions. For our purposes, though,
the example serves to illustrate the fact that total customer satisfaction in a
commercial world is not attainable.
1.4 Transport Modes

1.4.1 Air transport
Many airports do not cater for all sizes and types of aircraft. For instance,
the length and strength of runways at smaller airports are insufficient for
the larger aero planes. Conversely, the airspace at major airports is so
busy that it cannot accommodate the requirements of private flying clubs.
Whatever the size of the operation, it is a fact that the air, as a way of
moving passengers and goods is available to all operators and requires
little, or no, maintenance.
The costs arise from the
need for massive land use at
the terminals and for
stringent safety controls and
monitoring activity.
Airports will ideally be sited

where their operations
cause neither danger nor
inconvenience to others.
This usually means that they are some distance from the communities
they seek to serve. This also means that many smaller/older airports that
were sited close to houses or where housing developments have brought
them in close proximity. They also handle freight are unable to operate at
night, when much of the time critical airfreight in the UK. This is especially
the case with parcels traffic that is required to be moved, because of the
noise and disruption to the local residents.
AO/QUA/0227 – V2.2 29
Airside
At busy airports, an aeroplane will be landing or taking off every few

minutes. So, to keep runways clear, it is necessary to provide a number
of access roads (taxiways) for aircraft moving to and from the passenger
and freight loading/unloading areas (known as "aprons"). These aprons
must have sufficient space to allow safe manoeuvre of the many aircraft
onto and off the loading bays. Besides allowing passengers to board and
disembark, when aero planes are on the ground they need to be fuelled
and prepared for their next flight. It is also usual to have some aircraft
maintenance facility available.
To avoid conflict of aircraft and service vehicle movements, ground traffic

controllers have to work closely with the air traffic controllers. Another
important airside facility is the provision, when the airport handles
international flights, for customs activities.
Landside
In the public area of the airport, it is necessary to provide facilities for

passengers and freight to be received and dispersed, for passengers to
wait and for freight to be stored. The increased need for security measures
and security processes to be undertaken has led to the increased need for
space due to passengers being required to check in earlier and for
luggage to be scrutinised more closely.
The receipt, storage and dispatch of freight are relatively straightforward.

Passengers, on the other hand, these days require:
 Road transport set-down and pick-up points, and parking varying from
an hour to a few weeks
Adequate interchange between rail and airport terminal buildings
 A high standard of catering and toilet facilities, waiting areas,

bookshops, and a wide range of other stores.
30 AO/QUA/0227 – V2.2
It is obvious that in order for the best, most cost-effective use to be made
of the expensive infrastructure, major airports should be able to operate all
day, every day. However, factors such as bad weather and night-flying
restrictions mean this is not always possible. Such potential problems
create a demand for additional facilities.
To an observer, it may seem that the increased dwell times for many
passengers at airports are not being actively reduced as the airport
facilities rely upon passenger custom in order that they are able to meet
the high costs related to commercial operations within such interchanges.
This point of view would obviously be challenged by the airport operators,
but is nevertheless worthy of consideration, because without some time for
passengers to rest, relax and buy gifts, etc. the whole nature of air travel
and airport layout and services would have to change.
1.4.2 Rail transport

Much of the railway infrastructure is evident as track, signalling, stations
and marshalling yards. Less evident, but equally important, are the
locomotive and wagon maintenance facilities, provided by private
companies. To ensure efficient and safe train movements, the control
systems and space requirements at major passenger and freight terminals
are extensive. Maintenance of the rail network, as the permanent way, is
also high and has to be met by the operators as the network is not open to
public, so cannot be supported by public conscription, in the same way as
the road network.
Freight terminals require reasonable road access, and heavy mechanical

handling equipment is essential to move the containers. Proper storage
facilities are also needed for goods being made up into train load sets or
awaiting dispersal by road. Some loose goods traffic is still hauled and,
while this continues, appropriate handling facilities are needed at receiving
and destination stations.
AO/QUA/0227 – V2.2 31
The largest accepted drawback to rail freight growth or provision within the
UK is the fact that it is generally unable to offer a door to door service
which means that goods travelling by rail must usually also travel by road
to and from the rail network. It is also fact that service levels have, in
recent times, led to freight being shifted to road, or remaining on road, in
order to meet ever challenging customer demands.
On the passenger side, access will vary from a small car park at a rural
station to interchange with bus, taxi and underground or light rail services
at main terminals like Manchester Piccadilly. Support services will vary
from a bare platform with fares being collected on the train, to an
extensive range of shops and food/drink outlets, together with the
ticket/booking hall, toilets and showers at the principal mainline stations.
Rail terminals of whatever size must provide for an interchange with other
modes but the current situation, which relies on many older rail
interchanges still being used, often sees a shortfall in this inter-modal
provision. It is almost certain that the reader can name a railway station
which is not in close proximity to a bus station or one where local taxis are
not available on a 24 hour/7 day basis.
1.4.3 Road transport

Whatever the scale or nature of individual road transport businesses, there
is one essential requirement. That is, an approved centre, out of which to
operate. For the small company, this may be little more than provision for
the safe overnight parking of vehicles with basic “comfort” facilities (toilets,
hot drinks, etc.) for drivers at the start and end of their duties.
Administration and vehicle maintenance may be done elsewhere. Larger
companies, however, will operate from several depots, most of which will
have facilities for vehicle fleet maintenance and business administration.
The use of these premises will be restricted by the legal requirements of

planning regulations and the licence granted to the operator to undertake
road haulage or road passenger operations (known as operator licensing
or “O” licensing).
32 AO/QUA/0227 – V2.2
Much of the loading and unloading of buses involves small numbers of
people along the way. No special facilities are required but the operator
may provide a stop sign and display a timetable. Some local authorities
provide and, using their legal powers, enforce the use of lay-bys and bus
or coach stations. In large towns and cities, these bus stations are often
situated within major new shopping complexes so there may be no need
to provide any separate facilities for passengers. Where the bus station is
there only as an interchange, it is for operators and the local authority to
decide what, if any, special provision should be made for passengers, and
who will pay for it.
The one-vehicle owner/driver requires no more than a good hard standing

for his vehicle while the heavy haulage contractor might occupy a larger
site but only need basic facilities for vehicle storage and maintenance.
On the other hand, firms operating in consumer goods and parcels
businesses need sufficient premises to handle incoming goods, and make
up/break up long-distance loads. On a national or international scale,
this can require the provision of several interchange depots (known as
hubs) for the temporary storage and transfer between vehicles of goods.
This is clearly part of the operator's own business requirement and, unlike
for road passenger transport, these interchanges must be provided at the
operator's own cost.
The road infrastructure, or way, is supported through taxation of all users

and debate has continued over many decades about proportionate rates
being paid by users who are seen to either cause wear and damage or
who are seen to be able to benefit to a higher degree than some other
road users. This often takes the form of measures against road freight
aimed at ensuring LGVs pay for the pollution and damage they cause.
Unfortunately, as any costs to operators will be passed on to the end user
this practice can, at times, seem somewhat short-sighted.
AO/QUA/0227 – V2.2 33
1.4.4 Sea transport
Seaport design has to take into account the fact that shipping offers larger
capacity than do the other modes and vessels are not easy to manoeuvre
or stop. It must be possible for cargo or passengers to be loaded and
unloaded, and for customs requirements to be met. In normal working
and weather conditions, the quick passenger turn round means that very
little in the way of waiting facilities is required.
Much more is needed, though, to allow fast loading and unloading of cargo
vessels while, at the same time, ensuring their stability both in port and at
sea. When "roll-on/roll-off' or side-port working vessels are moored at
open quays. For example, equipment is needed which can make
allowance for the tidal variations of height between quayside and deck
levels. Modem handling equipment means that ships can now be loaded
and unloaded quickly, despite the large volumes of their cargoes. This
brings its own complications in terms of congestion of the quayside.
Effective freight operations at ports depend upon adequate facilities for the
assembly, storage and dispersal of ships' cargoes.
Once again, sea transport, like air transport, benefits from a low cost way,
open to all but suffers from the massive terminal costs associated with
large/bulk movements.
In Europe, the shift to container movements, using ISO containers, has led
to the development of a hub and spoke type operation. Rotterdam is used
as the main EU container hub with the Ro-Ro ferries acting as elements of
the spokes. This in itself has led to massive increases in Channel Tunnel
and Channel ferry traffic and has contributed to a decline the almost
extinction of the British coastal fleet, so long an important mode for the
transport of freight around the UK.
 Task 1.2
Examine the use of ‘intermodal’ transport networks. How do these differ

from single modes, and what are the advantages and disadvantages of
developing these in relation to the type of goods carried?
34 AO/QUA/0227 – V2.2
1.5 The Seamless Journey
1.5.1 Infrastructure and support services
The way
One essential operational

characteristic of transport is the
operating medium, natural way or built
way. Air and water are natural ways
whereas roads, railways, pipelines
and canals are built ways.
A further distinction is the usage of the various ways. Commercial road

transport" for example, whether passenger or freight, has to share the way
with other road users (principally the private car, bicycle and pedestrian),
and is equally subject to the associated problems. The only segregated
commercial road use is inner-city bus lanes and on-road light rapid transit
(LRT) systems.
At the opposite end of the scale, the only users of rail permanent way are
trains whose movement along the track is strictly controlled and regulated.
So, while a train's ability to progress might be subject to breakdown or
staff shortage (which also affect road transport operation), it should not
suffer from congestion.
Terminals and interchanges
In the broadest sense, a terminal might be described as any point at which

a particular trip ends, thus anything from a major airport to the corner-shop
or a bus stop. However, it is more precisely any point at which some or all
of the goods or passengers are unloaded. Thus it can be where:
 The way for a mode ends, e.g. a large mainline railway station in a city
(London Euston) where passengers have no alternative but to continue
their journey by some other mode as the way, the railway line,
terminates at the station.
 The service goes no further, but the way continues, e.g. the final stop
on a bus route where, although the road may continue (into an estate or
to another town, for example), the service does not.
AO/QUA/0227 – V2.2 35
 The passengers or cargo have reached their destination, i.e. while the
service and the way continue, some unloading facility is needed, if only
at a basic level such as a bus stop or goods entrance.
 The passenger or cargo has to change mode, e.g. the railway journey
between suburban stations which requires travel by road at either or
both ends. Points at which the change of mode takes place are more
correctly called interchanges. However, the facilities and services
required are similar to those needed at a terminal.
The size of terminals and the facilities provided will vary depending on the
mode, the volume of traffic, and whether that traffic is freight, passenger or
both. In passenger transport, the bus stop requires no more than a small
area of firm, level ground at the point where passengers board and alight.
On the other hand, at a major rail or air terminal, extensive facilities must
be provided for both the vehicles and passengers. Freight transport
terminals have a similar wide range of requirements. At one extreme is
the yard used by the one-vehicle owner/driver who never has customer
goods at his base, and whose lorry is serviced elsewhere. In contrast
are the major inland or ocean "ports" where goods from many sources are
consolidated into large loads for carriage by rail or sea over long
distances.
At all terminals, it is essential that provision is made for the efficient

handling of traffic. If leaving the terminal, cargo should be dispersed
quickly. If waiting to start or continue a journey, it must be safely stored
and cared for until loading takes place. Everything must be done to avoid
congestion of the terminal by vehicles, cargo or passengers.
Components of a journey
Every journey can easily be broken up into its component parts. Take for
instance, a journey to work using a car to the railway station, the train and
a bus to the workplace. Quite clearly, each element is a component, but
what makes a journey seamless?
36 AO/QUA/0227 – V2.2
A seamless journey is one where the passengers or goods are able to
move from one mode or one vehicle/craft with minimal disruption and time
loss. In response to the need for seamless travel most modern passenger
interchanges are now connected to the other available modes to ensure
speedy transition and we see initiatives such as through ticketing being
introduced to support the infrastructure improvements.
The important issue in relation to seamless transport is how the

components align with each other to the maximum benefit of the traveller
or the goods.
For passengers, the increased use of inter-modal interchanges and inter-

modal partnerships has served to ensure passengers are subject to
minimal disruption and delay. It is now common practice for air
passengers to check in their baggage at the first airport and to collect it at
the final destination without the need collect it at every staging airport
along the journey.
For freight, containerisation and unitisation have enabled freight operators

to tranship and load/unload massive volumes of freight between
compatible but different modal infrastructure, which both speeds the
freight and ensures that minimum inventory costs are incurred. This is
important for many supply chain operators who need to respond to
consumer demand by establishing ever longer, and increasingly complex,
supply chains.
The need for the ideal interchange has long been recognised but, as with
most logistical solutions, the need for a trade-off is usually present and the
needs of the different modal operators almost always serve to prevent an
‘ideal’ journey from becoming reality. This may change as the industry
evolves and as customer demands drive the need for increased
efficiencies. In the meantime, operators and consumers alike will strive for
the seamless journey and the benefits they bring to both sides.
AO/QUA/0227 – V2.2 37
 Task 1.3
We have explored the various ‘ways; railways, roadways, airways,

seaways & waterways etc. How important is it to identify the ideal mode
one may undertake for a trip? Give examples of the various components
of a journey you may have taken, and identify the significance and
importance of the terminal and interchange.
1.6 Transport Industry - Structure and Ownership

The way a transport undertaking operates must be considered in the same
way as any other commercial business. While it is true that transport is a
derived demand (not consumed for its own sake), and that a timetabled
service can be said to be a perishable product (vacant seats or space on a
departed service cannot be sold), the characteristics of a transport
business are still very similar to those of a business in any other sector.
1.6.1 Private ownership

In the UK, any individual or group of individuals may engage in business,
provided they have control of the necessary resources. The size and
complexity of transport undertakings range enormously from an individual
with his own truck or coach, through to vast multinational operations such
as Exel/Ocean.
The size of a business is often determined by the ease of entry to the

industry and the resources required. This explains why there are many
small road transport (haulage and passenger) undertakings but only a few
large shipping, ferry and airline companies. While this aspect will be
considered when you study the economics of transport, we shall now look
at the characteristics of the various forms of private ownership.
38 AO/QUA/0227 – V2.2
The sole trader
Any individual may trade under his own name, or any other name he likes
to adopt, unless such a name is clearly intended to mislead.
When one person provides the capital; that is the money necessary to
start the business:
 to buy or lease premises

 to fit them out
 to obtain stock, and
 to pay overhead expenses such as wages.
The business is that of a sole proprietor or trader. Examples may include

a retail shop, a garage proprietor, home industries, or an owner/driver with
a vehicle for hire and reward.
The sole trader is completely responsible for the management of the

business, and as the proprietor's (owner's) capital is usually limited, the
business seldom expands on a large scale. Sole traders tend, therefore,
to be found in areas where capital requirements are small and success
depends largely on the personal qualities of the owner and immediate
family.
As the sole trader and the business are one, i.e. they are not a separate
legal entity, this means that all the business profits are enjoyed by the
owner, but so are the risks. If the business is not successful, the owner's
personal assets (a house possibly) will have to be liquefied to repay the
debts.
The management of a business today, even where there is only one

vehicle involved, can be quite complex. Issues which the owner would
need to consider are:
 the maintenance of the vehicle

 preparing rates to quote to potential customers
 taking bookings
 recording financial transactions and bookkeeping
 licensing and legal matters.
AO/QUA/0227 – V2.2 39
Purely from a commercial point of view, most sole traders would be better
off closing their business down and working for someone else. The hourly
rate achieved is usually low when the number of hours worked is
considered, and there seems a never ending list of difficulties to be
overcome. However, most sole traders do not consider these issues
because of the benefits of working for themselves, which include:
 choosing what to do and when to do it

 offering a personal service
 enjoying the flexibility, and
 seeing the fruits of one's own labour!
Unfortunately, the results are too often serious under-funding,

deteriorating assets and a steady number of people, who were willing to
risk all and try their hand at running a successful transport business, losing
it all.
Partnerships
A definition of a partnership is the relationship which subsists between

people carrying on business in common with a view to profit, or, in another
words, a number of people agree to pool their resources. The agreement
need not be in writing but nonetheless if it is a recognised partnership, it
would be governed by the Partnership Act 1890 which contains the basic
rules on its creation and operation.
Partners manage the business and

its profits are owned by them.
However, it is possible to have
partners who play no part in the
running of the business but merely
share in the profits. These are
called sleeping partners and
normally join a partnership to inject
much-needed capital and then, hopefully, reap the rewards.
Partnerships cannot consist of more than 20 people (except solicitors and

accountants).
40 AO/QUA/0227 – V2.2
No formalities are necessary for the creation of a partnership. The general
rules relating to the law of contract apply. The members of a partnership
are collectively known as a firm and the name under which they trade is
known as the firm name.
In case of any eventual disagreement, however, it is more usual to draw

up a deed of partnership showing the following:
 names of the partners and the name of the firm

 the amount of money each partner contributes and the ratio in which
profits and losses are to be accepted
 how accounts will be kept and the duration of the partnership.
As with the sole trader, a partnership does not have a separate legal
existence from its members. Partners owe mutual rights and duties to one
another. For example, property bought or working for the partnership
must be used exclusively for the partnership. Unless there is an
agreement to the contrary, the partners share equally in the profits of the
partnership, but also any liabilities incurred due to one of the partners
misjudgement or errors.
The partnership agreement usually outlines the powers of the partners as

regards management of the partnership. The firm will accept any
liabilities incurred by a partner in pursuing the firm's business although it is
usual for there to be a spending limit on individual purchases, with the
authority of all the partners being required before it is exceeded. This is
a safeguard against unscrupulous trading by one partner at the expense of
the others. All partners may assist in managing the business and may
make drawings on account of expected profits but are not entitled to any
salary for their work. Disputes and disagreements may be decided by the
majority of partners.
Any profits made outside the business by one partner are to be given to
the firm unless specific consent has been otherwise given. In this regard,
there is a duty of partners not to compete with the firm.
AO/QUA/0227 – V2.2 41
Partners are usually considered to have the following powers:
 to sell any goods or personal chattels of the firm

 to purchase on account of the firm goods necessary for or usually
employed in the business
 to receive payment of debts due to the firm and the give valid receipts
 to engage employees but not to dismiss employees without the consent
of the fellow partners
 to employ a solicitor to defend the firm.
Most partnerships are formed because individual members can bring

capital, specialist knowledge and expertise, and the determination to
succeed in business with the other partners. Strangely enough, transport
is not known for its partnerships.
Registered companies
Sole traders and to a lesser extent, partnerships suffer from one big
disadvantage: an inability to raise sufficient capital to expand and become
a large trading organisation. In fact, their size and limited resources
preclude them from obtaining the capital they may desire to expand. If
they were able to gain capital, the interest rate on its repayment could
place an onerous burden on the operation, particularly during a recession.
An alternative form of trading, which many small firms embark upon,
indeed many start out this way in the first place, is as that of a registered
company.
A registered company is a type of corporation. The company consists of

an association of people grouped together with the object of carrying on
business. These companies are classified by either shares or guarantee.
In a company which is limited by shares, the members are only liable for
the amount unpaid on their shares. In respect of a company limited by
guarantee, the members are only liable to the extent to which they have
agreed to contribute should the company be wound up.
42 AO/QUA/0227 – V2.2
Before considering limited companies in more detail, we should note the
other forms of registered companies; although very few of them are
associated with transport. The first is the unlimited liability company
where each member is liable for the company's debts and there is no limit
to his liability. The second is called a statutory company which is a
company formed under a special act of parliament. Finally, there is a
chartered company, which is granted a charter by the Crown, usually
conferring special powers. Nowadays charters are normally granted to
charitable or public bodies such as the Chartered Institute of Transport.
The main differences between registered companies and partnerships are

shown in Table 1.1.
Table 1.1 Registered Company and Partnership
Register company Partnership

 Has legal personality distinct  Does not have a distinct
from its members personality from its members
 Continues to exist despite death
or bankruptcy
 Shares are freely transferable  If bankruptcy, death or insanity of
a member occurs, partnership is
dissolved
 A public company must have at  Shares can only be transferred
least two members with the consent of the other
partners( s )
 A private company must not have  Generally speaking cannot have
more than 19,999 members more than 20 members
 A shareholder is not an agent of  A partner is an agent of the firm.
the firm.
 Members have no power to  Unless otherwise agreed
manage. partners play equal part in
management
 Liability of members limited either  Generally no limit on liability
by shares or guarantee
 Affairs closely controlled by  Affairs managed by the partners
Companies Act
 Company must trade within the  Partners may trade as they
authority that it has please provided they do not act
illegally
AO/QUA/0227 – V2.2 43
There are two kinds of Limited Liability Company.
Private limited company

A private limited company is a limited liability company (i.e. limited by
shares or guarantee) which must:
 have at least one director. (Prior to 6 April 2008, a company secretary

was also required)
 not invite the public to buy its shares or debentures and is required to
certify that it has not issued any such invitation when making the annual
return to the Registrar of Companies
 has a registered name ending with “limited” or “Ltd”.
In the case of a company limited by shares, the authorised share capital

must be a minimum of one share and there is no longer an upper limit to
the number held.
For a company limited by guarantee, there are no shareholders. There

must be a minimum of two members and each director, member or
participant cannot hold shares in the company. This type of undertaking is
often reserved for clubs and societies. However, it is likely to become
more popular with small Limited (shareholding) companies, forming
consortiums or cooperatives to tender for large scale work. Any work
received is then divided between the consortium members.
There are many advantages to this type of undertaking for the members
and their customers. The customers risk is minimised, and the members
opportunities for large scale projects is maximised. It can also ensure
that the members operate within certain legal boundaries that would not
be available to them if they were not set up as a legal entity. For
example, if they were to form an informal association, agree prices and
tender for work they could find themselves in serious trouble with the
Office of Fair Trading, with charges of collusion.
44 AO/QUA/0227 – V2.2
Public limited company
A public limited company is a limited liability company (i.e. limited by

shares or guarantee) which:
 has at least two members

 has a registered name ending with Public Limited Company (plc)
 declares itself by its memorandum to be a public limited company
 has an authorised share capital of at least the authorised minimum (i.e.
£50,000).
The main differences between public and private limited companies are
shown in Table 1.2.
The most significant difference between private and public limited

companies is the way in which shares can be bought and sold.
A private company's shares are not quoted on the Stock Exchange, which
means that they are unavailable on the open market. If an individual
wishes to buy into a private company, he must be invited by the existing
shareholders to do so.
AO/QUA/0227 – V2.2 45
Table 1.2 Public and Private Limited Companies
Public Private
 Minimum of two members  Minimum of one member
 No maximum number of  No maximum number of

members members
 Generally no restriction on share  Restricted rights to share transfer

transfer
 Shares bought by the public  Shares cannot be bought by the

public
 Must hold statutory meetings  No need to hold statutory

meetings
 Directors must retire at the age  No age limit placed on directors

of 70
 Must have a certificate of  Commence trading on receipt of

incorporation and a trading certificate of incorporation
certificate
 Must have at least two directors  May have only one director
 Directors usually appointed by  May appoint directors by

shareholders resolutions
 May allot shares without

minimum subscription
In practice, many private limited companies are family concerns where the
majority of shares (and thus ultimate power of decision making) stays
within the family. Any increase in share issues outside that "family" will
dilute those powers and, ultimately, may result in the loss of control. In
contrast, shares in a plc are available for purchase through the Stock
Exchange and this can lead to some interesting battles for control of a
business.
46 AO/QUA/0227 – V2.2
Private to public
Some advantages of “floating” the company or “going public” are that it:
 increases the opportunities for raising additional finance

 heightens awareness and increases the public profile of the business.
Some disadvantages of "going public" are that:
 original shareholders may lose control of power and decision-making

 only certain parts of the business may be attractive to investors,
requiring other parts of the business to be sold separately before
flotation
 the likelihood of a takeover increases as share ownership becomes
more widespread
 decisions need to be justified and explained to a wider and much more
public audience.
Registration process
As a limited liability company has a separate legal identity from that of its
members, there are a number of formalities through which a company has
to go before trading can commence. This is called the registration process.
When a company applies for registration and is accepted, it becomes
incorporated. To become registered, it must supply the following
documents to the Registrar of Companies:
 the memorandum of association

 the articles of association
 a declaration that the requirements of the Companies Act will be
complied with
 the address of the registered office of the company and statement of
directors and secretaries (this must appear on the letterhead).
The memorandum of association deals with the external matters of the

company. The Companies Act 1985 specifies that this document must
include:
 the name of the company with the word "Limited" if the company is a
private limited company, or the words Public Limited Company if it is a
public company
AO/QUA/0227 – V2.2 47
 whether the registered office is in England, Scotland or Wales
 the company's objects (see below)
 a statement that the liability is limited, unless the company is unlimited
 the amount of the company's nominal or authorised capital.
The objects clause in the memorandum defines the activities that the
company intends to carry out. Activities which are not permitted by the
objects clause are said to be ultra vires, meaning beyond the company's
powers, and are void.
The articles of association deal with the internal affairs of the company
which regulate the rights of the members of the company and the manner
in which the business of the company shall be conducted.
This document contains rules on:
 issue of shares
 calls on shares
 transfer of shares
 notice of meetings
 appointment of secretaries and directors.
When the memorandum and articles of association are registered and

incorporation is received, this acts as a form of contract which means that
legally:
 members are bound to conform to the company's articles

 members are bound to one another
 neither the company nor its members are bound to outsiders.
The process of raising capital, which is the purpose of starting a limited

liability company, begins with a prospectus. The directors of a public
company will draft a prospectus inviting the public to subscribe for its
shares. This will contain sufficient information about the company to
allow the public to judge whether the value of the shares makes for good
and fair investment. Particulars of all incidental expenses associated
with the flotation, including any commission and expenses incurred, will
also be given. The directors must lodge a copy of the prospectus with
the Registrar of Companies, or a written statement in lieu.
48 AO/QUA/0227 – V2.2
When the Registrar of Companies (in Cardiff) is satisfied with the
memorandum and articles of association, a Certificate of Incorporation will
be issued. No company may commence trading without such a certificate
in its possession. If a company is registered on its original incorporation
as a public company it may not trade (including borrow) until either the
Registrar of Companies has issued a trading certificate, or it is
reregistered as a private company.
Shareholders and directors
Under the Companies Act, every company is required to keep a register

showing certain information concerning all directors and members.
This information includes:
 date on which each person became a shareholder

 shareholder's name, address and occupation
 number of identification of shares held
 details of transfers of shares
 register of mortgages and charges.
Companies must also keep a minute book and record all transactions in
books of account.
Membership or a registered company is achieved by:
 subscribing to the memorandum

 buying shares
 receiving shares transferred from another member.
Membership is proved when a person's name is entered on the register of

members.
Shareholders have certain rights:
 to transfer shares
 to call company meetings
 to receive notice of meetings
 to attend and vote at meetings
 to receive a dividend provided the company makes a profit.
AO/QUA/0227 – V2.2 49
Shareholders have certain duties:
 They must pay for their shares.

 They are liable for the company's debts to the limit for the amount
outstanding on their shares if their liability is limited.
As the numbers of members in a public company is limited only by the

number of shares, the amount of issued capital may be increased (subject
to the authorised capital in the memorandum and articles of association)
by:
 private issue, i.e. selling shares to relatives and friends

 public issue, i.e. drawing up a prospectus which advertises the shares
 share allotment, i.e. selling the shares through an "issuing house" which
sells shares on behalf of a company.
The holders of shares in a public company may transfer these to another

person. When a plc offers its shares to the public it may not allot these
unless:
 the offer becomes fully subscribed (or partially subscribed) to an extent

specified in the offer
 the company has received at least 25% of the nominal value of the
shares, plus the entire share premium (if any).
If a new plc acquires non cash assets worth 10% or more of the issued
capital from subscribers to its memorandum (e.g. by takeover), the
consideration must be valued and the acquisition then approved in a
general meeting.
Shareholders have the powers to appoint directors, who are then servants
of the company. Directors are normally required to hold shares in the
company to which they are appointed. Where the director is employed
by the company, he is entitled to payment for the work he does. A
director may be removed from office by the passing of a resolution at a
company meeting. Directors are answerable to the shareholders for the
conduct and efficiency of the company. They are also required to have
regard to the interests of the company's employees. The company must
keep an updated register containing the names, addresses and
nationalities of directors. Generally, all companies are forbidden to make
50 AO/QUA/0227 – V2.2
loans to directors.
Insider dealing, i.e. buying or selling the company's shares on the market,
using information obtained in confidence, to the buyers/seller's advantage,
whether by a director or any other person, is a criminal offence.
Directors can exercise all the powers of the company but these are usually
distributed according to the articles of the company. A director may not
act improperly nor exceed the powers given to him.
The Insolvency Act 1986 states that, directors of limited companies who
knowingly continued trading when their company had no reasonable
prospect of avoiding insolvent liquidation, may be required personally to
contribute to the company's assets.
The duties of directors are:
 to act in good faith for the interest of the company

 not to allow his personal interest to conflict with those of the company.
Every limited company, must, by law hold an annual general meeting.

These meetings will be held at published times each year when the
company must present to its shareholders a balance sheet and profit and
loss account signed by two directors and the company secretary. These
will also be given the report of -the directors and auditors of the company
explaining the trading of the previous year and the expectations for the
following year.
If the articles allow, a shareholder may pass his voting rights to someone
acting on his behalf. He will fill in the requisite from showing his own, the
proxy’s name, address, and the particulars of the meeting. He must also
sign the form and have his signature witnessed.
The company name should appear on all documents of the company.

Every company should have the following particulars mentioned in legible
characters on business letter and order forms:
the company's place of registration (England, etc.)
 the company's registration number

 the address of its registered office.
AO/QUA/0227 – V2.2 51
Benefits/disbenefits
Before moving on to other forms of ownership, we should consider the

advantages and disadvantages of registered companies compared with
the sole trader and partnership.
The advantages are:
 Shareholders have limited liability, which means that financially they

can lose only what they have put in or committed to the business.
 Additional capital can be raised through share issues.
 Banks may be inclined to lend larger amounts when the shareholders'
stake (equity) is substantial.
 The business is able to grow and operate on a larger scale, thus
achieving a higher volume of output at a lower cost.
 The company name is protected by law. This means that another
business cannot start up and lawfully trade under the same name.
The disadvantages are:
 Formation of a registered company can be expensive, i.e. there are

legal costs, registration fees and other charges.
 Decision making may be more complex.
 Employees of the business can often feel distant from its owners, the
company shareholders.
 The records of the company, such as its annual accounts, are open to
the public, enabling not only creditors but also competitors to examine
its financial health.
 Its activities are closely regulated by company legislation.
Cooperatives
There are very few cooperatives; in 1990 there were only 2,000 compared
to almost one million companies. However, there are some transport
cooperatives.
52 AO/QUA/0227 – V2.2
The idea is that people join together to work, share in the profits of the
business and take joint responsibility for decisions. The common
features of cooperatives are:
 The business is owned by its employees.

 Each employee usually owns a single share which carries and
entitlement of one vote.
 Each employee shares an equal liability for any losses which occur.
 There is either equal pay for all workers or limited pay differentials exist
between workers.
 Case study
Ayrshire Bus Owners (A1) Ltd was a bus operator for since the 1930’s and
was based in and around Ardrossan. Most observers viewed it as a single
operator. They marketed under one name, with identical liveries and staff
uniforms. However, it was a consortium or co-operative of many individual
bus operators. They operated under a single ‘O’ license, purchased fuel,
tyres, vehicle components. Some even shared premises. They also
tendered for public contracts jointly and had agreements on which routes
they would operate on, fares charged etc., and this was fully legal because
they operated as a single legal entity. However, each member owned and
maintained their own vehicles. As some members chose to retire, they
would sell their shares/assets to fellow members.
The consortium eventually dissolved because some operators were

retiring and chose to sell out to a national operator in the 1990’s. Four
went their own ways and concentrated on private hires and school
contracts.
It is business models such as this, which may prove to be a solution to the

future sustainability of the transport and other industries. It can protect a
local service provider against competition by the large national or
international companies, but still permit likeminded and similar
organisations to join, albeit, usually for a fee.
(Source: Ayrshire Bus Owners (A1) Ltd.)
AO/QUA/0227 – V2.2 53
Non-commercial considerations
Whilst considering how the industry is structured, it must be remembered

that not all operations are classed as ‘profit making’. There are rafts of
the transport industry that operate on a service, ‘not for profit’ basis where
they either provide a public service which is sponsored by local or regional
government. They also include, Community Transport Groups.
The real purpose of a public sector, usually on a national scale, is to

provide something which is either:
 a natural monopoly, e.g. gas, electricity, water, etc., or

 a "merit good", that is something which is not funded in sufficient
quantities privately but is socially desirable, e.g. the National Health
Service, parks, museums.
The arguments in favour of a public nationalised railway system, for

example, were that:
 Because the railway was a loss-making enterprise which needed a

terrific amount of ongoing investment, only the government could
provide the level of service needed and the funding required. For
example, British Rail (BR) identified a need for £850 million per annum
to be invested in the UK railway system over the years 1993-2003.
 It was a social service.
 As such, it was preferable for a variety of environmental reasons (the
alternative to the motor car!).
It should be noted, though, that most arguments in favour of a privatised

railway system were based on the belief that it would become a more
efficient and customer- oriented service. However, in 1982-1991 BR's
management was re-organised into sectors, which dealt with specific
market segments (passenger and freight), illustrating that market
orientation was possible within the public sector.
54 AO/QUA/0227 – V2.2
Even large joint stock companies found themselves unable at times to find
or sustain the investment necessary to provide public transport services
where these either were never a. commercial proposition or became
"unremunerative but socially desirable". Such operations then passed into
public ownership, by either the state (nationalisation) or local authorities
(municipalisation).
In more recent times, many of the UK's nationalised and municipalised

transport undertakings have been returned by sale to the private sector.
1.6.2 Mixed ownership

Between the two extremes of privatisation and nationalisation, there are
examples of mixed public/private ownership. Private Finance Initiatives, for
instance, have seen private capital and state investment in projects as
diverse as the building of the high-speed rail link from London to the
Channel Tunnel and the second Severn River crossing. This type of
approach is not new, though. Mixed investment models can be found in
such undertakings as the French State Railways (SNCF).
1.6.3 Public ownership/public control

It is a mistake to equate public ownership with public control; a distinction
must be drawn between them.
In many cases, governments have succeeded (by licensing and/or by the

appointment of an executive "board") in controlling privately owned sectors
of the transport industry. Conversely, a "hands off' approach has been
adopted to state enterprises, giving them commercial objectives and
offering subsidies only where market forces are unable or unwilling to
meet a "public service obligation" to provide an un-remunerative but
socially desirable service. The creation of a Railways Board in 1962 and
the National Bus Company in 1968 were both attempts to inject
commercial management and control into what remained publicly owned
utilities.
AO/QUA/0227 – V2.2 55
1.6.4 Background to today’s industry
The situation in the industry in the UK today has been arrived at against a
background of swings in political preferences and policies. A few
examples, in roughly chronological order, from surface transport (road and
rail) will serve to illustrate this.
It should also be noted, here, with regard to the swings between

privatisation and nationalisation depending on the political party in power,
that history does not slavishly repeat itself. The replacement of "clause 4"
of the Labour Party's constitution with a form of words which does not
commit it to wholesale re-nationalisation is a case in point.
Municipal transport undertakings
Municipalisation of road passenger transport was largely a consequence

of the Tramways Act 1870. This permitted private operators to lay tracks
and run tramways subject to a clause giving the local authorities reserve
powers to acquire their assets after 21 years, or thereafter at seven-year
intervals. Many privately owned public passenger transport operations
consequently passed into public ownership. This was partly because
these powers came into force at a time when the private companies'
original assets were considerably depreciated. At the same time, the
enormous expense of conversion of the horse tram operations by
electrification was becoming imperative, and unaffordable by most private
operators.
In London, the process went a stage further in 1933 when the various
London boroughs' municipal passenger transport operations were
nationalised by the creation of the London Passenger Transport Board.
56 AO/QUA/0227 – V2.2
Nationalisation of transport, 1945
The UK transport industry's most comprehensive nationalisation

programme came with t4e Transport Act 1945. The newly elected post-
war Labour Government created, in 1947, the British Transport
Commission (BTC) which took into public ownership:
 London Transport as the London Transport Executive.

 The four major railway companies (which had been formed by
amalgamations of many former independent companies under the
Railways Act 1921) as BR, the Railways Executive, which also acquired
from the four companies major (but minority) share interests in the two
main groupings of non-municipal bus companies, British Electric
Traction (BET) and the Tilling Group.
 The former railway-owned docks and harbours companies and most of
the former independent canal companies as the British Docks and
Inland Waterways Executive.
 The Tilling Group of companies which became the Passenger Transport
Executive of the BTC, not to be confused with today's passenger
transport executives (PTEs).
 Most long-distance road haulage undertakings as the Road Haulage
Executive, which created and owned British Road Services (BRS).
 The hotels owned by the former railway groupings as the British Hotels
and Catering Executive.
When there was a return to a Conservative Government in 1953, the

process to denationalise road haulage was started with the creation of a
Road Haulage Disposals Board, which privatised some of BRS. BR was
"regionalised", with each regional manager being given considerable
autonomy from BR headquarters management, and overall a greater
degree of commercial freedom.
AO/QUA/0227 – V2.2 57
Commercialisation
The Transport Act 1962 took the

process further towards the
creation of separate commercial
entities, albeit still publicly owned,
but each with clear trading
objectives and an intention, not
always realised, to separate the
ownership and control of the different undertakings. The docks and
waterways, and London Transport executives became boards, constituted
as public liability companies with all the shares publicly owned and their
members publicly appointed. The residual passenger transport, road
haulage and hotels interests were passed to the Transport Holding
Company (THC). In six years, THC traded quite profitably purchasing
additional road haulage undertakings and the other large non-municipal
passenger transport operator, BET.
Other public owner models
In 1968, with the return of a Labour Government, the form of "arms length"
control (by appointed boards) of what were still in the main nationalised
transport companies, was remodelled in several important ways.
Passenger Transport
First, the creation of PTEs in four metropolitan areas (Greater Manchester,

Merseyside, Tyneside and West Midlands) with local authority
representation on their controlling passenger transport authorities (PTAs)
was a move from state to municipal ownership. The London PTE (1969),
Greater Glasgow (1970) and West Yorkshire and South Yorkshire (1972)
were added as a result of subsequent local government reorganisations.
The PTEs were given near monopoly operating powers in their areas and
required to cooperate with the National Bus Company (NBC). This had
been newly created out of the passenger transport assets of the THC and
some further assets still held by BR.
58 AO/QUA/0227 – V2.2
Over 90% of all stage and express services operated under road services
licences were controlled either by the nationalised NBC the PTEs, or
outside the metropolitan areas, municipal operators. Some of these,
such as Cardiff, Hull, Leicester, and Nottingham, had large fleets of buses;
others, such as Accrington were of modest size.
Road haulage
Second, road haulage was deregulated, with operators being able to

obtain goods vehicle operators' licences for any number of vehicles that
they could demonstrate they could safely and competently operate.
Before 1968, the industry had been composed of mainly large operators
possessing haulage licences which had given them a near monopoly of
the traffic they carried.
The road freight transport assets of the THC, together with those of BR
(then trading as National Carriers) and of Freight liner Ltd were
reconstituted as the National Freight Corporation (NFC). Many other
large hauliers who had been returned to the private sector by the Road
Haulage Disposals Board became part of the other large road freight
transport grouping, the Transport Development Group (TDG), but some
remained independent. There was a significant growth of owner/drivers
and small operators with between one and five vehicles. It was said at the
time, and is still true today, that there were too many vehicles chasing too
little traffic.
Privatisation and deregulation
The policy of the successive Conservative governments from 1978 was to

dispose of nationalised transport undertakings by sale to the private
sector. British Transport Hotels was the first part of BR to be privatised
(being sold to a number of hotel companies), followed soon afterwards by
a management and employee buyout (MEBO) of NFC's road haulage
assets (after Freightliner was returned to BR).
AO/QUA/0227 – V2.2 59
Passenger transport deregulation
Following the disposal of freight assets to the private sector, came the
deregulation of passenger transport. First, in 1980, express services were
freed from road service licensing (a quantity control), then in 1985 all
services except in London. Under the Transport Act 1985, the sale of the
NBC, to a large number of bidders, including in some cases the managers
and employees, got underway. The act also provided for the separation
of the ownership and control of both municipal passenger transport
undertakings and the operating divisions of the PTEs by the creation of
publicly owned (by local authorities and PTA’s) public transport companies
(PTCs). These were to be disposed of later by further privatisation.
London
London was dealt with differently. In the first instance, with the winding
up of the Greater London Council (at the same time as the Metropolitan
County Councils) by the Local Government Act 1984, the London PTE
was renationalised and controlled by the DoT, now the DfT. The London
PTE was required to split its operations into two, London Buses and
London Underground. The former has now been disposed of to the
private sector, in some cases by MEBOs, and in others through outright
purchase by already privatised large bus operating groups. Second,
however, the operation of bus services within London is still controlled
through a system of franchising by Transport for London (TfL).
Road passenger consolidation
Outside London, following completion of the sale of the NBC, there has
been a steady consolidation by acquisition of adjoining and/or competing
companies. Today, today three extremely large groups, British Bus,
FirstBus and Stagecoach, and several significantly sized groups, own
most of the former NBC's assets. In addition, they have in some cases
acquired the former PTE and municipal PTCs, sometimes by outright
purchase, but often by their onward sale from MEBOs or employee share
option schemes (ESOPs).
60 AO/QUA/0227 – V2.2
1.6.5 The situation today
Very few transport organisations remain in public ownership. The
Government has undertaken a large privatisation programme during the
last 30 years which has seen companies like British Airways (BA), British
Airports Authority (now BAA), NFC, NBC, Scottish Bus Group, Associated
British Ports and Sealink sold to the private sector. Organisations such
as these, were in public ownership in the first place because of a
combination of political ideology and social reasons. For instance, those
industries that were considered at risk of not surviving commercially in the
free market without some form of government intervention were brought
into public ownership. Other companies which fitted into this category
were the British Motor Corporation and British Steel. Nonetheless, the
Government asked: with the right management could these enterprises be
floated on the free market and survive?
Road passenger
In the road passenger transport sector, it is interesting to study the effects

of bus deregulation since the Transport Act 1985 was implemented on 26
October 1986. Initially there was a minibus revolution and widespread
industry reductions (by up to a third) in operating costs. Competition
occurred in certain places, giving rise to the "bus wars" reported in the
media.
There was also a lack of investment in new buses and the decline in
patronage continued. A small number of rapidly expanding bus
companies emerged which took over competitors and other operators in
order to become the largest and most powerful bus group. The actions of
some of these companies have been considered unethical, with the Office
of Fair Trading (OFT) and the Monopolies and Mergers Commission
(MMC) becoming involved.
The present situation, however, is one of consolidation. Competition has

declined and the larger bus groups have been investing in new fleets of
buses. The emphasis has changed from competitive aggression to
customer-oriented quality services. This process has really only just
begun, and so you must judge whether deregulation in the case of the bus
industry was a success, a failure or a mixture of the two.
AO/QUA/0227 – V2.2 61
From 2001, a number of Acts of Parliament began to appear in England &
Wales, and Scotland to provide for Quality Partnerships. These fall into
two areas, Voluntary Quality Partnerships, (VQP) and Statutory Quality
Partnerships (SQP). These are intended to raise the standards of road
passenger transport, and schemes include:
 Branding
 Ticketing & Fares
 Vehicle Specification & Driver Training Standards,
 Marketing & Customer Relations
 Data sharing
 Punctuality and Monitoring,
 Network Design
 Infrastructure Investment and Maintenance
 Improving bus journey times and enforcement.
The spirit of the legislation lies in the competition test. This is where an
operator is not to be unfairly treated because of the introduction of an
SQP. On the same note, competition rules have been relaxed and this
can lead to operators pulling out of a network on the announcement of the
introduction of the SQP, rather than go through the process of consultation
with other operators and the transport authority.
Measuring the success of such schemes may prove very difficult because
the transport authority and participating operators will want to publish
statistics that show a positive outcome for the SQP.
Air
A study of BAA, on the other hand, is one of a real privatisation success

story, which would not have occurred under the "shackles" of public
ownership. Possibly these shackles are what are wrong with public
ownership, i.e. the constraints on investment, the requirement for
immediate high returns on capital employed, etc. BAA now manages the
retail network at Pittsburgh and other US international airports. It has also
been involved with the building of a new terminal at Manila airport in the
Philippines. Profits from these enterprises come back to the BAA
shareholders in the UK. Of course, the other argument is that if BAA had
remained in public ownership the profits would have gone to government
62 AO/QUA/0227 – V2.2
revenues.
Rail privatisation
The Railways Act 1993 provided for the privatisation of BR. This involved
the creation and ultimate disposal by sale to the private sector of:
 a company to own and manage the railway infrastructure.

 passenger and freight train operating, leasing, "engineering" (carriage
and rolling stock maintenance) companies.
Following a series of fatal accidents in the late 1990’s, Railtrack was

superseded by Network Rail in 2001. Their role is the responsibility for
track, signalling, tunnels, bridges, level crossings and a few of the stations
from the British railway system.
Liberalisation
The Common Transport Policy of the European Union (EU) essentially

consists of two not always complementary strands:
 There is an assumption that harmonisation of the social (e.g. drivers'

hours), fiscal (e.g. vehicle excise and fuel duties) and technical (e.g.
weights and dimensions) legislation of member states will ensure that
transport operators can compete on terms of equal opportunity playing
the "level field").
 There is a belief that without some form of liberalisation, or freeing of
the market for transport services, such competition can never be truly
fair and equal.
In general, states with a socialist government and a more planned

economy emphasise harmonisation, while those with more right-wing
governments, including at present the UK emphasise liberalisation.
Liberalisation itself has three elements
1. There is, first, the necessity to remove quantity controls by various

deregulatory processes usually, as in the UK, via the licensing system.
2. Second, there is the need to put in place controls over competition.
These may range from the sort of anti trust legislation found in the USA
to our own Monopolies and Mergers Commission and Office of Fair
Trading.
AO/QUA/0227 – V2.2 63
3. There is finally the need to restructure an industry so that any vertical
integration is broken up in such a way that the finances of each sector
are disaggregated (as provided for in the so called "normalisation of
accounts" EU Directive) and any subsidies are "transparent". For
example, an operator owns and controls both the track and the vehicles
(as with the old BR). In other words, it should be possible to see
where subsidies are applied (as when a socially desirable but un-
remunerative bus service is put out to tender, rather than when an
entire network is subsidised by a process of "deficit financing").
While privatisation is undoubtedly one way of accomplishing this third pre-

requisite of a liberalised transport industry, it is not the only way. It is
neither essential nor always desirable to separate ownership and control
to restructure an industry. This can equally well be accomplished by
creating "internal markets" with distinct "procurer" and "provider" roles.
This still happens in many "shire" counties in respect of the provision of
education and social services transport (subject to an overall requirement
in the Transport Act 1985 to cooperate with the providers of public
transport to obtain best "value for money").
 Task 1.4
With transport establishments with which you are familiar, identify the
advantages and disadvantages of:
 Being a sole trader
 Being part of a Consortium
 Being a Private Limited Company
 Being a Public Limited Company
Give reasons for your analysis.
64 AO/QUA/0227 – V2.2
2. The Regulation of Transport
Learning Outcomes
 Understand the structure and ownership of the transport industry.

 Understand the concept of economic regulation and de-regulation of
the transport industry.
 Understand the principles of quality regulation and the requirements
placed on the operator.
 Understand the effects of laws regarding restrictive practices and the
enforcement of competition.
 Understand the nature and role of national and international regulatory
bodies, trade associations, user groups and pressure groups which
impact on the transport industry.
2.1 Regulatory Bodies

All levels of government
have an interest in
controlling the supply and
provision of transport both
within and to and from their
territory. This may be
achieved by themselves
owning and operating transport undertakings, or by licensing either the
level of provision (quantity licensing) or the safety and environmental
standards of that provision (quality licensing) or both.
Governments become involved in this way because of their concern for

the safety of their citizens who are transport users, or for their economic or
social needs. Transport is also a strategic need of national states in
times of emergencies or hostilities.
AO/QUA/0227 – V2.2 65
2.1.1 Powers and duties
EU and domestic legislation gives the European Commission, EU member
states, and often their regional and local governments and variously
constituted providers and procurers of transport widespread powers.
In many cases these are supplemented by a duty to achieve certain

objectives, such as, for example, the requirement for UK local authorities
to produce Local Transport Plans (LTPs) and the duty of local education
authorities to provide free transport to children who live beyond a statutory
"walking distance" from their school. However, the existence in law of a
power does not necessarily mean that central government or a local
authority is required to exercise that power in every case. For example,
not every county council in England and Wales has determined a
concessionary fares scheme for its pensioners, children and disabled
passengers. Where, on the other hand, Scotland has a national scheme.
2.1.2 The European Union

In considering the legislative powers of the EU it is useful to compare the
UK and EU constitutional powers.
Both have a legislative assembly (parliament), but the European

Parliament is not the supreme legislative body. That function is discharged
by the Council of Ministers, effectively the prime ministers of each member
state, but often delegated to their ministers of transport when transport
legislation is being considered.
Following the Maastrich Treaty of 1992, the council decides legislative

matters by employing a system of qualified majority voting. However,
some matters which pre-date Maastrich are still historically decided on a
unanimous vote; in other words, each member state retains a veto.
Other matters are deemed to be covered by the doctrine of "subsidiarity",
i.e. they are considered not to be of concern to the EU as a whole and can
be decided upon by the individual member state.
66 AO/QUA/0227 – V2.2
EU legislation takes two main forms:
 A regulation, such as the EC Regulation 3820-1/85, on drivers' hours

and keeping of records, is binding on member states.
 A directive is more like a duty, setting out what the member state needs
to achieve but leaving it to the state to pass its own legislation to do so.
Thus, the aim of the directive on professional competence in road

transport operations is achieved in the UK by an amendment to the
Transport Act 1968 and a statutory instrument, the Goods Vehicles
(Operators’ Licences, Qualifications and Fees) Regulation 1992.
The EU equivalent of the Civil Service or the government's administrative

arm is the European Commission. Should the commission be unhappy
about the way in which a member state implements its directives or
complies with its regulations it can ask the European Court to intervene.
2.1.3 Central government

Policy
The UK Prime Minister appoints his cabinet from elected members of

parliament; it is the cabinet which determines the broad thrust of
government policy. The necessary legislation is then drafted by the civil
servants, in the case of transport legislation by the DfT, and enacted by
parliament, as described below. Both the courts, through the mechanism
of judicial review of ministers' (or their civil servants') actions, and
parliament, are able to monitor, scrutinise, and if appropriate question
government policy and its implementation.
The departmental standing committees set up in

the 1980s and made up of MPs in proportion to
party numbers in the House of Commons,
review important policy matters and can be
quite critical of their government's policies.
They both consider matters referred to them by
the government or can, and often do, generate
their own agendas.
AO/QUA/0227 – V2.2 67
Select committees are similar but are set up on an ad hoc basis to
address a particular matter and are then disbanded.
In addition, the House of Lords can amend (and even initiate) legislation
during its passage through the house. However, if they defeat a bill which
is then re- presented to them after one year, they cannot again veto it.
In recent years, there has been a move towards devolved government in

the UK and Northern Ireland. There is now; The Scottish Parliament, the
National Assembly for Wales and the Northern Ireland Assembly. Each of
these has responsibilities for transport through the devolved powers.
Administration
Many of the DfT's functions have now been assigned to "executive

agencies" such as the Highways Agency or the Vehicle and Operator
Services Agency, but overall policy relating to all modes of transport
remains with the DfT. On the other hand, while sea and air transport were
once seen as the preserve of the Board of Trade, (now the DTI), they have
been passed to the DfT.
The legislature
Parliament passes primary legislation in the form of bills which are

debated, scrutinised in committees and, if a majority of MPs voting after
their final reading are in favour, become acts of parliament.
Acts usually have an enabling function. They allow a minister to take

executive action, for example to sell the assets of defunct bodies such as
Railtrack. They also invest other authorities, such as PTEs, county
councils, ministries and executive agencies (e.g. the Vehicle Operator
Services Agency) with statutory powers and they can also impose
statutory duties.
68 AO/QUA/0227 – V2.2
"Enabling" legislation usually empowers ministers to make regulations
(correctly termed statutory instruments) in order to achieve the objectives
of the act. For example, the Road Traffic Acts enable ministers to make
regulations as to the construction and use of motor vehicles. These
regulations are placed before the house for 14 days and, provided no MP
objects, come into force on the "commencement" date. Usually they
address non-contentious matters, but sometimes the Government will set
aside parliamentary time to debate their content when the matter is of wide
concern, e.g. tachographs, lorry weights, seat belts on buses, etc.
Devolved and Local Government
Regional or devolved government is one which appears to be growing,

and which we are likely to see more widely in the future. Some devolved
government bodies are able to make statutory changes to the principle
structure of transport and transport operation and they can also introduce
regional and local initiatives and to administer them independently.
This relaxation of central control has led to a variable approach by both

regional and local authorities to matters such as speed camera
introduction and local speed limits, etc.
Devolved government is responsible for local government and PTE activity

within the region under its control and sometimes superimposes itself over
local government, although it is generally agreed that regional government
acts as the link between the local authorities/PTEs within a region and
central government.
In Scotland, there is no longer a PTE, but the country is covered by seven

Regional Transport Partnerships, operating on three separate models.
The PTE and Local Authorities no longer have responsibilities for
concessionary fares. This lies with Transport Scotland, a Scottish
Government agency. Wales and Northern Ireland have similar
arrangements for concessionary fare schemes.
For example, devolved government is responsible to ensure that all the

local authorities actually submit their local transport plans on time. In that
way, they are ensuring that whatever funding the region applies for it is
done so from a position of knowledge of what the various local authorities
see as priority needs and wants.
AO/QUA/0227 – V2.2 69
PTE/county council main functions are:
 securing by tender those services which the market cannot provide to

meet the requirements their areas (Transport Act 1985)
 determining concessionary fare schemes for elderly people, children
and people with disabilities
 providing or procuring transport for people with disabilities
 producing public transport publicity
 providing infrastructure, e.g. bus stops, bus stations, interchanges, light
rapid transit, etc., for which they can "bid" through the TPP process for
funding (Transport Act 1968, Section 56)
 setting up Quality Partnerships.
The Railways Act 1993 also makes PTEs and OPRAF jointly responsible
for specifying the passenger service requirements of a PTEs area and for
securing from train operating companies the appropriate services by
franchise agreements.
Other bodies
Other bodies with the power to influence transport operations, range from
user groups to trade associations and back to pressure/lobby groups.
The roles of these various bodies is always different but they do wield
considerable power and, as such, are often invited to contribute to debate
in order that government may take a balanced view when considering
future transport strategy or policy.
Trade bodies such as the Road Haulage Association (RHA), the Freight
Transport Association (FTA), the International Air Transport Association
(IATA) and the Confederation of Passenger Transport (CPT) represent
member companies and organisations operating national and international
goods and passenger services. They act in the role of information and
advice centre, lobby group, supplier of specialised services and guarantor
for many transactions. These trade associations are generally highly
respected by local, regional and central government and are often invited
to comment on proposed new legislation which may affect the sector the
trade association represents.
70 AO/QUA/0227 – V2.2
Along with trade associations, there are also more formal bodies such as
the UN body known as the Economic Commission for Europe (ECE) which
oversees many of the international trading conventions. These include,
the Accord Dangereux Routiers (ADR) the Accord Temperatures
Perisables, (ATP), the Convention Merchandises par Routiers (CMR), the
Transport Internationale Routiers (TIR) convention and the International
Standards Organisation (ISO). These bodies variously set standards for,
and control the movement of, dangerous goods and perishable foodstuffs,
lay out the conditions of carriage for the movement of goods
internationally, set standards for freight containers used on international
journeys and control and administer the specification of freight containers
and container vessels and container equipment.
Finally, it must be remembered that pressure group such as Transport

2000, Friends of the Earth and Greenpeace also have a role to play that
impacts upon transport development, operation and management. Their
role is usually biased towards environmental considerations, but it often
spills over into the political arena. This is where they are often able to
have a major impact on the future development of transport projects that
they consider to be either unnecessary or disproportionately harmful in
relation to any perceived benefits the project may bring to the users or
area concerned.
 Task 2.1
With the development of devolved government throughout the UK and

Northern Ireland, what are the likely impacts of implementing EU policy
throughout different areas?
Discuss your findings in relation to the EU, Westminster Government

and Devolved Government.
AO/QUA/0227 – V2.2 71
2.2 Economic De-regulation and Regulation
2.2.1 Regulatory control
Quantity and quality controls
As mentioned earlier, regulation can be of two kinds.
Quantity
In the first instance, a government may wish to regulate the amount of

transport provision. This will be either to protect its own nationalised
transport systems from competition; or to protect those operators to it has
awarded contracts or provided operating subsidies. It may also wish to
avoid wasteful competition.
Quality
In the second instance, the government will probably wish to regulate the
standard of operations, usually for either safety or environmental reasons,
or both.
We will examine issues connected with the de-regulation of services first

in order to establish some of the reasons and some of the effects of this
process which is often used by government to stimulate sectors or whole
markets, where inefficiencies or out-moded practices are thought to exist.
Later we will consider the issues surrounding regulation but this section is
aimed at the economic issues whilst the next section will consider operator
regulation purely from a quality perspective.
2.2.2 Deregulation
Somewhat of a misnomer, while this is no more than the relaxation or total
freeing of quantity controls, in some cases it is accompanied by a
tightening of quality controls to "raise the barriers to entry" and exclude
unsuitable operators. Quality controls are not often those associated by
many people. They more often relate to safety controls and, to some
extent, punctuality eligibility. The Quality Partnership aims to bridge this
gap. The objectives of a deregulation policy are to increase competition,
reduce costs, reduce fares and obtain better value for money.
72 AO/QUA/0227 – V2.2
In so doing this can lead to the market becoming unstable, difficulties with
the co-ordination of services and the loss of services on non-profitable, or
low profit routes and operations.
Deregulation is perhaps best documented by the bus industry. The

procedures for registering a local bus service are actually more complex
than those for obtaining a road service (quantity) licence which they
replaced. In addition, PSV “O” licensing, which came into effect in 1980
when deregulation applied only to express bus services, is a much more
rigorous procedure than the PSV licence required for each vehicle in an
operators' fleet before that time.
However, it is not as rigorous as goods vehicle “O” licensing, introduced in

1968, with the deregulation of the road freight transport industry. This was
found to need strengthening in 1984 (as a result of the findings of the
Foster Committee on LGV “O” licensing). Environmental controls were
imposed on the large numbers of operators who had entered the market.
Such controls were applied later to PSV operators, but many consider they
should now be tightened, since the fragmentation of the industry which
followed bus deregulation and the increasing use of older vehicles for
applications such as school transport.
Influence of deregulation
Deregulation creates competition. In fact, these two, together with

restructuring, are fundamental to the liberalisation of the transport industry.
The removal of quantity controls inevitably creates a contestable market
for transport services by allowing, depending on the severity and "height"
of the quality-based barriers to entry, new operators to attempt to
penetrate the market.
The entry into a free market where formerly nationalised operations are
allowed to trade freely did not mean that all who attempted the change
were successful. Many of the former ‘state’ operators were aggressively
countered by the existing private operators and successfully beaten off as
effective competition. The main area where former nationalised road
passenger operations were successful was in the provision of inter-city
coach services.
AO/QUA/0227 – V2.2 73
This led to the then BR, introducing price discrimination, saver tickets and
improved scheduling in order to counter the success of the inter-city road
services even though they were only in existence as the result of de-
regulation from a completely different mode of transport.
Monopoly
While whole sectors of the market were under public ownership and
control, and effectively had no competition, the legislation under which
they operated also exempted them from the provisions of UK competition
laws.
In some cases, the appropriate Secretary of State was given reserve

powers to refer matters such as efficiency and pricing to the MMC to
determine whether operators were abusing their monopoly powers. Thus
in the early 1980s, Cardiff City Transport, West Midlands PTE
(representing the municipal and PTE sectors), an NBC subsidiary, BR
South East Region and London Transport were singled out at random for
such references. Later in 1993/4, Virgin Atlantic claimed that its competitor
BA was employing anti competitive practices, and pursued this in the
courts.
Competition law
The bus industry is used here to illustrate the application of competition

law. It should, however, be appreciated that this has applied to the road
haulage industry since its deregulation in 1968. Rail transport is a little
different in that the ORR has a consumer protection role under the
Railways Act 1993, but has also been given "concurrent jurisdiction" with
the OFT to exercise some of its functions, such as, investigating
allegations by train operators of "unfair trading". The OFT also
investigates alleged malpractices levelled by trade associations and user
groups.
74 AO/QUA/0227 – V2.2
The Transport Act 1985, in deregulating road passenger transport,
specifically brought within the reach of UK competition law, not only those
existing operators who had hitherto been exempt, by virtue of their road
service (quantity) licences, but also all the new entrants with whom they
now competed. Significantly, at the time, London Transport and Northern
Ireland Transport (Ulsterbus and Belfast Citybus) were not referred, as
they remained regulated.
There are three distinct strands to UK competition law for controlling:
1. Monopoly
2. Competition, and
3. Preventing anti-competitive practices.
Competition Commission references
The Fair Trading Act 1973 gave the Director General of the OFT powers to
refer for investigation to the Competition Commission (CC) mergers,
takeovers or monopoly situations. If the CC finds factors contrary to public
interest, the Secretary of State for Trade and Industry can make orders as
to a remedy. Similar powers under the Competition Act 1980 can be used
to investigate the practices of any business with a turnover in excess of £5
million per annum or a 25% or more share of the relevant market. In
1999, the Competition Commission (CC) replaced the Monopolies and
Mergers Commission as a result of the Competition Act 1998.
Unlike the anti trust laws of the USA, there are no provisions for the award
of exemplary damages against proven "offenders". This, coupled with
the protracted nature of the investigations (during which complainants can,
and frequently do, go out of business, thus winning, if their complaint is
upheld, a very costly victory) is a major weakness of the legislation.
AO/QUA/0227 – V2.2 75
The Contracting Out and Deregulation Act 1995 attempted to address
some of this criticism. This provided that the Director General of the OFT
may propose to the Secretary of State that he should accept an
undertaking in lieu of his making a monopoly reference if he:
 considers that a monopoly situation exists which could be against the

public interest
 considers that the undertakings offered are sufficient to deal with any
adverse effects of the situation
 intends making a monopoly reference if these are not accepted.
The proposal must include terms of the undertakings and the person
giving these, and statements of fact regarding the monopoly situation and
its identifiable effects. The Director General of the OFT can only make a
proposal if he publishes these matters. Where the Secretary of State
accepts such undertakings, no monopoly references may be made.
The Director General of the OFT must review undertakings from time to
time and consider if they need to be varied or replaced, or individuals
released from them. Similarly, he is allowed to accept undertakings, as an
alternative to merger references, where these provide for:
 the division of a business by the sale of assets or otherwise

 the division or separation by the sale of assets or otherwise.
Many observers feel that the provisions of the Contracting Out and
Deregulation Act 1995, while strengthening the powers of the OFT and
speeding up references, was “too little too late”. Certainly, the legislation
did little to slow the inexorable trend towards the emergence, by takeover,
of large monopolies in the bus industry, the rail industry, the road freight
industry and, to some extent both, sea and air operations.
76 AO/QUA/0227 – V2.2
Under the Enterprise Act 2002 (the Enterprise Act), the OFT can
investigate whether there is a realistic prospect that a merger will lead to a
substantial lessening of competition (SLC) in a UK market. If it finds
there is such a prospect, it will refer the merger to the CC, unless it obtains
undertakings from the merging parties to address its concerns, the market
is of insufficient importance or it considers that one of a number of other
limited exceptions applies. In exceptional cases where a merger raises
certain public interest issues, the Secretary of State may also refer
mergers to the CC.
Where a merger is referred to the CC, the CC carries out an investigation

and decides whether it has or may be expected to result in an SLC. If so,
the CC has wide-ranging powers to remedy any competition concerns
resulting from the merger, including preventing a merger from going
ahead. It can also require a company to sell off part of its business or take
other steps to improve competition.
Registerable agreements
The Restrictive Trade Practices Act

1976 contains a presumption that any
agreement between two or more
operators, which restricts in any way
their freedom to compete, is against
the public interest. It should be
“struck down” unless all parties
concerned can show the Restrictive
Trade Practices Court (RTPC) that
this is not the case. Such agreements may include apparently ‘customer
friendly’ initiatives such as joint operation of service or the acceptance of
each other’s return tickets. On the other hand it also applies to price
fixing or market sharing agreements.
The mechanism contained in the act is that such agreements are

registerable with the OFT and, if operated without registration, are
automatically illegal.
AO/QUA/0227 – V2.2 77
Registration places a duty on the OFT to review the agreement and to
decide whether to refer this to the court. Any attempt by operators to
continue to operate under a struck-down agreement would be construed
as contempt of court, for which a fine can be imposed. Anyone adversely
affected by an unregistered agreement (e.g. a passenger or competitor)
can sue.
It is however possible for some agreements to be shown to pass through

one of the various "gateways" set out in the act, of which "public interest"
is clearly the most applicable in the transport industry. These will either
not be referred to the court or, if referred, will not be struck down, provided
the benefits to the public outweigh any potential detriment.
Clearly, inter-ticketing arrangements between rail franchisees is

registerable. Given the ORR’s commitment to through ticketing, it is
unlikely that these would be referred or struck down. However, were it
not protected by the act, the ORR's decision not to license competing
operators who apply for "open access" to the franchisee's route, in the
early years of franchising, would at best be registerable it could even be
construed as restrictive and liable to be struck down.
The Contracting Out and Deregulation Act 1995 provides that the
Secretary of State for Trade and Industry can declare as non-registerable
certain agreements between operators whose combined turnover is
“small”. Thus some operators can now enter into inter-ticketing and inter-
running agreements without the need to register these and the consequent
risk of a costly investigation.
Non-notifiable agreements are defined as:
 subject to registration under the Restrictive Trade Practices Act 1976

 not price fixing
 not those for which the DGOFT has filed particulars
 of a description specified for the purpose by the Secretary of State (say
by size of the business expressed by turnover or percentage market
share or so as to exempt any community provision).
78 AO/QUA/0227 – V2.2
Anti-competitive practices
The Competition Act 1980 addresses practices which restrict, distort or

prevent competition. The most common accusation of an anti-competitive
practice is predatory pricing. This occurs where an operator reduces his
fares below his costs in order to drive off competition. In extreme cases,
an operator may provide a free service.
There have been numerous high-profile cases in the bus industry of such
accusations made to the OFT by smaller operators against their large
competitors. One large national bus operating group has been the subject
of 14 such complaints since deregulation, the majority of which have
resulted in no action being taken by the OFT. Charges of predatory pricing
have also been made in the air industry as the new low-cost operators
endeavour to enter new markets and some of the existing carriers take
measures to retain market share.
A major worry is the, albeit necessary, long time OFT involvement in a

thorough investigation of such complaints. For example, the OFT is
required to advertise its involvement and ask for evidence. During this
time, the complainant's business may well be irreparably damaged, so that
if a finding is eventually made in his favour, restraining his competitor, it
may well be too late; the competitor will have achieved the desired result
of the operator's demise.
With this criticism in mind, the Competition Act 1980 was amended by the
Contracting Out and Deregulation Act 1995. Certain provisions were
removed relating to preliminary and formal investigations (and their
constitution) where these related to "courses of conduct constituting an
anti-competitive practice". Provisions were substituted allowing the
Director General of the OFT to accept, as an alternative to making a
reference to the RTPC, undertakings which appear to him to remedy or
prevent any effects adverse to the public interest.
He must first publish an appropriate notice and consider any resulting

representations made to him. When the DG accepts such an undertaking,
he may not while this is in force make a competition reference to the
RTPC.
AO/QUA/0227 – V2.2 79
The CC replaced the Monopolies and Mergers Commission in 1999,
following the commencement of the Competition Act 1998. The Enterprise
Act introduced a new regime for the assessment of mergers and markets
in the UK. The CC’s role in such cases is now clearly focused on
identifying and remedying competition issues, replacing a wider public
interest test in the previous regime. It also continues to act as an
appellate body in relation to regulatory, particularly price control, and
decisions taken by economic regulators.
However, with the development of SQP’s, some organisations may be

able to use / misuse the spirit of the legislation to operate in an anti-
competitive way.
2.2.3 Regulation
Regulation of services acts, not surprisingly, in opposition to de-regulation.
It exists to control the market and ensure it remains stable; it is less
concerned with cost, although quality is an essential feature and it is often
used as a tool to maintain services that would otherwise not be seen as
viable, in a deregulated market. Regulation is almost always controlled
by some form of licensing of the operators. The introduction of a SQP is
one form or re-regulation into the bus industry.
Conclusion
Much has been written about deregulation and regulation and the
advantages and disadvantages of both options. Clearly, they have a
direct effect on the economy and the economic capability and performance
of operators within the system and, whilst many economic influences are
hinted at, the reader can easily identify economic links to and from
regulated and deregulated services as they have the power to affect us all
as users of public, and some private, transport.
As the UK becomes much more aware of customer rights and service

needs it is likely that major initiatives, such as the deregulation of the bus
industry and the privatisation of rail will emerge.
80 AO/QUA/0227 – V2.2
However, it is worth considering the effects on industry of some of these
measures. In addition, to examine the changes to traditional service levels
and patterns that result from attempts to open up markets to competitive
forces; or to control markets in order to achieve stability, and service levels
that the public demand.
We have looked at the two kinds of regulatory control and considered the
means of exacting that control in the form of licensing. We have gone on
to examine regulation in the UK, and the role of the licensing authorities,
for each of the modes. We have seen how deregulation creates
competition and increases the role of competition law with regard to
monopolies and prevention of anti- competitive practices.
 Task 2.2
Do you think collusion still remains in the Transport industry in the UK?
Comment on the reasons for your answer, and what, in your opinion,
should government do more or less to ensure the sustainability of the
transport industry?
AO/QUA/0227 – V2.2 81
2.3 Quality Regulations and Requirements
2.3.1 Regulatory control
This section examines the quality
control systems and operator
requirements existing in the transport
industry. The actual type of
infrastructure and the vehicles and
motive power which operate on or over
it are usually more a function of
ownership and are shaped by
investment, public, private and mixed.
As mentioned earlier, control is most easily exercised in two ways:
1. by regulation of the actual transport operations

2. by financial direction, both operational (revenue and subsidies) and in
terms of capital expenditure or investment.
Safety is often a paramount consideration where public transport is

concerned. Passengers may have no choice but to use a public transport
service, and no choice of service (for example on a suburban railway).
Having paid a fare, they are entitled to expect that the vehicle in which
they travel is driven by a competent driver, and that the operators of the
service are themselves competent and observe all the necessary safety
and operational rules. However, as a customer, the passenger may
expect more. This can include: correct heating and ventilation for time of
year, comfortable seats, visual clarity (windows not obstructed by adverts),
and ability to carry out a conversation and not be hindered by engine
noise.
There will be further expectations if the passenger has a disability or is

conscious of the environment.
Nowadays, environmental matters are assuming ever greater significance.

Environmental considerations, for example, in relation to goods vehicle
operating centres, have become an integral part of the operator licensing
process.
82 AO/QUA/0227 – V2.2
2.3.2 UK regulations and licensing authorities
The DfT has an almost total overview of transport regulation and control in
the UK, especially since it acquired responsibility for air and sea transport
(from the DTI).
There are seven Traffic Commissioners and they are appointed by the
Secretary of State for the Transport and have responsibility in their area
for:
 The licensing of the operators of Heavy Goods Vehicles (HGVs)

and of buses and coaches (Public Service Vehicles or PSVs)
 The registration of local bus services
 Granting vocational licences and taking action against drivers of
HGVs and PSVs
The Traffic Commissioner for Scotland is also responsible for dealing with
both appeals against decisions by Scottish local authorities on taxi fares,
with appeals against charging and removing improperly parked vehicles in
Edinburgh and Glasgow.
Commissioners are statutory independent in their licensing functions.

When necessary, they hold Public Inquiries, in particular to consider the
environmental suitability of HGV operating centres and the possibility of
disciplinary action against operators who have not observed the conditions
of their licences.
The role of the Senior Traffic Commissioner is a statutory one whose

responsibilities are set out in the Local Transport Act 2008.
AO/QUA/0227 – V2.2 83
Air transport
The International Civil Aviation Authority is an intergovernmental agency

which establishes, but does not enforce, detailed safety and operational
standards. Enforcement is performed in the UK by the CAA which is
responsible for air safety, and:
 issues certificates of airworthiness

 licenses flight crews, aircraft engineers, aerodromes
 certifies UK air operators.
In 2001, the CAA ceased to control air traffic services which are now
under the control of National Air Traffic Services (NATS). NATS controls
air traffic from a number of centres:
 London Area Control Centre at Swanwick, Hampshire

 London Terminal Control Centre in West Drayton, Middlesex
 Scottish Area Control Centre and Oceanic Area Control Centre at
Prestwick, Ayrshire
 Manchester Area Control Centre located at Manchester Airport.
In the future, NATS will handle en route traffic from two new centres – the
Swanwick Centre in Hampshire and the New Scottish Centre at Prestwick.
In addition, NATS provides air traffic control services at 14 of the nation’s

airports including Heathrow, Gatwick, Stansted, Birmingham, Manchester
and Glasgow.
NATS also:
 operates and maintains a nationwide communications, surveillance and

navigation network
 provides engineering support at all operational units
 carries out advanced research and development
 develops software for current and new systems
 trains air traffic controllers and engineers.
Civil aviation is not fully deregulated, although the EU Common Transport

Policy will eventually require this, and Trans-Atlantic flights are in theory
deregulated but in practice regulated by the availability of "landing slots" at
major UK and US airports.
84 AO/QUA/0227 – V2.2
The CAA retains a quantity licensing function in the economic regulation of
the civil aviation industry, including for air transport licensing and the
licensing of air transport travel agencies, and in the approval of air fares
and certain airport charges. In carrying out this function, it works closely
with the International Air Transport Association in making bilateral and
multilateral agreements with other national carriers. The European
Commission has however taken an interest in this area and has declared
that it, not individual member states, is the competent authority to reach
such agreements on their behalf. For example, in 2012, Stansted Airport
claimed they could double the passenger numbers to over 36 million per
annum if exempt from CAA’s regulations. This would clearly have
significant impact on the wider community in environmental and economic
terms.
The EU "Open Skies" policy effectively deregulated flights between the UK

and the Benelux countries (Belgium, the Netherlands and Luxembourg),
on which fares fell and frequencies improved on the trunk routes between
capital and major city airports and the emergence of the ‘low-cost’
operators has also enabled deregulation to an extent previously
unthinkable.
Rail transport
Prior to privatisation, BR was the sole mainline railway operator in the UK,
apart from a few private "preserved railways" and other heavy/light rail
and metro operators being such as Glasgow Subway, Croydon Tramlink,
London Underground, Manchester Metrolink, Tyne & Wear Metro and
Sheffield Supertram. Because it was a nationalised undertaking, the
control exercised over its operations was largely internal, but to standards
laid down by the Railway Inspectorate.
The Railways Act 1983, merged the Railways Inspectorate with the Health
and Safety Executive, but, more importantly, set up the independent ORR.
Not dissimilar to the role of Traffic Commissioners in the road sector, the
ORR’s functions are to regulate the activities of Network Rail, the TOCs,
the train engineering service companies, and the rolling stock operating
companies.
AO/QUA/0227 – V2.2 85
One of the ORR’s most important functions is to licence operators and
operatives, drivers, platform staff and "track side" staff, i.e. those with
direct operational functions like track maintenance staff, signal staff and
controllers. Operators are required as a condition of their licence to
make a "safety case" to be approved by the Railway Inspectorate.
The ORR also has some commercial functions, such as having an

overview "in the public interest" of fares and ticketing, and the appointment
and servicing of the RUCCs.
Road transport
LGV and PSV “O” licences are granted by Traffic Commissioners,

appointed by the Secretary of State for Transport to control the licensing
and operation of road passenger and road freight fleets within traffic areas
to which they are appointed. Currently there are seven traffic areas within
the UK, controlled by Traffic Commissioners but Northern Ireland has a
quality licensing system which is currently administered by the Department
of the Environment. Appeals against their decisions are heard by the
Administrative Appeals Chamber of the Upper Tribunal Traffic
Commissioners. They also consider environmental objections to the
granting of LGV (but not PSV) “O” licences.
The Driving Standards Agency of the DfT is responsible for driver testing
and licensing. Another DfT agency, the Driver and Vehicle Standards
Agency (DVSA), is responsible for the inspection and testing of goods and
passenger motor vehicles which fall outside the normal MOT test
requirements, either by size, seating capacity or gross weight. Thus, for
example, light vehicles need to pass the "MOT'! test; LGVs have to attend
an LGV testing station; and PSVs need to be issued with a Certificate of
Initial Fitness (CIF) by a certifying officer.
DVSA examiners carry out fleet inspections and roadside checks of LGVs
and PSVs, and issue prohibition of use notices (Form PG9) to un-
roadworthy vehicles. Certain police officers have similar powers to issue
immediate prohibitions, but cannot issue delayed prohibitions. Currently,
DVSA examiners have the power to stop vehicles for inspection,
something that previously required a police officer in uniform.
86 AO/QUA/0227 – V2.2
Outside London and Northern Ireland, bus operations are completely
deregulated; there are only quality licences and the road freight industry is
also entirely deregulated.
Sea transport
The International Maritime Organisation (IMO), a United Nations agency

based in London, establishes quality standards for merchant shipping
throughout the world. IMO conventions are ratified by seafaring nations,
but their effectiveness depends entirely on the willingness of the signatory
nations to enforce them.
UK-registered ships are inspected by the DfT, Maritime and Coastguard

Agency in respect of:
 the competence of the crew (master, engineer, radio operator, officers

and seamen, etc.)
 the safety of the vessel (with inspection subcontracted to classification
agencies such as Lloyds of London), and
 manning levels.
However, many UK-owned ships are registered in foreign ports (where
standards are not so high) under “flags of convenience”.
While technically there are no quantity controls over sea transport, the
existence of liner "conferences" provides a form of voluntary self-
regulation through cartel agreements. However, these are now facing an
unprecedented level of external competition on many trade routes as a
result of overcapacity in the sea freight market. The market for passenger
travel is now, apart from short-sea ferry crossings, almost entirely in cruise
liner operation, which is experiencing enormous growth, along with other
sectors of tourism.
AO/QUA/0227 – V2.2 87
Inter-modal transport
Inter-modal operations are normally regulated by the regulations in force

for the mode being used at the time. However, there are some regulations
that apply across modes. International Standards Organisation (ISO)
containers are designed, approved and tested to agreed standards which
apply to whatever mode of transport they are being carried by. In addition,
there are inter-modal regulations for the carriage of such things as
dangerous goods, bonded goods, waste and toxic products and livestock.
Sometimes one set of modal regulations takes precedence over any other,
as in the case of the International Maritime Dangerous Goods regulations
which can, and do, take priority over ADR regulations on some sea
crossings.
Some of the inter-modal practices, standards and equipment are able to

serve a wider purpose. For instance, the ISO container is a secure
container and as such is usually recognised as meeting the standards
prescribed for the carriage of goods under TIR regulations, insofar that it
can be sealed, there are no secret compartments and it has current
certification. In this way, an inter-modal container is able to transfer
between modes and be speedily cleared by the customs authorities at any
border point regardless of the mode.
International transport
The international transport of goods and passengers also requires

regulatory controls and, whilst there are additional quality controls and
qualifications required for operators wishing to trade internationally, there
are also many other controls aimed at ensuring the operation is safe and
in compliance with agreed standards.
88 AO/QUA/0227 – V2.2
Most EU countries require UK drivers to carry additional proof of driving
entitlement (normally a ‘green card’). Others require drivers to carry
authorisation to drive from their employer, proof of ownership of the
vehicle, insurance documentation, a European Road Traffic Accident form,
proof of entitlement to operate abroad (Community Authorisation), proof of
the status of the goods, prescriptions for medication, bail bonds and proof
of pick-up and delivery points. Furthermore, all drivers using French
roads are required to carry an approved breathalyser kit.
These examples may seem onerous given that the EU was initially
established, under the Treaty of Rome, to secure the free movement of
goods and the free movement of people. In addition, whilst that may be
true, there are a number of things that could impede this. This includes:
things such as the cost of medical treatment for foreign nationals, unequal
taxation levied on vehicles excise duty, fuel and road tolls, differing
exchange rates, etc. It also means, that even member states of the EU
feel the need to safeguard their economies and their people by the
insistence on compliance with domestic legislation designed to prevent
non-domestic operators gaining unfair advantage.
Clearly, passport controls are much relaxed across the EU as a whole and
passengers are now able to travel virtually without challenge but, whilst
this is normal, it is still necessary for passengers to carry passports in
order to prove, for both security and control purpose, their national origin.
With the advent of EU ‘open borders’ policy, stricter regulation of the

carriage of clandestine persons coming into the UK, means new
challenges for HGV and PSV drivers and their employers. Fines of £2,000
(for driver and operator) for each clandestine coming into the UK via the
vehicle, are not just a serious deterrent, but can put a company out of
business if correct procedures and checks are not made, and detected by
UK Border Agency staff.
Travellers by air are probably the most scrutinised of all; a move clearly
aimed at countering terrorism. More and more travellers, and their goods,
are x-rayed, filmed, recorded and processed under security requirements.
Bulk freight too, is now more closely scrutinised with large x-ray machines
operating to x-ray complete vehicles and trailers using the freight service
operating through the channel tunnel.
AO/QUA/0227 – V2.2 89
 Task 2.3
What are the quality requirements in relation to:
 Customer perception and expectation
 Government expectation
 Service Provider perception and expectation?
Do you think there are differences, and if so, give reasons for your
answers?
2.4 Monopolies and Cartels

2.4.1 Consumer protection
While some sort of contractual relationship almost always exists between
transport users and providers, this can often be a very unequal
relationship. The ability of the carrier to impose their conditions of carriage
on a consignor or passenger is not matched by the user's ability to
challenge them. This is
especially so where user choice
is denied, as in a monopoly.
Monopolies have been a feature

in the transport industry for
many years and have; it should
be agreed, served the industry
well and, for the most part,
provided services which met the
requirements of the time. In later years, the activities of monopolistic
service providers led to the appointment of various ‘Regulators’, appointed
to ensure that any government funding was applied correctly and
effectively and to safeguard the interests of the public, and other users.
90 AO/QUA/0227 – V2.2
A monopoly allows the operator to practice price discrimination. Without
the advantage of a monopoly, no operator could offer discriminatory fares
or rates without the danger that the competition may undercut the
premium rates they charged. Monopolies also lead to operators being
accused of failing to provide the best value for money and so, in addition
to regulators being appointed, there are additional measures that
accompany monopoly operation.
2.4.2 Carriers' negligence

Carriers of passengers often have a common law duty of care which, in
the case of passengers on public service vehicles (PSV s), is given
substance by the provisions of the Public Passenger Vehicles Act 1981.
These effectively prevent them from limiting their liability for the safety of
any passenger, fare paying or otherwise.
However, it is often in matters of less gravity than liability for death or

injury, but nevertheless of great concern to users, that this unequal
user/provider relationship is exposed. Passengers' luggage, for example,
may be lost, their journey delayed, or a pre-paid seat reservation not be
made.
Unfair contractual terms
In this context, legislation such as the Unfair Contracts Terms Act 1977
may be of limited assistance. The act renders void unreasonable
contractual clauses imposed by a party to a contract (in this case the
carrier) whose bargaining power is disproportionately greater than that of
the other party. In effect, the act applies in situations where the carrier is
able to impose an unreasonable condition (basically "take it or leave it")
which the user has little option but to accept.
The Unfair Terms in Consumer Contracts Regulations 1995 go further in

applying an EU directive which virtually outlaws many "small print" or "get
out" clauses. They provide that, irrespective of the bargaining power of
the parties, if these are unfair they will no longer be binding on consumers.
This is often referred to as ‘Fair, Reasonable and Non-discriminatory, of
FRND.
AO/QUA/0227 – V2.2 91
Many consumers, though, are unwilling to initiate costly litigation against a
large organisation. This is where consumer charters can be useful.
2.4.3 Consumer bodies and charters

While consumer activist organisations, such as the Consumer's
Association, have been in existence for some time, the eruption on to the
political stage of consumerism in 1991 took people by surprise. Private
utilities and public services were required to detail exactly what their
customers could expect and how they could obtain redress when things
went wrong.
A White Paper of 1995 addressed the central preoccupations of these

citizens' charters (choice, access, information, safety, representation and
redress). It concluded that, in the short term, increases in the number of
complaints were to be welcomed as a sign of easier access to systems
and a belief that it is worth complaining. A government-sponsored task
force at the time issued a good practice guide on the subject.
Transport user committees
Over time, legislation creating transport "monopolies" (such as BR, BA,

London Transport and the PTEs) has contained, almost as a quid pro quo,
provision for the creation of user committees.
Air
The Civil Aviation Authority (CAA) sponsors the Airline Users' Consultative
Committee: BAA sponsors the Airport Users' Committee. The former was
successful in the in obtaining redress for the airline practice of booking
passengers on a flight for which the seats were already fully booked (in
the anticipation that there will be some "no shows" on departure). The
practice does seem to have re-appeared in recent years but the redress
avenue is still open to passengers who may have been affected.
92 AO/QUA/0227 – V2.2
Rail
Passenger Focus is the operating name of the Rail Passengers Council, a

new body established by section 19 of the Railways Act 2005 to replace
the Rail Passengers Council and Committees.
Its ancestry goes back to the Transport Act 1947, which created the
Central Transport Consultative Committee (CTCC) and regional Transport
Users Consultative Committees (TUCCs) as part of the Labour
government’s nationalisation programme.
The original CTCC and TUCCs were abolished by section 56 of the

Transport Act 1962, and replaced by new bodies with the same names.
The CTCC and the TUCCs established by the Transport Act 1962 were
abolished by sections 2 and 3 of the Railways Act 1993, and replaced by
the Central Rail Users Consultative Committee (CRUCC) and regional Rail
Users Consultative Committees (RUCCs). Originally established to
consider, and where necessary make recommendations, in regard to any
matters affecting services and facilities, including fares and charges their
powers were extended to enable them to hold public inquiries into
proposed rail closures and the hardship they might cause.
At the government rail summit held in May 2000 the Chairman of the
CRUCC announced that the CRUCC and RUCCs were rebranding
themselves as “the RPC Network”, and that the CRUCC would in future be
known as the Rail Passengers Council and the RUCCs as Rail
Passengers Committees. These changes of name were subsequently
legalised by section 227 of the Transport Act 2000.
Road passenger
The PTAs were given powers (but not a duty) by the Transport Act 1968 to
set up advisory committees; many of them did so.
Sea
The privatisation of Sealink and the British Transport Docks Board

(Associated British Ports) effectively removed these from the scrutiny of
user committees, ending with small provision existed for statutory
consumer representation in the shipping industry.
AO/QUA/0227 – V2.2 93
2.4.4 Cartels
Unlike monopolies, cartels exist as a mechanism for operators to fix prices
and agree on non-competitive behaviour. Some of the earliest cartels
were the shipping conferences operating liner services across the world.
They agreed which routes each would operate and at what price the
services would be offered. It may be argued that there is some cartel
activity still in force in the air industry today, although most cartel activity is
now deemed illegal if it does not benefit the traveller.
Both cartels and monopolies are able to be ‘controlled’ to some degree by

the use of grants and subsidies and by processes such as tendering for
services, where the successful bidder may well be seen to obtain a
monopoly on a service but where the body offering the tender act in the
role of ‘regulator’.
However, in some circumstances, cartels are set up illegally. This

includes, bus operators setting one up to agree geographical areas or
certain routes to tender for. Often difficult to prove, since little evidence
will exist, but it does increase the cost of the service to the public. The
establishment of a formal company, such as a cooperative / consortium, is
one way round this to ensure the activities are legal. This can ensure the
sustainability of various operators business, and reduce the overall risk to
the buyer.
2.4.5 Grants and subsidies

Grants and subsidies are provided by the EU as well as central and local
government. Grants are normally for some form of capital investment and
subsidies are normally in the form of revenue support. Both are open to
scrutiny to ensure value for money.
94 AO/QUA/0227 – V2.2
Grants
Transport grant
Transport grants are provided to local authorities as dedicated transport

grants, they cannot be used for any other type of local government
expenditure. They are made available from central, or regional,
government following receipt of "bids" for transport projects from the local
authorities. The bids are normally made as a result of the submission of a
Local Transport Plan (LTP).
The system enables local authorities to submit "package" bids. These are
described as a comprehensive set of balanced transport proposals, new
schemes and complementary strategies, which could together achieve
clearly defined transport objectives for the area. Thus reduced highway
expenditure on radial commuter routes might be balanced by increased
expenditure on public transport infrastructure. This could involve anything
from bus lanes to "park and ride" schemes, guided busways, LRT
schemes, or heavy rail improvements including new stations.
Grants for rural bus services
A number of grants become available from time to time throughout various

parts of the UK; especially in rural areas, or areas deemed to suffer from
social exclusion. These schemes are broadly similar, and exist to help
rural and socially excluded communities take advantage of the provisions
of the 1985 Act, and of the opportunities to bring in a new service.
The fund does not replace the normal forms of assistance for transport but
complements them by providing extra help when additional money is
needed to start a new service. For instance, projects serving people
living and working in rural areas where the population is less than 10,000
can be considered for assistance where a new public transport service is
to be provided. The fund is generally not available for services which are
going ahead anyway, existing services, or for proposals which would
compete against existing services. In recent years, more emphasis has
been placed on assisting Social Enterprises organisations, such as
Community Transport projects, in efforts to ensure sustainable
communities.
AO/QUA/0227 – V2.2 95
Subsidies
PTEs and county councils in England and Wales have powers to secure
public transport services by entering into service subsidy agreements.
They may only do so where there is, in their opinion, a public transport
requirement not being satisfied by the free market, and which will not be
met unless they take action of offering a subsidy for the service.
Those responsible for expenditure on public passenger transport are:
 in PTA areas (i.e. metropolitan counties) their PTEs

 in shire counties. county and district councils
 in Scotland, Regional Transport Partnerships.
Since devolution, much of the responsibility for expenditure on public

transport has passed to devolved government under a budget awarded by
central government.
There are a number of ‘Indirect’ subsidies given to transport operators,

usually in the passenger sector. This includes, the Bus Operators Subsidy
Grant, (BOSG), entry into the concessionary fare scheme and access to
reserved infrastructure. These cannot be seen as easy hand-outs because
they come with a set of strict conditions and their terms may change
suddenly. For concessionary fares, the bus operator is obliged to join the
scheme on registering a service. However, the cost of the specified
Electronic Ticket Issuing Machines (ETM’s) and the supporting back office
systems can be very expensive. This, coupled with, maximum permitted
fare scales, and varying levels or reimbursement, or in some cases, none
at all nearing the end of the financial year, can place a heavy financial
burden on a company.
BOSG also has some drawbacks. For example, in Scotland in 2012, new
rules were introduced to provide generous reimbursement for eco-friendly
vehicles. The grant could effectively assist an operator with a small
vehicle, operating on a short route, with 100% reimbursement on fuel
costs. However, few operators can suddenly change their vehicles or
routes in a short period of time, and many found themselves losers.
Access to infrastructure can provide operators and their passengers with

increased productivity by avoiding delays at bottlenecks and congestion.
96 AO/QUA/0227 – V2.2
Bus lanes, access through bus gates and priority use at traffic lights are
just some of the benefits. However, more and more of the Quality
Partnerships are becoming Statutory and this can insist on arduous
Conditions of Contract to the user.
2.4.6 Tendered bus services

Tendering authorities have a duty to cooperate with:
 local education authorities (LEAs) (England & Wales)

 social services.
Tendering authorities can invite tenders for subsidised services, and any
agreement entered into as a result must be on the basis specified in the
invitation to tender. The invitation may not specify any requirements as
to the pay or conditions of service of the staff to be involved in running the
service.
Tenders must be open, i.e. the authority must issue a general invitation, by
whatever means it thinks will bring this to the attention of potential
operators, and an individual invitation to anyone who has informed the
authority of their wish to receive these.
Any individual or organisation may request further information concerning

tendered bus services, but tenders may only be accepted from holders of
a valid “O” Licence or Community Bus Permit.
Under current procurement rules, authorities should issue general

invitations to tender both through an electronic procurement portal. This
sets high standards and ensures fair play for those competing for public
contracts.
The maximum period for a subsidized service contract to run is five years.
A tendering authority must conduct itself as not to inhibit competition

between bus and rail operators.
AO/QUA/0227 – V2.2 97
An authority is not compelled to accept the lowest of any of the tenders
submitted. However, it must take into consideration other expenditure and
other services in the area, other services provided by LEAs or social
services, and any other relevant matters, e.g., inter-working of two or more
tendered services. For school transport, it is usually the case that the
authority asks for the lowest price. However, for supported local
registered services, it is by the ‘Most Economically Advantageous Tender’
(MEAT).
There are two different tendering processes:
1. supply side, cost based, gross tender, where the operator tenders on
the basis of his operating costs but the tendering authority receives the
revenue, and
2. "bottom line"/net tender, where the operator indicates his minimum
requirements for subsidy per annum on the basis of his retaining the
revenue.
Operators may be invited to tender on more than one basis. They must
be made fully aware of the basis, on which tenders will be compared, and
there must be a sufficiently objective basis for comparison, for example,
quotations may be sought on precisely stipulated alternatives.
A minimum capacity in a stated time period would allow operators to

submit a variety of proposed service patterns, including high-frequency
services, using smaller vehicles. It is recognised also that authorities have
a legitimate interest in fare levels on services which they support and may
specify actual or maximum fares. The latter system allows operators to
use their expertise to devise the most attractive fares structures.
Table 2.1 indicates the major considerations that tendering authorities and
operators need to bear in mind in deciding how to let tenders or respond to
tendering invitations, respectively.
98 AO/QUA/0227 – V2.2
2.4.7 Framework Agreement
A framework agreement is one that sets out the terms particularly relating
to price, quality and quantity under which individual contracts can be made
throughout the period of the agreement.
There are many advantages for the awarding authority. This includes
lower costs because of the procurement process itself. One operator
would then take on the role of providing all the services under the
agreement, and subcontract, if required, other services. It may also
prompt lower prices due to the supplier enjoying Economies of Scale.
There are also disadvantages. They can be unresponsive to change, and

new entrants with innovative ideas will be excluded. They also tend to
have a ‘one size fits all’ approach. Many frameworks don’t place an
obligation on the buyer to purchase, so there are disadvantages on the
supplier. However, for the transport operator of say, a regular school
service, this would be a daily requirement and unlikely to vary. On the
other hand, a university may invite tenders for the supply of coaches for
365 days per year availability for sporting events but the supplier/s get little
or no work.
AO/QUA/0227 – V2.2 99
Table 2.1 Tendering
Type of Tender
Supply Side /
Bottom Revenue
Gross Cost
Line/Net Guarantee
Tender
Operator Fixed operating Subsidy plus Minimum

receives costs revenue guaranteed
revenue
Benefits to Revenue plus Service only Service and

tendering service revenue above
authority maximum level
Allocation of To tendering Requires Requires

concessionary authority complex complex
travel negotiation negotiation
"travelcard"
receipts
Fares/fares Set by tendering Made by Set by tendering

adjustment authority operator authority
Revenue By operator, By operator, By operator,

collection monitored by provides diluted an
tendering incentive to incentive to
authority exceed "on bus exceed
revenue" maximum
maximum
Risks taken by Tendering Operator, who Tendering

authority may face authority
competition on a
route "won" by
tender
100 AO/QUA/0227 – V2.2

The code of practice suggests that competition could be inhibited by
authorities:
 subsidising services to provide a greater frequency on a commercial

route
 specifying timings unduly close to a commercial service
 putting out tenders for such substantial packages of services so that
only large operators would be likely to have the resources to respond
 specifying requirements likely to limit the number of operators
responding but which are not essential to meet the transport needs of
the area
 awarding all (or a substantial majority) of contracts to one operator.
When putting services out to tender, authorities may choose to specify

them in terms of:
 routes
 timings
 capacity
 fare levels
 vehicle features.
All public service procurements over a certain value must be open to EU-
wide competitive tendering on an equal basis (European Community
Directive 92/50). This equally applies in the case of tenders for rail, tram or
trolleybus services.
After tenders are accepted, the tendering authority must publish:
 the name of the successful tenderer

 the amount of the successful tender
 the number of tenders received
 the amounts of the highest and lowest tenders received.
Tendering authorities must also publish details of tenders when none of

the bids was accepted. In this case the following information would have to
be published:
 the number of tenders received

 the amounts of the highest and lowest tenders received.
AO/QUA/0227 – V2.2 101

There are three circumstances under which authorities may enter into
service subsidy agreements without inviting tenders:
Any service subsidy agreement providing that the operator does not
receive excessive subsidy from any single tendering authority.
It is possible in an emergency, where urgent action is required to:
 maintain a service, or
 provide a service to replace one which has ceased to operate, or
 satisfy a public transport requirement which has arisen unexpectedly.
The service must, however, be put out to tender as soon as possible
thereafter, and the agreement must be concluded within three months
of the date by which tenders for a permanent agreement are required to
be submitted.
An authority may negotiate an agreement for the provision of a service

where it does not receive an acceptable tender, or where no tender at all
is received. The resultant agreement should be for a period specified in
the invitation to tender. The reasons for entering into such an agreement
must be published.
In considering grants and subsidies it can be seen that, in addition to

creating possible monopoly situations their primary role is to reduce the
risk of competition and maintain service levels which might otherwise be at
risk if market forces were to prevail.
 Task 2.4
In relation to tendering for public contracts, when can cartels be illegal?

How can those tendering for public contracts get round this legally?
Give your reasons for this with examples.
102 AO/QUA/0227 – V2.2

2.5 International Transport Requirements
2.5.1 Documentation
International transport is a specialist area which requires in-depth
knowledge of the various procedures and forms used to move both goods
and people across frontiers. It may seem that the EU has made great
progress in reducing much of the administrative burden, which is true.
However, even after many years of alignment the need for robust
documentation systems, to support movements, are vital. In this section
we will examine the EU, and EU requirements for the movement of goods
and passengers, although the movement of passengers is largely much
less controlled than for goods.
In general, Bills of Lading act to

perform a multiple task when
accompanying goods. The
convention known as the
‘Hamburg Rules’ cover the
international use of bills of lading
which are documents that act as
a receipt from the carrier, provide
documentary evidence of the
contract of carriage and show ‘title’ to the goods. Other accompanying
documentation may take the form of Consular Invoices or Certificates of
Origin. The situation for EU movements is somewhat simplified.
The EU is deemed to be a single entity for customs purposes but, in spite

of that, there are requirements that importers and exporters notify the
authorities of the movement of goods in order that trade statistics and
travel patterns can be calculated for the governments of the member
states. Goods that originate within the EU, and on which there is no duty
liable, are said to have ‘T2’. This means that they are in ‘free circulation’
and are able to travel freely throughout member states.
Goods that are liable for duty or which have originated from outside the
EU are said to have ‘T1’ status and are not in free circulation until all duty
has been paid and the goods have been cleared.
AO/QUA/0227 – V2.2 103

The status of goods is recorded on a Customs Form 1-88, a Single
Administration Document (SAD). The SAD form replaced 27 individual
customs forms and really did simplify procedures at a stroke. The form is
an 8 part form which can be used for import, export and community transit.
It is probably the most widely used form for EU movements.
In addition to the SAD form, some goods will have to be accompanied by a

Transit Advice Note (TAN) where they leave the EU and transit EFTA or
Visegrad countries. The TAN notifies the authorities in those countries of
the status and origin of the goods. There are other transit forms such as
the T2L which is a form used to carry goods to Greece when the transport
entails a vehicle leaving the EU (for example to enter the former
Yugoslavia) and then to re-enter the EU at the Greek border.
The documentation required to be carried will be dependent upon both the

goods and the destination, but each member state of the EU has its own
requirements and an operator needs to be certain that the driver has the
correct documentation for each country they may visit.
It should be noted that there are different documentary requirements for

the driver, the load and the vehicle. With, in the case of road freight, the
driver possibly needing to carry:
 Driving licence
 International driving permit (CIS, Hungary, Poland)
 Passport
 Visas (Bulgaria, CIS, Turkey)
 Bail bonds (Spain)
 Medical prescription (France)
 Salary/wage slip (France)
 Training certificates
 Breathalyser Kit (in France from July 2012)
 Letter of authorisation to drive (France and Germany)
 Vehicle Insurance Certificate (France)
 European accident statement form
 Form E111.
104 AO/QUA/0227 – V2.2

For the load the driver may need:
 SAD form
 T2L form
 T5 form
 EUR1
 ATR1
 Community Transit Guarantee
 Passenger Manifest
 TAN
 ATA Carnet (temporary import and re-export)
 TIR Carnet (as discussed earlier)
 Security Checklist (to show the driver/s have checked that clandestine
passengers are not stowaway).
For the vehicle, the driver may need:
 Green card
 TIR certificate
 ATP certificate
 Permits
 Spare Bulb Kit & Warning triangle
 Vignettes
 Community Authorisation.
The lists above are not exhaustive but are included to demonstrate the
complexity of international operations in relation to documentation.
2.5.2 Procedural requirements

When importing or exporting, customs authorities will normally process
goods as they arrive. This may take time with certain goods and so
many operators inform the authorities in advance in order to speed the
process and avoid unnecessary delay. In the case of dangerous goods
and some bonded goods prior notification is mandatory and failure to
notify may well lead to long delays. In the UK the customs authorities will
advise operators of whether or not they require prior notification (not more
than 4 days) for imports and, for exports, operators to use a pre-entry
system to notify in advance of the movement.
AO/QUA/0227 – V2.2 105

On a wider scale, the TIR scheme is the most common scheme for the
rapid clearance of goods at non-EU borders. (There are no such
requirements for goods to clear between EU borders). The TIR scheme
allows that, if the load arrives and the vehicle/craft has not been
compromised or breached and providing the customs seal from the
departure country is intact and the paperwork correct, the load can drive
through the border and enter the country with minimal delay.
This scheme is in common use for most countries and most modes.
Without such a scheme the load would be liable for a full check against the
accompanying paperwork which, at some border crossings may take
several days.
Procedures can, and do, vary and operators may well require specialist
advice when moving goods or passengers internationally. Advice is
always available through the various trade associations who have experts
on hand to answer member queries.
2.5.3 Cabotage
Broadly speaking, cabotage is deemed to be ‘domestic movement of
people or goods carried out by a foreign operator’. This means that if a
French haulier was to bring a load from Paris to London, and unload and
then re-load in London and take a load to Birmingham the London to
Birmingham leg would be cabotage; as it is UK domestic traffic but it is
being carried out by a foreign haulier.
Cabotage is illegal outside of the EU but is permit free inside the EU. It
can be undertaken on any mode of transport and is aimed at improving,
the effectiveness of fleet utilisation, and to reduce empty running.
Arguments do exist that tend to revolve around some of the inequalities

that exist within the EU which make the use of foreign haulage or transport
more attractive due to reduced costs in the country of origin. Once
again, if a foreign haulier was to arrive in the UK with a full tank of diesel
purchased elsewhere in the EU at lower cost, then quite clearly, that have
an advantage when tendering for work as the running costs of their vehicle
are less.
106 AO/QUA/0227 – V2.2

The vignette system, currently in force in some member states is a
mechanism for reducing this sort of imbalance and the EU is expected to
introduce its own vignette system in the near future. The vignette system
is a means of charging all vehicles, including foreign vehicles, for using
domestic infrastructure. The domestic operators are then able to reclaim
a proportion of the charge in order to level the costs of operating
irrespective of the country of origin. It also ensures that infrastructure
repair costs are met by all users. This is important where small countries
or regions act as corridors for freight and transport and suffer
disproportionate maintenance costs as a result of foreign vehicles that
have free passage.
2.5.4 Planning and external pressures

When planning international transport operations there are factors to be
considered that may not be relevant for national operations. Planning
needs to consider, not only things such as time differences and language
problems, but some of the more obscure issues that may be relevant.
This includes, cultural issues and accident procedures and
driver/passenger repatriation.
Planning, as discussed, may be needed to co-ordinate movements with

the customs authorities but it may also be needed to ensure a vehicle or
craft is able to arrive at a destination at a time which is suitable. The route
may need to be planned to avoid delays, prohibitions, public festivals, etc.
There may also be a need to plan a sequence of activities covering
different countries and different time zones, which can make the planning
process extremely complex.
Other planning can result as a requirement to counter any number of

potential problems from selecting a route to fit in with a drivers legislative
rest or break requirements to planning fuelling and/or service area stops,
hotels, passenger transfers, through ticketing, electronic cash or business
transactions, servicing schedules, load transfer, modal interchange, weight
restrictions, height restrictions, infrastructure compatibility, etc.
Planning in itself will depend upon the journey and the commodities in
transit but, as an operator new to international operations the amount of
planning and the planning areas should not be under-estimated.
AO/QUA/0227 – V2.2 107

Most planning is carried out in order to counter some sort of external
factor, or factors, which have the ability to change or alter an expected
outcome. Often these factors arise from external sources that apply
pressure to the operation and, by so doing, call for some sort of remedial
actions to be taken.
Whilst planning can vary from strategic (long term) to operational (short
term) it is important that plans that work are noted and that plans that fail
are analysed in order to prevent any recurrence. This may seem difficult
when external forces, for example, industrial action taken by foreign
workers. This external force would cause delays your shipment may
appear to be something for which you cannot legislate, but any lessons
you do learn from a negative situation, such as that, should be captured
and recorded in order that they may be used in any future similar situation.
External forces are constantly at work demanding corrective action to be

taken by managers and operators but comprehensive planning and a good
deal of ‘what if’ contingency planning can go some way to ensure that any
externalities that you do encounter only cause the minimum of disruption
to both you and, most importantly, your customer.
 Task 2.5
1. Consider the practice of cabotage and, for a country of your choice,

identify the possible advantages and disadvantages to that country of
the introduction of a cabotage regime.
2. List as many possible external forces that may come into play
when planning an international journey to a country of your choice, using
a mode, or modes, with which you are familiar.
108 AO/QUA/0227 – V2.2

3. Operation of Transport
Learning Outcomes
 Understand the different types of transport services

 Understand how to use resources to achieve efficient, effective and
legal operations
 Know how to use routeing and scheduling to maximise effectiveness
and efficiency of operations
 Understand the techniques used for the costing and pricing of transport
operations
 Understand the different types of international transport operations and
the different requirements under trade agreements and conventions.
3.1 Efficient and Effective Utilisation

3.1.1 Introduction
It is said that transporting goods
adds to their cost and not to their
value, therefore movement of goods
is normally by the cheapest and
most suitable method in the given
circumstances. This statement does
not appear to apply when
considering the movement of
passengers which clearly demonstrates that the two sectors, whilst similar
in so many ways, do differ and it is because they differ that we will
examine them separately.
It is important when considering effective and efficient operation that we

consider, the correct mode for the commodities and not simply how to
ensure the mode we do use is used as effectively as possible. Failure to
select the most appropriate mode in the first place will certainly ensure
inefficiencies throughout the entire supply chain or journey.
AO/QUA/0227 – V2.2 109

3.1.2 Freight modal characteristics
The essential differences between the transport modes often dictate the
operating characteristics, costs, and customer choice.
Factors to consider when choosing a transport mode are:
 amount of delivery time, or deadline to meet

 security of goods in transit
 packing requirements
 loading and unloading facilities available
 nature of the goods
 the wishes of the consignor, i.e. how does he/she want them sent?
We shall consider here each mode of freight transport, its characteristics,

strengths and weaknesses.
Air freight
The strengths of air freight are:
 speed
 security of goods
 reduced packing
 reduced insurance rates
 greater market flexibility.
The weaknesses are:
 cost
 restriction in size and weight
 delays resulting from adverse weather conditions
 will form just part of the journey (not door to door).
110 AO/QUA/0227 – V2.2

Considerations to be given to the use of air for freight movement are:
 goods of high value in proportion to size or weight (e.g. diamonds,

electronic equipment)
 perishable nature of goods (e.g. flowers, newspapers)
 urgency for the goods (e.g. spares for breakdown, medical supplies,
certain express parcels)
 prohibited and restricted items, for example hazardous goods which
include flammable liquids, explosives, compressed gases, etc., cannot
normally be accepted for carriage by air.
Pipeline
A few items are suitable for movement by pipe, e.g. gas, oil, coal.
The strengths are:
 the pipes are usually underground

 the explosive nature of items makes their transfer safer
 low operating costs are achievable
 can change load type, i.e., from gas to oil, to water, to aggregates or
coal
 no packing is required
 no return loads need to be found
 it is not affected by the weather or terrain.
The weaknesses are:
 the initial cost

 the disturbance of land during construction
 costs associated in changing load type
 Inflexibility, particularly if commodities need to be conveyed in greater
quantities than the capacity of the pipeline or commodities no longer
need to be piped.
AO/QUA/0227 – V2.2 111

Conveyor systems
We are familiar with conveyor belt systems being used in factories and
warehouses, even supermarket checkouts. However, they can play major
part at airports for moving passengers on ‘moving walkways’ or luggage
from airplane to baggage terminal. Their major benefits are their ability to
move large amount of goods, especially aggregates, through
environmentally sensitive areas, such as from a quarry to a rail or road
head.
The strengths are:
 Remove trucks from roads

 Low use of manpower
 Remove need to build new roads
 Operate through difficult terrain
 Low visual intrusion
 Ease of removal after lifetime of project
 Operate in virtual silence 24/7
 Can extend for up to 100KM’s
 Can convey up to 960 tonnes of aggregates per hour
 Low environmental footprint.
The weaknesses are:
 High installation costs

 Maintenance costs
 Lack of security over long distances
 May be affected by weather conditions (Snow, but some are
covered).
Cable Cars
This is similar in character to a conveyor belt system. Most often uses in

tourist and alpine regions for passengers. However, many had been used
to convey cement and other more costly aggregates over long distances,
but they have been largely replaced by conveyor systems because of their
visual intrusion upon the landscape, and the weight limitations.
112 AO/QUA/0227 – V2.2

Rail freight
The strengths of rail are:
 a speedy service can be achieved between main towns

 special contracts can give advantageous costs and service for train
loads (e.g. bulk movement of coal, oil aggregate, etc.)
 with the introduction of the channel tunnel, goods can now be moved to
mainland European destinations without transhipment
 for bulk movements, the cost per tonne-mile is cheaper than by road
 it is energy and fuel efficient
 with careful planning, the "paths" of trains can be uninterrupted and
therefore suffer few delays.
The weaknesses are:
 few journeys can be achieved by train alone. there are usually at least
two other "legs", requiring transhipment
 there can be slow delivery between origin and destination of goods,
particularly if long collection and delivery journeys by road are involved
 good packing is required
 there is an increased risk of pilferage and damage in transit
 track gradients pose problems for heavy trains
 the loading gauge (height/width of tunnels, etc.) can prohibit certain
types of load.
AO/QUA/0227 – V2.2 113

Services offered by rail are:
 Contracting bulk movements of iron ore and steel products, cement,

coal, oil
This is the movement of large quantities on a regular basis from one
plant to another. The consignor and consignee have their own sidings
and wagons and in some instances the locomotives as well.
 Container services
Special containers are available which can be transported by road and
special trains. Containers are available in different sizes and types to
suit both general and specific needs.
 Part train loads

The TOCs now take freight without the need for the customer to require
a full load to be moved. Part loads give greater customer choice and
allow goods to be delivered to an increased number of destinations.
Road freight
Road transport has the following strengths:
 a relatively fast delivery, particularly for short journeys

 door-to-door delivery enabling good security
 flexibility, e.g. almost any cargo and destination, and ability to divert at
little notice;
 less stringent packing possible
 lower capital investment, one vehicle being able to move goods almost
anywhere
 security of the load assisted by being under the control of one driver
 Costs for using roads and infrastructure limited to vehicle excise duty,
bridge tolls and fuel tax.
114 AO/QUA/0227 – V2.2

Road transport has the following weaknesses:
 road congestion, adding to cost of goods and therefore increased prices

to the consumer, and causing unreliability
 low vehicle capacities compared with trains, barges and coastal vessels
 some large lorries perceived as environmentally damaging, i.e. noise,
vibrations, and visual intrusion
 Susceptibility to fuel price increases and unavailability of supplies.
A question which often faces manufacturing organisations and large retail

companies is whether or not to own and operate a fleet of vehicles itself or
to contract hire. There are no hard and fast rules on which to choose and
the choices are outlined below:
General haulage
The advantages of using a general haulier are:
 the company is relieved of operating its own vehicles and therefore the
associated problems
 the company has not legal responsibilities for the vehicles
 the hauliers can be used as and when needed
 the right type of vehicle can be used each time
 no garage or transport organization need be provided by the consignor
 all transport costs are known in advance and costs planned
 the lowest competitive price can be accepted (costs for general haulage
are usually based upon weight of consignment and distance involved).
AO/QUA/0227 – V2.2 115

Contract hire
This is another alternative to purchasing and operating one's own vehicles.

Under a contract hire agreement, the vehicles are operated exclusively for
the client, often in their livery (e.g. Marks and Spencer). There is usually
an agreed minimum hiring period, e.g. of 12 months. Also, a minimum
three months' notice of cancellation is required.
The advantages of contract hire are:
 the client company has complete control of the drivers

 the client company has complete control in the operation of the vehicles
 the contract hire company is responsible for all costs of servicing,
maintenance, road fund licence, replacement vehicles, etc.
 costs are charged on a known basis and budgeted for in advance
 the fleet carried the client company livery and thus has a corporate
image impact.
There are costs associated with contract hire as a result of the fact that:
 the vehicles are limited to carrying goods for the client company
 balanced loading is difficult, as it is usually hard to get return loads
 vehicles may therefore return empty
 some fixed cost charges continue regardless of use made of the
vehicles.
Costs for operating a contract fleet will depend upon the contract made
with the hirer. The usual type of agreements is:
 for large goods vehicles (LGVs), a fixed annual charge plus a charge
per mile on all mileage or a higher annual charge and the mileage
charge operating after a specified distance
 in the case of light vans, a fixed annual charge up to a specified
mileage, and a charge per mile above this, the charge covering
maintenance costs, road fund licence and a replacement vehicle.
116 AO/QUA/0227 – V2.2

In order to arrive at the true cost of a contract hire fleet, it is necessary to
analyse the agreement, which might include matters such as:
 responsibility for making good accidental damage to vehicles

 mileage charges and type/scope of insurance cover
 any advance hire charges that are required
 conditions under which replacement vehicles are supplied.
At the end of the hire period, the vehicles will revert to the contract hire
company as it is their property.
Own fleet
A company which operates its own vehicles has the following advantages:
 complete control over drivers and vehicle operations

 flexibility of control
 ability of carry corporate image and/or advertising.
There are of course also problems:
 setting up the transport management function and organisation

 legal responsibility for vehicles operated by company
 provision of garage, maintenance, and servicing facilities
 vehicles licensed for own use only
 uneconomic use resulting from few return loads and thus empty running
 vehicles depreciating and becoming obsolete whether in use or not
 people using the vehicles, regardless of cost, particularly the firm's van
 large capital cost of purchasing vehicles and replacing them
 hidden indirect costs, e.g. purchase of vehicles, wages, stores.
3.1.3 Shipping
Shipping covers esturial, coastal, and deep-sea transport.
AO/QUA/0227 – V2.2 117

Esturial
The strengths are:
 uncongested transit between two points in the same estuary

 high-capacity vessels
 dock dues not payable on deliveries to and from import and export
vessels in enclosed docks
 free time allowed before the incidence of demurrage permits
economical use of labour
 esturial transport forming part of an international transit (advantage can
be made of small vessels).
The weaknesses are:
 Minimum tonnage
There is a high minimum tonnage figure per barge to be paid, making it
unsuitable for small consignments.
 Specialised terminal equipment

Unless wharf facilities and equipment exist, high capital cost may
preclude their provision, unless regular traffic makes this worthwhile in
order to take advantage of much lower transport costs.
Coastal
The strengths are:
 the low cost of bulk transport by water makes a cheap form of transport,
for over 100 tonnes over 150 miles where load and discharge points
have access to or near water
 for very heavy of large indivisible loads coastwise heavy-lift vessels
may provide a better alternative to road or rail, providing load and
discharge are convenient to a port.
The weaknesses are:
 specialised terminal facilities must be available

 it is slow compared with rail or road (except perhaps for awkward loads)
 additional transport costs may be incurred unless private access to a
waterway is available
 bad weather can delay coastal transit.
118 AO/QUA/0227 – V2.2

Deep-sea
Strengths are:
 low freight rates

 very high capacity
 continuous operation (24-hour)
 less susceptible to adverse weather (fog).
The weaknesses are:
 relative low speed

 possible less frequent service
 because of high capacity, time spent loading and discharging can be
disproportionate to actual travel time
 usually more packing required than air transport.
With deep-sea operation and long voyages, the greatest economy can be
obtained by vessel charter, at sole disposal of the charterer with freight
rates being agreed. Operation is only available to users who have large
quantities of goods to ship, usually of a bulky nature.
The majority of users are best served by liner companies. Freight

forwarders use these vessels at published freight rates. Liners operate on
a regular scheduled service basis. Containers are the most commonly
used packing facility on these services.
3.1.4 Conclusion
The essential differences between the various modes of freight transport
give rise to their differing operational characteristics and associated costs.
Customer modal choice is then a matter of weighing up their individual
advantages/ disadvantages based on such aspects as the required time
scale, and the nature of the goods.
AO/QUA/0227 – V2.2 119

3.1.5 Passenger modal characteristics
We shall now consider the modal characteristics of passenger movement.
We will not be considering private transport in this section but it is worth
noting that many forms of private transport either supplement or mirror
commercial passenger movements. (e.g. private cars are often used to
move staff involved in business or commercial activity).
As with the transport of freight, the essential differences between the

modes often dictate the operating characteristics, costs, and customer
choice.
Air transport
While this is the obvious choice for long-haul journeys and business
passengers to whom cost is a secondary consideration, competition from
high-speed rail networks is increasingly eating into the short-haul air
transport market. Thus, the Eurostar service through the Channel Tunnel
has taken traffic away from the London to Paris/Brussels flights, and the
electrification of the East Coast Main Line railway has taken traffic away
from the London to Scotland flights.
One reason for this is the convenience of rail's city centre to city centre
travel, which airlines cannot offer. There is often a considerable transfer
penalty, i.e. city centre out to airport and vice versa, involved.
Heavy Rail
This is generally in two forms:
 underground systems such as those in London, Glasgow and Paris

which were originally described as metropolitan railways, or metros (not
to be confused with some new LRT networks with the word metro in
their name)
 surface rail which is also referred to as main line rail.
120 AO/QUA/0227 – V2.2

Underground
The strengths are:
 considered to be the best form of urban people mover, most

underground trains carrying between 800-1,200 people, and capable of
moving up to 75,000 passengers an hour (Singapore and Hong Kong)
 being underground, less congestion on the surface
 close running between trains
 relatively fast
 usually self-contained systems, and independent of other forms of rail
traffic, although sometimes sharing common track
 electric propulsion now used so environmentally friendly.
The weaknesses are:
 There is a high capital cost involved in the building of a system (the

extension of London Underground's Jubilee Line); tunnelling is
extremely expensive.
 Some systems, notably much of the London Underground (especially
the deep-level lines and platforms) are inaccessible to physically
disabled people, having been built when there was far less awareness
of the need for all public transport to be accessible.
 Susceptible to flooding in some areas.
Surface/main line
The commuter train services in the south east of England carry vast
numbers of people at peak times, in to and out of London and relatively
low numbers of passengers during the off-peak periods. Other commuter
train services are similarly found in Greater Manchester, the West
Midlands, Merseyside, Strathclyde (Glasgow) and South and West
Yorkshire. The larger commuter trains are capable of carrying about
1,200 people, although away from London there is not the necessity to
provide this amount of capacity.
Rural branch and cross-country services are operated throughout

England, Scotland and Wales. Some of these cross-country services link
distant points, e.g. Liverpool and Norwich on weekdays, extending to
Great Yarmouth on Saturdays.
AO/QUA/0227 – V2.2 121

The express and high-speed inter-city services link all of UK's main
centres; those termed high-speed being able to operate at 125 mph.
The advantages of express and high-speed trains are:
 Comfort
Compared to car travel, there is the ability to relax or move about the
train at will. Also, buffet and restaurant facilities are normally available.
 Speed
Some inter-city services cannot be matched by any other mode of
transport including air.
 Capacity
Inter-city trains can convey between 350 and 450 people.
 Facility
The train can convey the customer to/from the heart of cities without the
problem of finding and paying for a car-park space, etc.
The disadvantages of travelling by inter-city rail are:
 the expense, particularly on peak-time journeys where the minimum

charge is based on the standard fare
 the need sometimes to make connecting trips to/from the train, which
can negate the benefits of the train journey.
 The limitation on seat widths, cushion padding and legroom can make
the journey uncomfortable.
Light rapid transit
LRT is the term used to describe what were originally called trams. While
the UK disbanded its street-running systems, apart from in Blackpool,
about 50 years ago, they are making a revival in a number of cities. LRT
can also be rail-based (known as light rail).
Today's examples of LRT systems include the Tyne and Wear Metro,
London's Dockland Light Railway, Manchester Metrolink, Croydon’s
Tramlink and Sheffield's Supertram.
122 AO/QUA/0227 – V2.2

The strengths are:
 It is said to be suitable on main arterial routes where passenger traffic

flows are expected to be 25,000 per route.
 It has a capacity advantage over buses.
 Operating costs per kilometre are lower than those for buses.
 It has an advantage over trains in that it can be street running, and
nearer to where people want to be collected from and delivered to.
 It is does not cause pollution where it operates (which tends to be city
centres) being powered by electricity (pollution is at the power station);
it is relatively quiet; and the new vehicles are attractive.
 Once purchased, the vehicles can have a long and useful life.
The weaknesses are:
 Installation of an LRT system tends to require the relocation of essential

services, such as water, gas and electricity mains, and the associated
disruption and inconvenience while this is done.
 The initial capital investment, on infrastructure and vehicles, is
considerable. Advocates of the bus maintain this could be better spent
on new buses and cheap or free fares.
 It is inflexible, the way and space on which it operates are permanent.
Road (public)
Taxi
Taxis have almost the same characteristics as the private motor car. They
are flexible, private and provide a door-to-door service. They complement
buses, particularly for those who enjoy a social night life. In many areas,
bus services finish around midnight, or even earlier, so the outward
journey is often made by bus and the return journey by taxi.
With regard to cost, the taxi for an individual is more expensive than a bus
but in certain respects if four people share the cost a taxi can often work
out as the cheapest option.
Compared with a private car, the advantage of a taxi is that the hirer does
not need to be able to drive, needs not worry about finding a parking
space or be concerned with any ‘drink-drive’ issues.
AO/QUA/0227 – V2.2 123

Comparing with a bus, the taxi is much more demand responsive as it only
takes one person to initiate a journey. Buses are often seen carrying
only a few passengers, but they need a higher continuous response rate
for commercial operation. The taxi is also highly flexible, not having a
fixed route or timetable. Unlike the bus, however, the fare is not normally
known in advance.
Bus and coach
The trend in the provision of local bus routes since deregulation has been
a move away from the conventional artery services. Smaller vehicles
have been introduced in many areas, including mini and midi buses of
varying sizes, and the resultant service frequency has been increased,
much to the benefit of passengers on the more popular and profitable
routes. However, on the less profitable and non-commercial routes, local
authorities have provided basic frequency services through the tendering
process. Some areas have better early morning/late evening and Sunday
services than others. This has depended on the entrepreneurial skills of
the local bus company and the priority given to public transport by local
authorities.
The strengths are:
 As a mode of transport local buses are inexpensive (in comparison to

other modes) to introduce. Their operating costs are also low when
measured on a per passenger-km basis.
 They are flexible and adaptable. With features such as those advocated
by the Disabled Persons Transport Advisory Committee (DiPTAC and
DDA) being incorporated as standard on new vehicles, and with
innovations such as kneeling buses, wheelchair ramps and lifts, buses
are becoming more accessible.
 They take up little road space when considered from a passenger
capacity viewpoint.
 Coaches provide a desirable service of express, tour, excursion,
contract hire and private hire in terms of cost, energy consumed per
person, and environmental pollution.
124 AO/QUA/0227 – V2.2

The weaknesses are:
 Buses and coaches suffer from congestion problems in common with

the private car as they share the same road systems (unless priority
bus measures exist).
 Buses are subject to fixed routes and timetables, which mean they are
not totally demand responsive as customers have to adjust their travel
patterns to suit the times of the bus.
 Buses are subject to changes in the travel patterns of consumers. If
some dramatic social change occurred, the commercial structure of a
service or even a bus network could be unbalanced.
 Bus companies suffer from labour problems because of the unsocial
hours and “stigma” associated with being employed by a bus company.
 Buses are perceived to be expensive by car owners. This is because a
car owner will agree that the fixed costs of the car have to paid
regardless of using it or a bus. Therefore, only the marginal cost of the
journey will be considered, and that really means petrol and tyre wear
against the bus fare.
 Other than regulatory training for drivers, little is provided by way of
customer service delivery.
Guided bus
This is an inexpensive traffic management system which has been

introduced in a few places, for example Leeds. Buses are fitted with
horizontal guide wheels which, when the vehicle enters a guided track
(really nothing more than high kerbs set at the right distance apart), the
bus driver is able to remove his/her hands from the steering wheel and
allow the guided wheels to direct the vehicle.
The main strength of this is that it allows the bus to get alongside bus
stops so that there is no gap between it and the kerb. The guided bus is
thus easy to board for everyone, particularly people with buggies or
shopping trolleys, wheelchair users, and elderly people.
The weakness is that the system needs dedicated road space unless it is
introduced as part of a bus priority area from which other vehicles are
excluded.
AO/QUA/0227 – V2.2 125

Sea transport
The movement of passengers by sea, apart from short-sea ferry

movements, has been almost completely eclipsed by air transport, which
is faster and more convenient. At the same time there has been a
phenomenal growth in the tourist market for sea cruises, with new cruise
liners being built all the time.
Ferry operators, facing competition from short-haul aircraft and the

Channel Tunnel train services, are increasingly replacing their traditional
Large and relatively slow "roll-on/roll-off' ferries with new faster vessels
(such as the "High Speed Ships" on the Irish Sea routes), hovercraft and
hydrofoils.
3.1.6 Modal integration and coordination

Before the introduction of the 1985 Transport Act, many local authorities
coordinated and integrated passenger services. With the implementation
of the act and the introduction of deregulation, it was assumed that this
would cease.
Road
However, what has happened is that these local authorities have adapted
their role to suit the prevailing legislation. Where local bus services are
now provided commercially, the local authority role has diminished.
Nonetheless, they are still able to provide concessionary fares to students,
elderly and disabled people but cannot or timetables of the commercial
services. Where they should not be able to influence fares for commercial
routes, some do through the maximum permitted fare scales specified for
concessionary reimbursement.
However, where a commercial service is not provided and the local

authority can demonstrate a social need for one, possibly on the grounds
of hardship, i.e. loss of amenity or utility, it may provide funds for a non-
commercial service through the tendering process contained in the
Transport Act 1985. This in itself is a form of both coordination and
integration.
126 AO/QUA/0227 – V2.2

On the other hand, bus companies do coordinate their commercial
services and provide interchange facilities within their own network.
Coordination and integration with other bus companies, however, rarely
happens. In fact, those that initially tried to operate joint services were told
to cease the arrangements by the OFT in the public interest (no cartels or
price fixing). The OFT has since relented and allowed some bus
companies to register joint services, providing they receive prior
notification.
Rail
With regard to rail, the number of connecting services has reduced quite
considerably since the creation of the TOCs. For example, the former
Regional Railways trains used to connect purposely with Inter-city trains,
but as the services involved are now considered to be competitors this
does not occur to the same degree, unless the services are operated by
the same TOC.
In respect of booking tickets between points served by two TOCs, a

passenger might not always realise that there is a cheaper alternative.
Take for example the route between Birmingham and London. Intercity
West Coast Ltd provides a fast service to London Euston and, unless a
customer requests differently, a ticket for this service will be provided.
However, there is a cheaper but slower service provided by the Chiltern
Railways Co. Ltd from Birmingham Snow Hill to Marylebone. (Trains also
operate between Birmingham New Street and Paddington.)
Park and ride
Park and ride (P&R) has become very popular in the UK with some quite
high financial investments recently. When considering this subject most
people automatically think of buses providing the service but there are
also rail and river-based systems.
The main purpose of P&R is to reduce the number of cars driving into the
centres of towns and cities, and adding to their congestion /pollution
/parking problems.
AO/QUA/0227 – V2.2 127

In a well organised P&R system, a car proceeds to an out-of-town car
park, which should be conveniently sited for easy access to the trunk road
network, and parks either without charge or for a very low fee. The
occupants are then charged a low fare to ride (by bus, train, tram or boat)
to a final destination. The car park should be safe and secure, so that
the owner is confident to leave it. Ideally, the parking area should also
include amenities, such as, shopping, health care and even nurseries.
This ensures the sustainability of the P&R facilities. There have been
instances where the authority built an expensive ‘car park’ but the bus
operators failed to use it because of low demand. Marketing and SQP will
be important to a successful outcome.
Air
Integration does occur between services which genuinely feed rather than
compete with another mode. For example, the various coach-air and rail-
air links which exist, e.g. Paddington’s Heathrow Express, London
Underground's Piccadilly Line to Heathrow, the Gatwick Express and the
railway station at Manchester International Airport.
The majority of these types of service feed into a modal interchange, i.e.
from coach or rail to air.
3.1.7 Conclusion
We have considered the strengths and weaknesses of freight and
passenger transport by the various modes, and looked at where and how
coordination and integration of different systems is possible. The use of
the most appropriate mode is at the very heart of both goods and
passenger movements and utilisation and often comes into play before
most considerations linked to general thoughts about resource utilisation.
 Task 3.1
1. For two freight transport modes of your choice, draw up comparative

lists of their strengths and weaknesses.
2. For two passenger transport modes of your choice, draw up

comparative lists of their strengths and weaknesses.
128 AO/QUA/0227 – V2.2

3.2 Replacement and Investment Appraisal
This section examines some of the options faced by transport
organisations when they are considering projects involving asset
acquisition, and whether or not they are able to undertake a project in the
firm knowledge of when they will begin to recover costs and that any
investment will realise an expected return.
3.2.1 Asset purchase and comparative options

Any organisation needs to decide
whether or not to purchase,
lease, hire or rent new
equipment. Each option has
advantages and disadvantages
and each option is treated
differently from an accounting
perspective. For this purpose, asset acquisition and major new contracts
are normally treated as projects.
In addition, there are accounting matters to be considered. Should the

company, for instance, purchase an asset, such as a vehicle or an item of
plant, then the asset is recorded on the asset register and the balance
sheet as an asset and is liable for depreciation. When vehicles are
leased, it is only the sunken cost to date that appears on the balance
sheet with the outstanding balance being entered as a liability against the
company. Items hired or rented cannot be described as assets as they
remain under the ownership of the rental or hire company.
The preferred option for an asset acquisition project taken by a company

will normally depend upon the financial health of the organisation, and
whether or not the company wishes to depress declared profitability in
order to invest and expand the business. Many supermarket chains for
instance elect to hire vehicle fleets operated by third parties in order to
free up capital to be used on core business activity.
The choices are many and every company will have, at some time, to
compare the options available. This comparison must be seen as being
more involved than simply price comparison as the complexity of some
assets and convenience of hiring and off-hiring may outweigh any
AO/QUA/0227 – V2.2 129

disbenefit arising from cost surcharges.
In order to make effective comparisons, there needs to be an accurate

project description if any meaningful comparison is to be ascertained.
Once this is ascertained then the different options can be compared. All
economic evaluations effectively consider the net changes in costs and
benefits as a result of any proposed expenditure (i.e. for each option they
compare what the costs and benefits would be if the project did, or did not,
go ahead).
Once that is done the figures are pulled together into a time based format
as most asset acquisitions or capital investments have long lives. It is
also done in order that the costs and benefits can be calculated to produce
a benefit: cost ratio. The time based recovery of cost comparison is
essential when interest on loans is considered or when returns based
upon revenue is a factor. Many companies need to compare when, in
the life of the asset, they can expect pay back and benefit as they are both
often directly linked to repayments.
The benefits: cost ratio comprises the net benefits of the project (i.e. the
benefits achieved by the project less the disbenefits created) divided by
the net capital cost:
Total net benefits

B : CR 
Total costs
Projects that produce a ratio of less than 1:0 have costs in excess of
benefits.
Pay back
Pay back is the term used to describe the length of time it will take for any
operating surpluses gained from the acquisition of an asset to be sufficient
to pay back the original sum invested.
130 AO/QUA/0227 – V2.2

Investment appraisal
The tools used to appraise any investment in transport are exactly the
same as they are for other industries. The present value of assets will
naturally depend upon a calculated value which takes account of both
depreciation and the expected replacement cost for a new asset of a
similar specification. This replacement comparison can distort present
values as some machines are difficult replace, some vehicles, such as
security vehicles, have no residual value as they cannot be sold at their
life end and have to be crushed or broken up. This means that the
present value may not reflect the true or perceived value.
Such distortions on asset value can be as a result of other factors

including perceived environmental benefits of an asset, fashion or trend
making one make or model highly desirable or relatively worthless, new
technologies ensuring some equipment will have a longer future that other
items. There are numerous factors, not least, ‘what the market will bear’,
that need to be assessed when trying to establish the true present value.
The most common method of investment appraisal used in transport is a

technique that establishes the net present value of an asset, or assets.
This technique can be used year on year and is a technique that
compares the present value of future benefits and costs resulting from the
investment with the present value of the sum invested.
NPV calculations are often used in discounted cash flow calculations to

establish a comparison between ‘cash’ inflows, in the form of benefits
measured in money terms, compared with the cash outflows to cover initial
purchase and on-going maintenance costs. This technique is essential
where cash flows are spread over a number of years as they are with
many major capital projects.
AO/QUA/0227 – V2.2 131

3.2.2 Equipment replacement
When considering equipment or asset replacement there are factors that
must be considered especially if the old asset is to depreciate to a
replacement price level of a new vehicle/craft/equipment. Inflation is a
major factor here but in addition, exchange rates must be assessed when
replacement is intended and the ever improving specification of equipment
must also be assessed in terms of the value of the equipment to the
organisation and its ability to generate higher benefits than the item it is
replacing.
It is also worth noting that pay back periods will also be affected by
improved performance and that, as efficiency improves the life
expectancy, and thus the earning potential before replacement will also be
likely to be extended. All the variables should be considered when
calculating expected rates of return or equipment replacement costs and
investment appraisal.
3.3 Costing and Pricing

This section identifies the role played by the accounting function in a
transport organisation. It goes on to indicate the scope of accounting in
assisting in management decision making, looking at management
information systems and integrating accounting into the type of decisions
required to manage a transport organisation
132 AO/QUA/0227 – V2.2

3.3.1 Industry structure
When considering the financial management of individual organisations,
the following should be borne in mind:
 The size of transport firms varies enormously. For example, a local

bus company will have different types of financial needs from those of a
national road carrier or an international airline.
 A passenger carrier will have a different revenue structure than that of a
freight carrier. The former will normally be a cash business while the
latter will obtain business on short or long-term contracts.
 Cost structures vary enormously within the industry, resulting in large
variations in anticipated profitability levels.
 Ownership will affect availability of funds for investment, the scope and
degree of accountability of management, the pricing structure permitted
and the resulting required return on capital.
 The level and type of competition faced by the organisation will affect,
again, pricing and pricing structures, levels of profitability and the need
for frequent capital investment.
3.3.2 Accounting
Accounting is often divided into two broad areas of study, Financial
Accounting and Management Accounting. However, from a management
point of view, it is wrong to see them as separate. To a large extent, they
simply look at the same data but arrange them in a different way, at a
different time and for a different audience.
Financial accounting
This is concerned with presenting or reporting financial data to people

external to the organisation, normally and most importantly the owners of
the business. Financial accounting is concerned with disclosing financial
information in summary form on:
 how effectively the business has traded with its customers, through the
income statement or the profit and loss account
 the value and size of the business, through the balance sheet account;
 the way the business obtained and used its cash reserves, through the
cash flow statement.
AO/QUA/0227 – V2.2 133

Management accounting
This is concerned with providing management with financial information in

the right form and in sufficient detail to allow decisions to be made about
such things as allocating resources, pricing, and the level of service
provision and so on.
Management accounting has a planning function in that it can be seen to

provide an estimate or projection of what could happen if a particular
decision is taken. It has a control function in that it can be seen to be
concerned with verifying that plans are adhered to and are correctly
implemented.
3.3.3 Accounting in a transport organisation

Generally, the accounting structures and accounting problems faced by a
transport organisation would be the same as in any business: cash flow
into the business needs to be managed effectively; profitability of sections
of the business needs to be maximised costs need to be minimised. B
However, the nature of the transport function will affect the ability of the
transport organisation to provide a full, and complete transport service.
In fact, in passenger transport, full social provision will normally be the first
casualty of a rigorous application of accounting to the transport
organisation.
The following is an indication of areas in which the financial and

accounting functions may differ for transport organisations.
Cash and revenue flows
For a passenger transport organisation, revenue and cash could enter the
organisation in four distinct ways:
 daily receipts from passenger fares

 journeys bought in bulk, e.g. monthly/annual season tickets
 subsidies and revenue grants
 quarterly or annual contract fees.
For a freight haulier, revenue and cash will have a more industrial pattern
as payments are based on invoices and contracts.
134 AO/QUA/0227 – V2.2

Cost elements
In any form of costing, the elements involved are the cost of materials
used in the manufacture of a product or the provision of a service, and the
cost of labour expended in manufacturing a product or providing a service.
Then there are other expenses which can be associated directly with the
product or service.
Finally, there are the costs of running the business which cannot be
identified directly with any particular product or service.
Within this pattern, however, cost elements can also be identified by their
behaviour in changing circumstances. It is usual to separate them into
two or three classes:
 Fixed or standing costs (also known as Standing Costs)

Fixed/standing costs are those that, broadly speaking, will continue to
be incurred, irrespective of the level of activity within a business.
Typical examples are rent or rates which cannot be avoided so long as
it is necessary for the business to remain in existence.
 Variable costs (also known as Running Costs)
Variable/running costs are those that can react quickly to a change in
level of output. In the main, the cost of material elements falls into this
classification. In a situation where services are reduced, the cost of fuel
and lubricants, for example, will reduce in total, but those concerned
with storage and issue, although small in proportion, would be fixed.
 Semi-variable costs
Semi-variable costs are those that contain elements of fixed and
variable costs. An example would be a telephone account which
comprises a fixed rental charge for the instrument and a variable charge
arising from the use made of the instrument, or maintenance costs that
include periodic fixed safety inspections and variable elements linked to
replacement and repair.
 Direct costs
Direct costs can be fixed or variable but are always directly linked to the
generation of revenue. In transport terms direct costs would be vehicle
or craft depreciation (fixed) and fuel (variable). Direct costs are found
in the Trading Account and are those costs that, when subtracted from
AO/QUA/0227 – V2.2 135

turnover, allow an organisation to establish its gross profit.
 Indirect costs
Indirect costs are also known as overheads and are those costs that are
incurred by an organisation but that are not directly linked to revenue
generation. Again, they may be of a fixed or variable nature. These
costs would include such items as rent, rates, telephone costs,
advertising costs, administrative costs, etc. They are occasionally
referred to as ‘Establishment costs.
Indirect costs are found in the Profit and Loss account and by
subtracting the indirect costs from the gross profit the organisation is
able to establish its net profit (usually before tax).
The proportions of fixed and variable costs in a business may be very

important in influencing management decisions, such as where to invest in
new or replacement assets, which, in the main, give rise to fixed costs. In
a condition of increasing demand, the business which has a high fixed
cost ratio (normally highly mechanised) has a cost structure with variable
costs predominating. In a condition of recession, the advantage is
reversed.
The ratio of direct to indirect costs and the change in this ratio may also be
important to an organisation as direct cost rises will impact directly on
charge out rates and are more difficult to control as many are externally
generated.
Indirect costs, many of which are internally derived are more easily
controlled and, when indirect costs are reduced it has an immediate
impact upon the declared profitability of the organisation.
136 AO/QUA/0227 – V2.2

Cost control
In most organisations, cost controls are based upon a process of

identifying avoidable costs in addition to simply seeking to reduce existing
costs. When the avoidable costs have been calculated the organisation is
then able to examine the remaining costs for further savings.
In this assessment, the organisation may look for patterns of cost

increases that do not align with improved performance or profitability. For
instance, if staff costs have risen faster than was predicted it could be a
symptom of over-staffing, poor performance or some other negative but, in
any case it is worthy of further investigation.
Whilst some costs can be avoided many costs are unavoidable but they
too must be controlled and the budgetary process often employed in large
organisations is another cost control technique, as are levels of cost
authorisation, yet another means of ensuring costs are not incurred by
staff acting outside of their level of influence or authority.
In short, cost control must be taken as a whole and will not be effective
unless all costs are compared and all rises justified. In recent years, we
see the common practice by transport companies of regularly switching
suppliers in order to keep costs down whilst preventing any malaise from
setting in that could incur unnecessary cost.
Price setting
The price of a transport service will depend upon many factors. The
passenger sector uses price discrimination much more effectively than the
freight sector and we see fares and holiday travel varying wildly dependent
upon when the service is booked, times of travel and the destination.
Price setting is normally done on a cost plus profit basis but, as with price
discrimination, this is not always possible or desirable. Where it is done,
the price may still vary depending upon such things as the level of service.
Marginal costing also effects pricing but is not a technique that can be
applied widely as businesses grow and change and sooner or later, the
price that was dependent upon the marginal cost will have to rise to a true
level based on full cost apportionment.
AO/QUA/0227 – V2.2 137

A dilemma faced by many operators is that of whether or not to accept
work. When there is no other, or price work in a competitive market when
the work offered appears to fail to equal cost incurred. For example, if an
operator has fixed vehicle costs of £200.00 per day and running costs
totalling £2.00 per mile; if offered work which is comprised of 1 day and
200 miles by a customer who is only prepared to pay £540.00 for the
entire job, what should the operator do?
On the other hand, should they choose to not take the work, would cost
the operator £200.00 for the fixed costs incurred. To take the work would
at least pay the running costs and contribute £140.00 towards the fixed
costs. Whilst this as a stand alone action would quickly bring the
organisation down, it may be sustainable providing a return load can be
assured and, as a one-off, it may secure new work which may be
profitable.
The example above is not a wholly pricing issue but used to demonstrate
the complexity of pricing in competitive markets and the many factors that
come into play for transport operators seeking to set prices aimed at
profitability.
3.3.4 Conclusion
The financial viability of operations is critical. Operators who cannot
implement management and financial information systems which their
operations can generate, and who cannot understand and act upon this
information, will obviously run considerable and often unnecessary
commercial risks. Even where operations are not profitable, an
understanding is still critical to be able to judge whether or not prices
should rise or whether the company should cease to offer certain services
or, indeed, cease to trade.
138 AO/QUA/0227 – V2.2

 Task 3.2
1. In your own words, briefly explain the difference between Financial

accounting and Management accounting.
2. Identify, for a mode of your choice, two examples of each of the

following:
(a) fixed (or standing costs)
(b) variable costs.
3.4 Routeing and Scheduling

Routeing and scheduling of
both passengers and freight is
an often complex and difficult
task for managers and
operators of vehicle and craft
fleets. Not only are there well
documented difficulties when
considering the road transport
industry but the other modes, rail, air and sea all have their own
complexities which may often be overlooked in favour of the more high
profile and emotive issues connected with roads and road usage.
Initially, it must be understood that routeing and scheduling are different

disciplines which must be considered separately, in addition to them
forming integral parts of many journeys, when combined for effective fleet
operation.
AO/QUA/0227 – V2.2 139

3.4.1 Routeing
The routes used for freight movements often need to be assessed and
agreed to ensure that:
 the vehicle or craft is available to load at an agreed point or facility

 goods are in transit for the minimum period of time
 the company incurs minimum cost of getting the vehicle or craft to and
from any points
 the vehicle or craft can physically (or politically) follow a given route
 the customer is happy with a proposed route
 any crew (and/or passenger, if applicable) are able to gain access to
necessary facilities
 Where the load or passengers are on an extended journey, the route
caters for any interchange or transfers.
In addition, there are extra considerations for passenger, or other
specialised operation routes, such as high value loads, where a contract,
or security considerations, may prevent diversion from a given route.
Where the mode uses a dedicated way, as in the case of rail, the route
needs to be compatible for the goods carried, as in the case of restrictions
on dangerous goods movements through certain residential areas and
when considering abnormal indivisible loads (AILs), etc.
In a similar way to rail, air and sea routes may also be determined by
resource or other factors, permitted flying hours at some freight handling
airports, especially regional airports, and matters such as tide and channel
depths at some ports.
Whilst the considerations above are all valid factors of routeing, the actual
route chosen may be determined by any number of external
considerations which may be out of the control of the operator. The route
is however, almost always partly determined by the scheduling of the load
or passengers.
140 AO/QUA/0227 – V2.2

3.4.2 Scheduling
The scheduling of the load is perhaps more important in modern supply
chains, where reduced inventory levels are required to ensure competitive
advantage. A preferred, or more direct route, may often be traded off to
ensure that the goods, or passengers, arrive where they need to be at the
right time, irrespective of some additional costs related to the route.
For instance, no UK road operator would opt to despatch goods in

vehicles using the M25 at peak times, as the goods would certainly be
subject to delay and the scheduling would need to take account of the
delays incurred. Ideally, if the M25 had to be used, the operator would
select to send the goods, etc. at off peak times, thereby reducing the need
for ‘loose’ scheduling and effectively increasing the utilisation of the
vehicle and driver and subsequently reducing costs.
The scheduling of loads and passengers must also take into account such
things as:
 staff availability to load/unload

 legislative driver/crew requirements
 timed vehicle and craft restrictions, (including things ranging from lorry
bans to tidal flows)
 congestion
 public, and other, holidays and cultural working practices
 interchange arrangements
 environmental considerations
 contractual considerations
 supply chain or logistical flows
 known pinch-points, or infrastructure delays
 delays at borders and for customs, etc. for international movements
 date and time zones, for international movements.
Scheduling is normally more complex than routeing but the two cannot
usually be totally separated, without costs coming into play. Effective
routeing and scheduling is the major component of effective and efficient
fleet operation and, as such, plays a major part in the movement and
management of goods and passengers.
AO/QUA/0227 – V2.2 141

Information technology will play a major part in both routeing and
scheduling. There are many software packages available to assist in
these functions. However, it is still important for the operative to have a
good background in manual systems, and not rely upon the software to
make important decisions.
3.4.3 Benefits and operational considerations

The benefits to be derived from effective routeing and scheduling, in
addition to reduced operational costs through increased utilisation, include
the maximising of the vehicle crew members, through effective
interpretation and application of any legislative constraints placed upon
them and the work they are able to do. As we hinted at earlier, intelligent
use of road vehicle drivers’ hours regulations, and thus increased vehicle
availability, can increase productivity to such an extent that the
improvement may be the competitive advantage the company needs to
succeed. It also means that the customer is more likely to be better
served and be able to benefit from some sort of flexibility.
Customer benefits such as these should never be under-estimated, and

should be openly marketed, where they form part of any perceived, or
actual, added value from which a customer may gain.
Increased flexibility and utilisation opportunities must be grasped by

operators as they are opportunities to take advantage of any additional
loads, back loads and cabotage that may be available and to increase
productivity. This extension of productivity does carry some dangers as it
often means operators moving into new areas, where they may not have
the same levels of expertise and may also lead them into being charged
with ignoring some existing customers in favour of the new opportunities
presented by the new market.
Once again, the logistical ‘trade-off’ will come into play and any benefits
arising from improved routeing and scheduling will have to be tinged with
caution in order not to let the existing customer base become weakened.
142 AO/QUA/0227 – V2.2

Any expansion of business will also have effects on the vehicle or craft
design and choice. It is relatively easy to select the best vehicle for the
job when the commodity to be transported is known, the route determined
and the schedule agreed. What is more difficult is to maximise vehicle
capability when operating in several markets or sectors.
For instance, a coach operator who may win a schools contract may well
not wish to use a high specification luxury coach to take children to school
and may well need the coach back in the depot to be cleaned and
prepared for private hire later that morning. In this case, most operators
would run two distinct fleets but, particularly in rural areas, we see lower
specification coaches employed on both activities, where the vehicle
selected is a compromise aimed at satisfying both markets.
The example above is only used to highlight the need for appropriate
vehicle usage to be combined with routeing and scheduling. After all,
there would be little benefit from using a high road vehicle on a route that
had low bridges and there would certainly be complaints if a road operator
used refrigerated vehicles, with the fridges running, that needed to wait
overnight outside private houses until the plant next door opened the
following morning.
 Task 3.3
Consider an operation of vehicles or craft and briefly describe the

operation as you understand it. Once you have an outline of the
operation and the tasks it performs identify all the routeing and
scheduling constraints that you feel are applicable to the operation.
AO/QUA/0227 – V2.2 143

3.5 Different Services
The management of transport will always depend on many factors related
to the vehicles/craft used; the customer, the goods carried and the routes
taken, but the type of movement is also a factor and, so we must also
consider whether or not the services required are regular services or on-
demand.
3.5.1 Regular services

Regular services, such as many passenger operations and most goods
operations involving distribution to retail outlets are determined and
controlled by the conditions and levels of service agreed in the contract.
Regular services may seem a preferred way of operating, but they are
demanding for the service provider as most contracts and agreements
relating to service provision provide for compensation or penalties when
the service provided falls outside of the agreed level.
Other factors surrounding the provision of regular services are linked to

such things as demand variables and continuity of provision.
Whilst a regular service can be scheduled and vehicles provided to carry

out the provision it becomes difficult for the service provider to maintain
the service where demand increases and decreases at certain times of the
year or day. For instance, the increase in consumer activity which is
associated with Christmas means that most distribution companies have
to hire in vehicles and drivers to cover the additional demand. They do
not staff up to the peak level and neither do they set staff at a level
commensurate with low demand, perhaps during the summer months
when many customers are away on holiday. Instead the resource levels
are set at an average requirement and then ‘flexed’ to cater for up and
down turns. This short term flexing allows the service provider to
minimise cost, but only to a degree that is able to sustain the service at all
times.
144 AO/QUA/0227 – V2.2

When fleet ‘flexing’ is required it, in itself, can throw up problems as
vehicles become out of regular synchronisation and are often not able to
be positioned where they should be to order to ensure the return of units,
such as pallets and cages, or to be re-loaded to meet service specification
the next day. This resource misplacement is a common feature when the
railways suffer from industrial action that leaves rolling stock and engines
not where they would normally be to re-commence service provision.
Regular service providers in all modes expect to flex and we see charter
aircraft used on holiday routes, and additional sea ferry services used at
peak times in addition to the massive use of hired road vehicles and
agency driving staff in the road sector.
Longer term considerations of service provision under contract include

reliability, when the fleet is aging, livery standards associated with
customer image and possible contract renewal or termination. The
service provider must also work closely with the customer in order to
ensure that, should the customer have a strategy of expansion, the service
provider is able to gain any new work without disruption to existing
business and without suffering from such things as poor cash flow or
excessive borrowing.
Most contracts are for a given time and, where the duration of the contract
means that either the vehicles or craft will require refurbishment or
replacement at some stage within the contract this must be written in to
the agreement, from the outset. Another major consideration revolves
around the disposal of liveried or specialised resource at the end of a
contract and the preference by many customers to change contractors
regularly, in order to keep prices artificially low and attempt to gain
competitive edge by doing so. This practice is common in retail
distribution where transport costs account for a considerable proportion of
the ‘on the shelf’ product price.
AO/QUA/0227 – V2.2 145

More recent developments, and often associated with SQP’s, is where the
transport authority provides the vehicle in line with their specification.
This ensures the vehicles and livery are provided to a set specification and
not altered by operators. (Often the larger operators change the livery
design slightly so they can distinguish their own fleet). It also reduced
capital outlay on the part of the operator but can insure high maintenance
costs. There is also the opportunity for abuse by a transport authority.
In one recent case, an operator was awarded a five year contract for a
route that operates up to eighteen hours per day, every day, except
Christmas and New Year, and in an arduous rural area, but was supplied
with a seven year old vehicle.
Furthermore, the vehicle provided is often based of initial purchase cost

and not overall lifetime costs that an operator would take into
consideration. It would be the operator’s responsibility to maintain the
vehicle at their cost.
3.5.2 On demand services

For operators subject to the vagaries of on-demand provision the picture is
somewhat different and the pricing structure somewhat more flexible, to
reflect the generally more difficult trading conditions for companies
involved with on-demand provision.
On-demand provision means that the customer can simply ask an

operator to perform a service as, and when, the customer requires it.
Many on-demand services are used when the regular service providers
need to flex their fleets but other on-demand providers include general
hauliers, shipping companies (as opposed to ferry operators), an
increasingly large proportion of rail freight industry, as it endeavours to
increase market share and air freight parcels and postal carriers and
couriers.
The difficulties for these types of companies are related to the levels of
resources they are able to maintain in order to be able to undertake what
work may be required, set against the level of resource they are able to
sustain when work is not available. This dilemma leads to co-operation
between many of the on-demand providers who form temporary alliances
to take advantage of larger jobs that may arise from time to time.
146 AO/QUA/0227 – V2.2

We see sub-contracting and the use of ‘load agencies’ set up to cope with
fluctuating and variable workloads and able to call on the services of
signatory companies to undertake part, or all, of any work that is offered.
Obviously, these ‘load agencies’ take a proportion of any fees but, for the
operators, they do provide a direct link to additional markets.
The requirement for on-demand transport naturally fluctuates and it is

difficult for on-demand providers to reach utilisation levels that may be
achieved when the service provision is regular. Because of this the
prices charged tend to be higher and the customer is expected to meet the
higher charge on the understanding that, as the customer needs the
service they will therefore expect to pay a premium or they would have
already entered into a contract with a regular provider.
On-demand suppliers also make use of temporary additional provision

from charter/hire companies in the same way as regular providers but, by
and large, on-demand service providers tend to be small companies or
operators who elect to join with other similar providers to meet customer
demand. On-demand providers also tend to be found in the general
streams of transport provision and not to operate specialised services that
require high cost vehicles or craft that require excessive maintenance or
incur higher than normal depreciation costs.
Many transport authorities use Flexible Transport Services (FTS) or

Demand Responsive Transport (DRT) for passenger transport contracts.
There are many advantages, especially in relation to lower costs. Rather
than running a small rural network, a single vehicle FTS would operate.
This may result in the passenger being given a specific time for the
journey, a time not particularly suitable, but it does help the transport
authority meet their statutory obligations at lower costs.
AO/QUA/0227 – V2.2 147

 Task 3.4
For TWO modes of transport of your choice identify and describe at least
TWO regular and TWO on-demand service providers and compare their
operations, in relation to vehicles used and operational areas.
148 AO/QUA/0227 – V2.2

4. Resourcing Transport
Learning Outcomes
 Understand the concept of resourcing and how it should be managed
 Understand asset replacement strategies and decisions
 Understand investment appraisal methods.
4.1 Outsourcing
4.1.1 Introduction
The way we source transport is key to success in many transport
organisations. Since transport itself is not a means to an end but part of
some other function, many organisations will look to specialist providers
through outsourcing rather than operating transport on their own behalf
(Own Account). On the other hand, there are procurement issues that
need to be considered.
Outsourcing is the term used to

describe the contracting out of
activities (usually transport and/or
distribution) by an organisation
seeking to stabilise costs and
concentrate on core business
activity.
Transport outsourcing is a major

part of retail operations and is
common practice with most high street chains. Outsourcing is perhaps
less obvious in other modes but there are nevertheless, companies who
do outsource transport at sea. This is the case of many motor
manufacturers, by air, where the flight is a part of an extended supply
chain or an integral part of a holiday package and by rail, where the rail
movement can only be undertaken by a TOC.
AO/QUA/0227 – V2.2 149

4.1.2 Benefits
The massive move towards outsourcing in recent years has been as a
result of the improvements gained through the use of transport
professionals leading to the reduction and stabilisation of transport costs,
enabling companies to accurately forecast transport costs as a percentage
of any products retail price.
It also enables the company to concentrate on the core activity or core

expertise and to benefit from not having capital tied up in peripheral
activity. This concentration on core activity also means that the company
does not have to carry transport and transport support staff, need not
worry about transport legal compliance and is able to reduce inventory
through improved transport practices.
Operationally, the company operating the transport on behalf of a client is

able to do so more effectively to such a degree that the client is able to
identify savings, which exceed the costs incurred. Such is the degree of
involvement to maximise these savings that practices, including open-
book accounting and joint workforces and planners are commonplace.
Some of the larger outsourcing providers operate the entire supply chain
on behalf of the client, operating and overseeing procurement, inventory
control, warehousing operations and distribution. This sort of integration
is seen as a ‘win-win’ to all stakeholders, including the final consumer, but
it also makes it more difficult for the client company to break with the
outsourcing provider as the two elements become reliant upon each other
to such a degree that they would both suffer severe setbacks should they
separate.
150 AO/QUA/0227 – V2.2

4.1.3 Potential dis-benefits
Many practitioners initially believed that the costs would be crippling and
that the third party provider would not provide levels of service that the
customer required as they were not part of the central organisation. This
has proved not to be the case and outsourcing has moved and expanded
massively in recent years.
Security was another worry in the early days but this concern too has
largely proved groundless due to effective contractual terms and the
desire by the third party providers to be seen as honest and reliable.
Other possible disbenefits that have been voiced include poor customer
relations and poor co-operation between staff from the different
companies, loss of corporate image through a lowering of dress code, etc.,
excessive charges and lack of control. In reality all have been countered,
or not proved to be applicable, as the companies specialising in
outsourcing have concentrated to eliminate any perceived, or possible,
disbenefits as part of their overall marketing strategy.
4.1.4 Process
When a company is seeking to outsource the initial activity, it undertakes it
is important to establish which elements of the overall business activity it
wishes to outsource and which it needs to retain. Once this is agreed, it
is possible to establish such things such as:
 the required service and operational standards/levels

 control mechanisms
 auditing points
 contract period
 management structure
 penalty provisions
 staff integration
 training provision.
These then form the basis on which tenders are invited. Once the tender
has been awarded all training and other preparatory work is undertaken in
order that both human and physical resources are fully trained and
operating before the contract goes live.
AO/QUA/0227 – V2.2 151

Once operational, regular progress and operational meetings between
both sides will seek to remove any inefficiencies or poor practices, as soon
as possible. In an ideal agreement, once the contract is operating there
will be constant and on-going reviews aimed at coping with any changes
experienced as the contract term enters new phases. This joint
improvement and review process is an essential element of modern
outsourcing and calls for a totally integrated approach by all concerned if
the ‘win-win’ expectation is to be fully realised.
The management of any outsourced operation will be at the heart of

success or failure. The way in which the two sides integrate the
management process must be to a sufficient degree that issues cannot be
blurred or figures and statistics ‘doctored’. This open-book approach,
whilst enabling management to function, also creates a culture of trust and
openness that sees the two sides functioning as a single entity for the
benefit of everyone involved.
4.1.5 Control and monitoring

Ultimately, it is true that the client company will almost always retain
overall control and will put in place control processes and procedures
aimed at retention of that overall control. The controls will depend upon
the nature of the contract, but will be linked to KPIs, and the ultimate
revenue stream being served by the outsourced operation. These controls
will clearly include security checks and order fill checks but will also
include delivery specification, warehouse aisle adjustment activity, pence
per unit analysis, etc.
On-going monitoring of the important activities, milestones or costs is as

important to the outsourcing partners as they would be in any other single
operation organisation. What often varies in outsourcing is that the
monitoring may be carried out by both sides monitoring each other’s
performance. For example, whilst one would reasonably expect the client
company to monitor the performance of the outsourcing organisation, it is
common for the outsourcing company to also monitor agreed levels of
performance by the client, especially in retail distribution where the shops
agree to give access to a vehicle and have it turned around with set time
limits.
152 AO/QUA/0227 – V2.2

This type of monitoring gives the outsourcing organisation confidence I
being able to operate within the contractual financial terms agreed at the
outset.
On the railways a similar, although different, approach is taken but the

penalty for delaying rolling stock is levelled at the door of the track
operator (Network Rail) when a TOC suffers claims from passengers for
delays which were caused through no fault of the operating company but
arise from infrastructure problems.
Outsourcing in the road sector has been used to demonstrate the more
common deployment of the practice but partnerships and alliances are
commonly used throughout all modes to the benefit of all participants and
in an effort to allow organisations to play to their strengths and allow other
professional organisations to do likewise for the benefit of both.
Organisations that provide transport from firms outsourcing are referred to

as 3PL or third party logistics. Those who use specialist firms to monitor or
otherwise act as an agent between the principle and 3PL are known as
4PL of fourth party logistics. Organisations who provide their own transport
are referred to as ‘own account’.
4.1.6 Public transport procurement

As mentioned in an earlier section, the Restrictive Trade Practices Act
1976 contains a presumption that any agreement between two or more
operators, which restricts in any way their freedom to compete, is against
the public interest. This means that public transport services are basically
put out to tender and the tenders are, as we also know, scrutinised by
various controlling bodies, who act to maintain quality services in all
modes.
AO/QUA/0227 – V2.2 153

Licensing
The most direct way in which to regulate transport is through systems of

licensing. For instance, quality licensing has been instrumental in
developing the road freight haulage industry that operates in the UK at the
present time. It has greatly improved the operational standards and
safety levels of transport fleets and has ensured that aspiring operators
have to meet a set standard of knowledge and understanding if they wish
to enter the profession of haulage.
This form of licensing and the rigid enforcement, and quality controls that
are interwoven into the control and administration of the licensing system,
have effectively brought the road freight sector into a position, where UK
operators are respected by their EU counterparts for their ability to operate
effectively, efficiently and with profit margins much lower than are often
found in Europe.
This has had some adverse effects and the ‘pirate’ operator still exists,
albeit in very few numbers, but, as is well documented, the few have the
power to taint the industry overall and enforcement activity is now
concentrated on eliminating any rogue elements trying to avoid the rigours
of the quality licensing system in place.
Controlling standards
A licence is in effect a permit to operate, and can be issued at different

levels within a system and by various licensing authorities. For example,
drivers are usually required to have licences which show their driving
entitlement; vehicles are required to be tested annually; operators are
required to obtain licences to operate. The licensing system can thus be,
and is, used by licensing authorities to control standards within an
industry. They can oversee not only the quality of entrants (by granting or
refusing licence applications) but also the quality of their operation (by the
reserve powers which they have to revoke, suspend or curtail licences). In
the road sector the licensing authorities take the form of Traffic
Commissioners who control and administer licensing for both road freight
and road passenger operators within laid down traffic areas.
154 AO/QUA/0227 – V2.2

Source of income and information
Licensing is of course a source of revenue to a government, some, but not

necessarily all, of which must inevitably be employed in administering the
licensing systems. It is also a means by which data can be collected
about the size of an industry in terms of vehicles and operatives and the
extent to which it operations, which may require to be registered, are
performed. The statistical information held is economically and
commercially valuable.
Limiting competition
Where legislation permits quantity licensing, the system can be used to

limit competition. Indeed, the avoidance of wasteful competition was the
principal reason for the introduction of PSV and hauliers' licences as far
back as the 1930s.
Granting and appeal
Licences may be granted ''as of right" or discretionary. For example, a

television licence which is given as of right to any person able and willing
to pay the fee; a gun licence is issued at the discretion of the police (but
with appeal against refusal to a Magistrate's Court). A road freight or road
passenger “O” licence is issued as of right to applicants who can meet the
three EU criteria of good repute, financial standing and professional
competence.
Most licensing systems have built into them by legislation an appeals

procedure, thus, passenger transport company refused an "O" licence, or
whose licence has been revoked, can appeal to the Transport Tribunal.
Tendering and franchising
How tendering and franchising can be applied in the transport industry is

well illustrated by the provisions of the Transport Act 1985 and the ways in
which public transport procurers (PTEs and shire county councils) have
responded to them.
AO/QUA/0227 – V2.2 155

Tendered services
The act empowers the PTEs and councils to secure by tender services to
meet the requirements of their areas which the market does not provide.
In effect, the public transport procurer must take account of the
commercially registered services and put out to tender a range of services
to fill the gaps in the network. These gaps may be chronological (e.g.
evening, Sunday and infrequent services) or physical (e.g. a rural service),
or both.
The type of tender influences the responses made by operators. For

instance, with a net tender, the authority reclaims the operator's revenue
and pays his operating costs; a net subsidy tender involves the operator
retaining the fare revenue and tendering for a price to reflect the difference
between this and his costs. So, because with the latter some of the
commercial risk falls on the operator, the price quoted may be higher
(taking into account the loss of fare revenue to the authority) than if the
authority decided to offer a net tender.
The net tender arrangement does however encourage the operator to

maximise revenue by giving a good service and by picking up all
passengers who offer themselves to be carried. The gross tender requires
the authority to monitor the operator's fare collections to protect their
revenue. Some authorities have devised hybrid tenders which guarantee
a minimum revenue shortfall but lay claim to revenues over and above an
agreed maximum. Others have resorted to resource tendering, under
which tenders are put out for a number of vehicles for a set
period/mileage, the tendering authority then allocating work to these.
Rail franchising
The Office of Passenger Rail Franchising (OPRAF) puts out the tenders
for networks of rail services (e.g. North West Regional Railways, Inter-city
(West Coast) and a public service requirement (specified as a service
level) which the successful bidder will be required to meet in return for the
subsidy received. In the case, of a few profitable cost centres, such as
Inter-city (East Coast) and Gatwick Express, the operator may enter into a
"negative tender" agreement where in effect he pays OPRAF for the
operating franchise.
156 AO/QUA/0227 – V2.2

The Office of the Rail Regulator (ORR) has offered a degree of protection
from "open access" agreements, where in effect other operators will be
allowed to run services in any vacant "paths" or timetable slots not
allocated by tender, for a period of seven years. At the same time, by
capping the majority of passenger rail fares" it has removed from
operators a degree of commercial freedom.
Network Rail also fixes access charges on a formula based on the

"modem equivalent asset value" of the track the only control over costs
which the potential franchisees will have will be in the areas of operating
productivity and wage costs.
Other modes
In the case of air and sea passenger services, the procurement is a

complex matter with operators tendering but limiting their desire for new
routes and/or services to routes where they either already have a
presence or which suit the company profile. Very rarely is there true
competition for routes, in the true sense, as many air and sea operators
who may wish to take up new rates may be prevented from doing so
because of external restrictions relating to which airports they may use or
which ports will be allowed to handle their ships.
In any case, with both air and sea the government intervention is at a
much higher level as the consequences of poor operator selection may be
tragic and far reaching. It must also be appreciated that government
have to control some aspects of these modes as the operators are also
major employers.
Politically, any new tender gained will also have to take into account the
surrounding area and infrastructure, should a new operator be successful.
These types of externalities make the tendering process for these two
modes something which may appear less than an open market due to the
additional considerations mentioned.
AO/QUA/0227 – V2.2 157

Taxis
Before moving on it is perhaps worth mentioning public transport in a

slightly different vein. Local authorities have powers to license hackney
cabs to ply for hire at ranks and on the streets. They may also (except in
London) license private hire cars which cannot ply for hire but may carry
passengers who book in advance.
The local authority authorises the drivers and their vehicles to operate, the
latter by the issue of taxi "plates". Sometimes the criteria for a hackney
plate are more severe, (e.g. black cabs only, as in Manchester and
London) than for a private hire plate (e.g. four-door saloons). Also
because of the quantity licensing of hackney carriages in some local
authority areas, these plates often acquire an economic value (in terms of
their opportunity costs) out of all proportion to the value of the vehicle they
represent.
Section 12 of the 1985 Transport Act makes provision for taxis to operate
as a bus service. The taxi operator will apply for a ‘Special Restricted ‘O’
Licence’, then register a bus service, similar to a local registered bus
service, with the traffic Commissioners. One of the conditions of the
license ensures that at least one pick up is registered in the taxi license
issuing local authority area. Another is that the sign ‘Bus’ must be
displayed. Such operations have the potential to make significant cost
savings to a transport authority in a rural area. There are some
drawbacks. For example, vehicles carrying less than ten passengers are
not VAT zero rated, and some transport authorities will not be willing to
reimburse this cost on behalf of the operator, thus making it unattractive.
Such operations have seen little development or had little success since
its introduction in 1986.
Procurement
There is likely to be significant changes to procurement rules over the next

few years. In 2011, the train maker, Bombardier, lost out on a major
contract to build 1,200 carriages for the route between Bedford and
Brighton. The contract was won by the German company, Siemens.
Most of the work will be carried out in Germany and about 1,500 jobs lost
out to the UK.
158 AO/QUA/0227 – V2.2

This prompted a rethink of procurement rules in the UK, because there
appeared to be different standards applied throughout the EU. One
paradigm is that procurement policy ensures any contract awarded is
economically, socially and commercially sustainable. Whilst the contract
awarder cannot stipulate the work is carried out locally, it can for instance,
stipulate minimum levels for recruitment of apprentices and the long term
unemployed.
This is not just a transport issue, but extends over a range of services,
including the large supermarkets and the impact they have on small
retailers and suppliers in the local area.
There is likely to be further legislation in this area, with government

reviews throughout the UK and Northern Ireland on issues, such as,
Welfare Reform, Procurement Legislation, Planning, and Local Authority
Reform. This will include easier opportunities for the 3 rd sector (Voluntary
and Social Enterprises) to tender for public contracts. The 3 rd sector is
generally free of VAT requirements, so this is likely to have a significant
impact on commercial operators. The formation of consortiums, with all
the advantages of knowledge sharing, is likely to be a means to ensuring
sustainability of the commercial transport operations sector.
 Task 4.1
As a potential applicant about to tender for a permit/licence to operate a

public transport service, consider the factors you would expect the
issuing authority to take into account when considering your application.
AO/QUA/0227 – V2.2 159

Appendix 1
Distance-learning essays
 Element One essay
Outline in detail what you consider to be the main changes to customer

service and expectation for both passengers and freight customers for
TWO different modes of transport, over the last 20 years.
From your detailed outline discuss what you consider will be the main
changes from the current position over the next 10 years.
 Element Two essay
For a mode of transport of your choice, in a country with which you are
familiar, explain the quality licensing systems in place that ensure the
safe and effective operation of vehicles or craft.
From your findings, decide whether or not you believe that the quality
system you describe is effective. Give reasons for your decision.
 Element Three essay
For a mode of transport of your choice, explain the routeing and

scheduling factors that must be taken into account in order to ensure
that an effective, value for money, service may be provided and outline
the costs, both monetary and business related, for each factor should it
be ignored.
160 AO/QUA/0227 – V2.2

 Element Four essay
For a mode of transport of your choice, what are some of the benefits, or
dis-benefits of public sector procurement rules? How will this impact on
business?
AO/QUA/0227 – V2.2 161

Appendix 2
Financial Calculations
Time Value of Money
It is important to understand the basics of the time value of money,

particular where the project is expected to run for a lengthy period or
where inflation is running, or expected to run high. The value of money
changes with time, either through inflation or deflation, and this risk will
impact on a project. Remember what was covered earlier in the course.
The higher the risk, the greater the costs.
There are two factors that you should be aware of:
1. The Present Value of Money (PV)

2. The Future Value of Money (FV)
There are discounting tables available, but these are too large for inclusion
into this document. You should be familiar with these and their impact on
a transport management project. The pound (or any other currency) will
not be of the same value a year from now as it is today. For example, if
inflation is currently at 3% and expected to remain the same over the next
year, then in one year from the present, the pound will be valued at 97.1
pence. In five years, this figure will be just 86.3 pence. The higher the
rate of inflation means the lower the future value of money.
1
𝑃𝑉𝑘,𝑛 =
(1 + 𝑘)𝑛
Where, discounted at k % for n periods
Internal Rate of Return or Net Present Value
Both Internal Rate of Return (IRR) and Net Present Value (NPV) are about
maximising the value of the project (or the supplier organisation).
Projects with NPV’s greater than zero, or IRR’s greater than the current
rate, will add to the value.
162 AO/QUA/0227 – V2.2

Internal Rate of Return
The Internal Rate of Return (IRR) of a Capital Budgeting project is the

discount rate at which the Net Present Value (NPV) of a project equals
zero. The IRR decision rule specifies that all independent projects with
an IRR greater than the cost of capital should be accepted. When
choosing among mutually exclusive projects, the project with the highest
IRR should be selected (as long as the IRR is greater than the cost of
capital).
𝑇
𝐶𝐹𝑡
𝑁𝑃𝑉 = 0 = ∑
(1 + 𝐼𝑅𝑅)1
𝑡=0
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑇

= 𝐶𝐹0 + 1
+ 2
+⋯+
(1 + 𝐼𝑅𝑅) (1 + 𝐼𝑅𝑅) (1 + 𝐼𝑅𝑅)𝑇
Where CFt = the cash flow at time (t)
Net Present Value
The Net Present Value of future cash flows is discounted at the required
Rate of Return, minus the initial investment.
𝑛
𝐶𝐹𝑡
𝑁𝑃𝑉 = ∑ − 𝐶𝐹0
(1 + 𝑘)𝑡
𝑡=1
The decision rule for NPV is:
1. If NPV is greater than zero – proceed with project

2. If NPV is less than zero – reject project
3. If NPV is equal to zero – you are indifferent.
Pinches, George E, 1992
AO/QUA/0227 – V2.2 163

Bibliography
Three of the following were published over 20 years ago, and may
be out of print, but they still contain the principles that are relevant to
transport operations today, and have not been replaced by
contemporary versions.
Atrill, P., (2011). Financial Management for Decision Makers. 4th ed.
Prentice Hall, ISBN: 9780273702498.
Banister, D., et al, (2000). European Transport Policy and Sustainable

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Brigham, E. F. & Ehrhardt, M. C., (2010). Financial Management: Theory

and Practice. Harlow: South Western. ISBN: 9780538746625.
Button, K., (2010). Transport Economics. 3rd ed. UK, Edward Elgar. ISBN:
9781840641899.
Emmett, S. & Wright, P., (2011). Excellence in Public Sector Procurement.

UK, Cambridge Academic. ISBN 9781903499665.
Faulks, R.W., (1990). Principles of Transport. 4th rev. ed. UK, Ian Allen.
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PD03

Author: Kieran Goddard (FCILT)

Verifier: Tim Polkinghorne (FCILT)

© Chartered Institute of Logistics and Transport (UK)

 Tasks/Distance learning essays

Key Text Books:

AO/QUA/0227 – V2.2 III

Work in quiet areas, with minimal distractions.

Opening Times: 09.00 to 17.00hrs (Monday – Friday)

Tel: +44(0)1536 740167

Table 2.1 Tendering ..................................................................................................... 100

CAA Civil Aviation Authority

DDA Disability Discrimination Act (1995)

EA Enterprise Act (2002)

FRND Fair, Reasonable & Non-discriminatory

AO/QUA/0227 – V2.2 VII

IMO International Maritime Organisation

JAUPT Joint Approvals Unit for Periodic Training

KPI Key Performance Indicator

MCA Maritime & Coastguard Agency

NATS National Air Traffic Services

“O” licence Operator's licence (road freight/road passenger)

P&R Park and Ride

AO/QUA/0227 – V2.2 VIII

OJEU Official Journal of the European Union

RDC Rural Development Commission

SAD Single Administrative Document

TAN Transit Advice Note

UK United Kingdom of Britain and Northern Ireland

The Unit consists of these elements:

1.0 The Nature of Transport

AO/QUA/0227 – V2.2 XII

After studying this element you will be able to:

 Understand the relationship between transport and economic

 Understand the role of government in transport.

 Understand the nature of supply and demand in transport.

 Understand the product of transport and how it is delivered by the

 Understand the concept of market segmentation in the transport of

 Know the characteristics of modes of transport used for the carriage of

 Understand the level of integration and the interchange requirements

Because of the nature of transport, we examine first all the implications of

Within the transport industry, for instance, a passenger airline is in the

1.2.1 Economic sensitivity

In addition, in recent years, as the service sector has diversified and

This consumer driven sensitivity is ever present in an industry where

1.2.2 The producer/supplier-consumer gap

With the development of canals, railways, and motorised road transport,

There may also be gaps in relation to social requirements. This includes

As far as goods are concerned, these days, manufacturers can obtain

1.2.3 Professional expertise

1.2.4 Monitored professional standards

In addition, certain professional organisations set standards for their

Without professional standards to enhance provision and ensure levels of

EU directives relating to procurement has also introduced standards that

1.2.5 Growing importance of customer opinions

Transport is particularly susceptible to the consequences of these growing

Should a service provider simply respond to market forces or are there

1.3 Nature of Transport and Supply and Demand