Lessons of History: An illusion of railway grandeur: The GWR's profits rested on monopoly and shabby service, writes Christian Wolmar

John Major once referred nostalgically to the old railway companies, expressing the hope that the golden age of rail could be recreated through a revival of a structure similar to the pre-nationalisation days. It was not to be. He was talked out of it by fellow ministers.

Mr Major's romantic attraction was understandable. Looking at the one railway whose shape survived virtually intact from the dawn of the industry until nationalisation in 1948, the Great Western, he would have found that for all but a few years it was healthily profitable. On closer examination, however, he would have discovered that the way in which it made its profits was not always commendable and none of the conditions in which they were made still pertain.

The core of the Great Western was the line from London to Bristol, its first. As with all great civil engineering projects, the assessment of the cost was over-optimistic. The Act authorising the construction, passed in 1835, allowed for pounds 3.3m. The total cost when it opened in June 1841 turned out to be pounds 6.15m.

No sooner was the line finished than extensions were being built. By 1848, the GWR had over 300 miles of track and by 1863 over 800 miles. Despite cost runovers, healthy dividends were paid in these early days. Before the depression of the late 1840s, the company was paying 8 per cent per annum which, at a time of no inflation and low interest rates, was very satisfactory. Even after the economy recovered, according to E T MacDermot, author of the History of the Great Western Railway, 'three-quarters of a century were destined to pass before the Company again paid 8 per cent'. The deterioration of the economy led to a cut in dividends to 7 per cent per annum, then to 6 per cent. By August 1849, dividends were down to 4 per cent, where they remained until they fell to 3 per cent in the mid-1850s.

The Great Western's early high profits were largely a result of its monopoly position. There were no competing lines between London and Bristol and indeed it was one of the few main lines that would retain its monopoly throughout the history of the railways. Its main potential rival, the Kennet and Avon canal, suffered severe water shortages, while stage-coaches were slow.

Terry Gourvish, a railway historian and director of the Business History Unit at the London School of Economics, believes other factors contributed to high early profitability: 'First, their accountancy procedures were pretty crude. They thought the equipment would last 150 years and built that into the accounts when, in fact, some rails needed replacing after just seven years. The need for replacement ate into their profits. Secondly, they went for a high charging policy, going for the luxury market rather than catering for the masses.'

When they were forced by Gladstone's 1844 Act to run trains at 1d (0.4p) per mile, Mr Gourvish says the GWR 'tended to run open-top trains early in the morning to fulfil their requirement to operate a train a day at that price'. The tariffs for first class were high, up to 2 1/2 d (1p) per mile.

Thirdly, the Great Western was fortunate in that it had a captive goods market. South Wales coal was also a healthy contributor to its coffers.

Mr Gourvish also reckons the GWR's profitability was helped by the fact that it resisted extending itself. In the 1860s, however, it did succumb to an over-ambitious expansion programme. It had borrowed too much and, as several other railways were in trouble, making the public suspicious of railway securities, refinancing was not an option. However, the company recovered, paying a dividend of 1.375 per cent in 1868 which rose to 6.25 per cent in 1873.

The GWR was also hampered in the second half of the 19th century by the gauge problem. Brunel had won his argument for a broad gauge, 7ft rather than 4ft 8 1/2 ins which had, by accident, become the standard elsewhere. However, no one followed suit and the Great Western was isolated.

By the early 1860s, the managers of the GWR realised the broad gauge was, as one of them put it, 'an encumbrance', but the company could not afford to change it. The first conversion was in 1868, but it took 24 more years for the broad gauge to go.

Profitability was boosted in these early stages by the absence of regulation. Safety was largely left to the companies and accidents were frequent. On the GWR or its predecessors, bridges collapsed, such as the one over the Dee in 1847 when five people were killed. Trains were derailed or crashed into each other, coaches were concertinaed, killing the occupants, because brakes were wrongly applied, and so on.

The main form of control exercised by Parliament was through the Acts required to build each railway but this was a very haphazard form of regulation, dependent on the whims of MPs and their local interests. Gladstone's Act had included a provision that if a new company earned 10 per cent net or more, the state would purchase it after 21 years. Needless to say, this never happened.

The first wave of stronger regulation followed the Royal Commission of the Railways in 1868 and led to the introduction of an effective communication cord. MPs, through the Railway Acts, had encouraged competing railways and the GWR had to face competition on its routes to, for example, Birmingham and Exeter. Parliament, fearful of monopolies, was also wary of mergers and several applications to create bigger conglomerates were turned down by the Board of Trade. Railwaymen died by the score: in the mid-1870s, an average of 472 men were killed and 3,500 injured nationally, out of a total at risk of around 200,000.

Richard Hope, consultant editor of the Railway Gazette, says: 'The GWR ran a few very fast trains, but on the whole it was a desultory, slow and shabby service. If you look at Bradshaw (national timetable) for the late 19th and early 20th centuries, there were nothing like as many trains and the frequency was irregular.'

Mr Gourvish says that even the relatively light regulatory framework prevented greater profits. But he says it was not a free enterprise culture. 'Parliament exerted quite a strong control through the Bills required for new railways and through discouraging mergers. The railways were worried that more mergers would lead to even tighter restrictions on maximum charges.' The threat of tighter regulations was ever present: 'Their response in improving the quality of their services in an attempt to defuse the pressure building up around them undoubtedly contributed to the lower margins and reduced profits of the latter part of the century.'

The railways were also under pressure to go down market. Third-class passengers and short-haul bulk freight, at charges fixed by regulation, were not a source of profit but it would have been politically damaging, in a climate of hostility against the railways, to turn down the traffic. The GWR still, however, managed to absorb more than 20 other railways between 1850 and 1875, ensuring that it was the largest British railway prior to the amalgamation of 1923.

It was more profitable than most of its counterparts. Dividends fell from the peak of 6.25 per cent in 1873 to 3.75 per cent in 1878, having been affected by coal strikes in the mid-1870s, but rose to 6.75 per cent in 1883. They stabilised, thereafter, remaining largely between 5 and 6.5 per cent for nearly all the years up until the First World War, with a low in 1898 of 3.75 per cent and a high of 6.75 per cent in 1889.

Mr Gourvish explains its performance: 'The GWR was very mean. Their service was not as good as other railway companies'. For example, they favoured slip coaches which were dropped off trains without stopping at a station. The guard would release the coach as the train approached the station and the coach would freewheel into it. He did have a brake but it couldn't have been that safe.'

In the 1890s, tighter regulation on working hours and a freeze on freight rates forced the companies to look at their operating practices and in the first decade of the new century they greatly improved the efficiency of their freight operations.

Like all the railways, the GWR was taken into government control for the War but continued to pay dividends of between 5.75 per cent and 7.25 per cent until just before amalgamation on 1 January 1923.

At the time, it had 1,000 stations, 116 million passengers a year, and made pounds 6.4m profit on a turnover of pounds 35m. It also carried 37 million ton of goods merchandise which made up over half its revenue.

GWR was to be the only company of the big four which made considerable profits throughout the quarter century between amalgamation and nationalisation. Terry Gourvish believes this is because it was retained as an entity: 'The other companies were all formed by mergers of two or more big constituents. The GWR took on smaller railways but its management ethos was able to prevail.'

Mr Gourvish says dividends for ordinary shareholders were around 4.17 per cent between 1929 and 1934, dipped in the late Thirties to 2.8 per cent but rose to 6.14 per cent in 1946-47. It outperformed all the other companies by far.

These figures illustrate the main determinant of profit levels. They fell in the 1920s and 30s as the motor car and the lorry grew in importance. The severe petrol shortage and rationing after the war ensured good profitability, but the onset of mass private motoring was only postponed. Nevertheless, 112 million people used their trains in 1947, only 4 million fewer than in 1923.

While it is very difficult to break down British Railways' accounts after nationalisation, Mr Gourvish attempted to do so for his book British Railways, 1948-1973. He emphasises the calculations are to some extent arbitrary but after just about breaking even, the Western Region of BR began to go heavily into the red by 1954, weighed under by inefficiency, the competition from cars and the transfer of freight from rail to road as the road haulage industry was denationalised. Performance improved briefly in the late 1960s but plunged again into heavy deficit by 1972.

The Great Western lines, the InterCity section of the old GWR, are about to be put out for franchise, returning them to the private sector for the first time in almost half a century. Will it work? The profitability of the GWR throughout its history was essentially a result of its monopoly position, not so much in relation to other railways, but more because rail was the only efficient mode of transport. The Great Western lines, mainly from London to Penzance, South Wales, and Bristol, are undoubtedly profitable. So when they are franchised, a private sector operator will not get a subsidy.

However, the manner in which that profit is achieved shows how arbitrary decisions will determine the profitability of potential franchisees. Castle Cary station in Somerset used to be an InterCity station but the staff proved too costly. Regional Railways, which runs provincial trains, decided to take on the staff costs, knowing this would make little difference to its losses of more than pounds 500m per year.

The other problem in assessing future profitability is the way in which privatisation is being carried out. Brian Scott, the manager of the Great Western lines, has said he will not take part in a management buy-out because the infrastructure will be the responsibility of Railtrack, a new body, while operations will be in the hands of the franchisees. He said: 'I would not put my money into a train operating company . . . without having day-to-day command and control of operations, including signalling and track and signals maintenance.'

Mr Major will not be bringing back the GWR. Instead, there will be a quasi-independent railway dependent for its profits on factors outside its control. The GWR's general managers, used to total control over their empires, will weep in their graves.

(Photographs omitted)

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