I see from the trade press that transport minister Norman Baker has once again been expressing puzzlement over the fact that motoring costs have generally fallen in real terms over recent years, whilst bus fares have generally risen by more than inflation.

Since this is fairly fundamental to his considerations of future policy as a Minister, may I take this opportunity to enlighten him?

Firstly, bus fares: well, Minister, there are two reasons for above inflation rises:

• Rising costs
• Falling patronage

Looking at costs, you need to understand four things:

• One, that over 60% of bus industry costs arise from employing people – drivers, mechanics, administrators and managers, training them and paying their pension contributions.
• Two, that historically, and particularly over the last 20 years or so, wages go up by more than inflation
• Three, it follows that if 60% of your costs are rising by more than inflation, then it is reasonable to expect that your total costs will rise by more than inflation. Since fuel costs, property costs and insurance costs have also been rising at an alarming pace, it’s a dead certainty.
• Four, what ultimately determines the number of a people a bus company needs to employ is the speed and efficiency of its services: the faster they run, the fewer people (and buses) you need to provide a given level of service.  Unfortunately, however, bus speeds have been falling, and other factors such as increased regulation, have meant that the productivity of the industry’s workforce has fallen by around 15% over the last decade. This gives a further twist to the cost spiral.

Not a good picture, then, Minister: what your coalition colleagues once called a “double whammy” – in this case, of rising costs and falling productivity.

Turning to falling patronage, what you have to understand is that as the number of passengers has fallen over the years – mainly as a result of rising car ownership through greater prosperity – the revenue you need to collect from each passenger in order to cover your costs rises too.

As we pointed out in our report “The Economics of Bus Operation” last autumn, the average load on each bus was just under 27 people in 1955, but this had fallen to just over 10 by 2007/08. On a journey that costs £25 to operate, this puts the revenue per passenger needed to break even up from 93p to £2.32.  By the way this equation is also quite important when thinking about concessionary fares reimbursement, but I’ll drop you a separate note on that subject shortly.

Oh, and whilst we’re on the subject of pricing, please don’t fall for the “if only we’d cut the fares, more people would travel” line: I’m afraid it doesn’t work, Minister. A few more people do travel, certainly, but never enough to replace the revenue lost by the fares cut. If the trick really did work, the industry would have cottoned on years ago: we’re not daft, you know (well most of us, anyway).

So taken all in all, you see that industry costs rise more than inflation for several reasons, and costs per passenger rise even further as the number of people carried falls. Now, as you’ll appreciate, the industry has only two sources of revenue – fares from passengers and, not to put too fine a point on it, you, Minister.

So it’s a choice between fares increases above inflation, or else persuading the Treasury to write what would effectively be a blank cheque for ever-increasing subsidies. You’ll be in a better position to know than me, of course, but personally I can’t see the Treasury being terribly keen on that, especially in current circumstances, can you?

Just quickly on motoring costs, because I know you’re a very busy man: three things have driven motoring costs down over the last 20 years – major improvements in fuel efficiency, major reductions in maintenance costs and falls in the cost of producing vehicles as costs have fallen and productivity risen. Very different circumstances in a very different industry.

The other quick point to make is that it is not price alone that determines consumers’ choice of mode for their journey – but that’s a whole other subject for another day.  I must let you get on.

I do hope that this has been useful, and that you’ll now stop wondering why fares go up and motoring costs go down. Because I couldn’t possibly accept, as a very cynical friend of mine suggested the other day, that you know all this already, but are just seeking to shift the blame for unpalatable facts on to transport operators who don’t get the chance to answer back.  We all know that your predecessors did that, of course, but you wouldn’t dream, etc etc. Would you?