Merging our city's two railway services involves a myriad of complex investment and public policy decisions. But for most people, its key selling point was the promise of substantial fare reductions. This promise was finally delivered yesterday.
The cuts are especially big for long- and medium-distance commuters, who will see fares reduced by at least 10 per cent and 5 per cent respectively. The longest routes will have reductions of up to 35 per cent. Even the lowest current fares will fall by 20 cents, while boarding charges - for passengers switching from one rail system to another - will be scrapped. At a time of rising costs, as inflation hit 3.2 per cent last month, commuters have been guaranteed that the reduced fares will stay in place until at least June 2009.
The new fares will likely satisfy the public, something demanded of the new MTR Corporation by its majority shareowner, the government. The challenge ahead, therefore, is for the publicly listed rail operator to placate another key constituency, its minority shareholders. These will not be so easily satisfied, and a viable, long-term profit growth strategy is necessary.
The steep fare cuts mean the merged rail giant will forgo an estimated HK$600 million a year in revenue. Furthermore, it will no longer be able to adjust fares independently. Instead, fares can only be changed according to a formula based on a basket of indicators such as inflation, wages and productivity. The MTR Corp has also promised not to make staff cuts; there will be voluntary redundancies only. Legitimate questions have therefore been raised by critics of the merger, with some warning that the corporation's cash flow will be impeded in the next few years as a result.
Clearly, the MTR Corp hopes to find profit growth in the city's property development and investment, especially from a strong portfolio of property sites it has obtained from the Kowloon-Canton Railway Corporation as part of the deal. This will be coupled with expansions across the border by exploiting existing KCR services and facilities on the mainland. This two-pronged growth strategy is one of great promise, but it also poses many difficulties and challenges.
For now, the MTR Corp can expect substantially increased streams of income from shopping malls, offices, and development rights of station properties owned by the KCRC. But the local property market is closely tied to the stock market, which has recently suffered extreme volatility, something that is not expected to go away any time soon. A steep market correction or a crash would have a significantly negative impact on the rail operator at this delicate, transitional time.
