All change! Transport operators wrestle with new travel patterns 

In recent years UK transport operators have endured a series of structural shocks, including shifts in consumer behaviour triggered by the Covid-19 pandemic, surging cost inflation and government policy interventions.

Covid has brought about notable changes in travel patterns. There has been a permanent reduction in business travel, once a high-yield segment, alongside evidence of longer trips and shifts from air to rail. Remote work has surged, leading to substantially less commuter travel; and because commuting is primarily concentrated on Tuesdays through Thursdays, cash flow reliability has been affected. Leisure travel, by contrast, has rebounded strongly. Sundays are now busier on the railways, although satisfying cost-conscious passengers is not without risks for operators.

Alongside these demand changes, travel businesses have had to absorb major increases in costs, particularly for fuel, energy and labour. Firms have had to weigh up how and where to pass through these costs in light of the evolving nature of demand and heightened price sensitivity.

Parallels to wider retail markets

These challenges mirror those faced by many other retail and consumer markets. Businesses have had to decide when and how to pass on rising costs and whether, if the shift in costs is structural, to overhaul their operating models. Cost-of-living pressures have led households both to trade down to cheaper alternatives and to spend less on more discretionary items. Firms have had to respond.

The major shifts in consumer behaviour witnessed as a consequence of the pandemic have come on top of longer-running trends – for example related to growth of online, health and sustainability - and the emergence of new business models including delivery and digital platforms.

Implications for value strategies

These shocks have prompted consumer-facing businesses to re-evaluate their traditional value strategies and make changes to remain resilient. From our work across sectors we see the evolution of value strategies in six key areas: core pricing, promotions, loyalty schemes, range architecture, personalisation and new revenue streams such as advertising. The transport sector has participated in many of these developments in recent years.

• Core pricing: higher costs mean higher prices, so businesses have to judge how and where to pass them through to customers. Big swings in demand over recent years have led to volatile pricing for many types of products whose prices are yield managed, reflected in sharp increases and falls in measured prices.
• Promotions: firms have focused on the role of promotions to influence customer behaviour, alongside core pricing. In designing promotions, businesses need to weigh up whether demand is growing and promotions can help to take a greater share of that growth; alternatively, if demand is weaker, the emphasis is more on using promotions to gain share from competitors. And throughout, making sure that the use of promotions remains economically sustainable.
• Loyalty schemes: although these are well-established tools to engage and retain customers, the recent focus has been on how such schemes need to evolve to remain relevant and open up new opportunities, particularly through digital usage. Retailers have revamped loyalty programmes to offer personalised incentives and rewards, and some have introduced loyalty pricing. Similarly, transport operators are increasingly using schemes to encourage loyalty and incentivise bookings via their platforms. Many schemes are free to join, but some are paid-for membership programmes – to unlock further benefits and drive specific behaviours.
• Range architecture: the product offering has to adapt to meet customer needs, respond to competitors and retain overall coherence. Examples in retail include the (re)launch of value ranges, the development of new plant-based food and low-/no-alcohol drinks, and the evolution of subscription models. For their part, innovations by transport operators include the introduction of the TfL Friday fare, the LNER single-leg pricing trial and the growth of sleeper trains across Europe.
• Personalisation: along with changes to core pricing and promotions, businesses are increasingly using the tools at their disposal – including loyalty schemes and digital apps – to better target customers via personalisation. This can range from presenting the standard offer in a personalised context (e.g. while the customer is browsing) to a bespoke price or promotion for that customer at that particular moment.
• Additional revenue streams: businesses are diversifying and adding to their income sources, particularly through advertising and the media, to boost overall profitability or to allow for different choices on prices and promotions. Transport operators are capitalising on advertising opportunities on board trains and buses and in terminals to generate extra income.

With the economic landscape in flux, transport operators will continue to face decisions on where and how to adapt their value strategies to meet changing consumer demand and market dynamics. Consumer businesses are grappling with similar issues, and the transport sector is likely to be able to learn from the approaches they take. An economic analysis of these deep-seated changes can help companies to evaluate the effectiveness of levers at their disposal and plan their response to ensure that their value strategies remain relevant.