First in the queue to take over east coast main line

SCOTTISH transport giant FirstGroup is in pole position to bid for Britain's most prestigious rail franchise, after troubled operator National Express signalled it was to pull out because of mounting losses.

Ministers announced yesterday that they were to renationalise the east coast main line contract temporarily, as The Scotsman revealed in May.

The move followed National Express admission that it would soon be unable to pay instalments towards the £1.4 billion it agreed to pay the government for the seven-year Scotland-London franchise.

The operation, including virtually all its staff, is expected to be transferred to a government company about October to ensure trains continue to run normally. National Express runs direct trains between Edinburgh, Glasgow, Inverness, Aberdeen and London via York.

Ministers are likely to run the service until a competition is staged for another rail firm to take over the franchise in late 2010.

Aberdeen-based FirstGroup, which runs ScotRail and four English franchises, is seen as the front runner, but is expected to face a challenge from west coast operator Virgin-Stagecoach.

First's bid could be masterminded by Mary Grant, who devised its successful bid to wrest ScotRail from National Express in 2004 and became its managing director, before moving to head First's rail division this year.

Industry experts said First, which launched a bid for National Express this week, would be a "very keen" contender.

However, there was uncertainty last night about the precise timetable for the changes, with National Express chiefs accusing Transport Secretary Lord Adonis of "jumping the gun" in announcing the government takeover.

In a series of dramatic developments early yesterday, National Express confirmed the surprise departure of Richard Bowker, its chief executive, as it admitted it was struggling with the franchise.

Minutes later, Lord Adonis announced he was ready to take over the franchise and National Express' two other rail contracts – in East Anglia and Essex – were also under threat.

The developments follow six months of talks between the two sides. National Express was seeking to renegotiate its contract to ease the financial burden, as its ambitious 10 per cent passenger growth targets virtually halted in the face of the recession.

This is believed to have included a £100 million offer by the firm to buy itself out of the deal. However, ministers have repeatedly stated – at least publicly – they will not renegotiate contracts, conscious that relenting would prompt other operators to follow suit.

The Department for Transport told The Scotsman in May that, instead, it was likely to take over the franchise directly, as happened with another operator six years ago.

The firm paid the government £82m in the year to March under the terms of the deal and is due to pay £125m this year and £162m next year.

These "premium payments" were due to rise to £311m in 2014-15, the final year of the contract.

The Department for Transport said payments were due in equal monthly instalments on the first of the month, and it had received July's, of some £10.4m.

Lord Adonis said he had set up the publicly-owned East Coast Main Line Company to "take over this franchise from the point at which National Express East Coast ceases to operate."

National Express, which also runs Scotland-London coaches and buses in Dundee, said it expected to lose £20 million in the first half of this year because of the east coast franchise.

It said the franchise "will continue to be supported by National Express in line with its franchise support commitments until the committed funding is fully utilised, expected to be later in 2009.

"If, despite the best efforts of National Express East Coast (NXEC) and the full utilisation of National Express's committed financial support, trading conditions result in NXEC being unable to meet its financial obligations under the terms of the franchise agreement, the board believes the secretary of state would have a duty to reassume control of the franchise."

The firm said it expected this to happen between October and December.

But the firm said it taken legal advice that the government was not entitled also to take away its c2c and National Express East Anglia franchises.

Lord Adonis described National Express's decision to refuse to continue funding the east coast line as "regrettable and disappointing". He said: "It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."

The Conservatives accused the government of incompetence in running the railways, while the Liberal Democrats said the east coast franchise should stay permanently in public hands.

Aslef, the main train drivers' union, said rail franchising had "started off as a pantomime, then become a farce and has now become a folly", while the RMT transport union called for a complete renationalisation of the railways.

Lord Adonis said National Express had said it did not intend to default on its obligations in respect of its other rail franchises. But he added: "Notwithstanding this, the government believes it may have grounds to terminate these franchises, and we are exploring all options in the light of the group's statement."

The decision to re-tender the franchise next year could have significant implications for railway funding if the recession continues and far less is bid by the winning operator. It will conveniently push the process beyond the general election, leaving one fewer extra headache for the government.

Nigel Harris, the managing editor of RAIL magazine, said: "The transport budget will take a hell of a knock, but while the east coast franchise has been brought to its knees by the recession, it is still growing – just."

Lord Adonis said the new franchise would include a greater say from passengers.

ANALYSIS

Groundhog day as east coast line operator hits buffers

IT IS Groundhog Day for the railways. In 2006, a train operator was forced to hand over the keys just 18 months into a new franchise for Britain's premier route after gambling for too-high stakes and losing.

The name on the side of the trains may have since changed, but three years on, over-ambition is destined to see the same thing happen to National Express as befell GNER, in having the plug pulled on the inter-city east coast contract.

GNER, which ran the franchise for 12 years, set the post-privatisation standard for everything from customer service to restaurant cars.

However, it was caught out after admitting to have overbid in agreeing to pay the government £1.3 billion to retain the contract in 2005.

The firm hadn't reckoned on being ambushed by a series of major extra costs such as the London terrorist attacks and the rising costs of fuel and electricity.

Just over eighteen months ago, National Express took over the contract with equally bold expansion plans and agreed to pay ministers even more for the privilege – £1.4bn. This time it was the recession which brought the downfall, shrinking the forecast 10 per cent passenger growth to 0.3 per cent.

Cost-conscious travellers also hit revenue, with lucrative first class business travel curbed and others passengers increasingly opting for cheaper advance tickets. Put simply, those who did travel were paying less.

However, as with GNER, the irony is that National Express will not be losing its contract because of poor stewardship, as happened when the government previously took over a franchise – South Eastern – from French operator Connex in 2003.

Instead, National Express improved punctuality, and passenger satisfaction ratings have held up despite a series of cutbacks such as the axing of the restaurant cars, as the firm struggled to maintain its franchise payments, currently £10.4 million a month.

Since the start of the year, National Express has been holding out for a renegotiation of its contract to ease the financial strain, but this been continually rebuffed by ministers who know it would prompt a rush from other operators also feeling the pinch.

Industry observers believe the fault lies on both sides, with National Express appearing to have failed to have learned the lessons of GNER, despite being led by the man who used to let franchises for ministers.

However, equally, fingers are being pointed at the government for again presiding over a franchise auction which pushed the winning price to dizzying levels in its determination to squeeze more out of the private sector to help pay for the railways. As one expert put it: "National Express bid a vast amount, but the government let them."

ALASTAIR DALTON

Who's in the running

ABERDEEN-based FirstGroup signalled its intention to take over the east coast franchise with this week's audacious bid for National Express.

Britain's biggest transport operator already runs five rail franchises, including ScotRail, and is seen as being in pole position when the contract is re-let next year.

It won a three-year extension for ScotRail last year after exceeding growth targets and is in the process of turning round the fortunes of less-well-performing First Great Western.

Virgin and Stagecoach, which jointly run the Glasgow-London west coast main line franchise, are equally certain to bid.

With FirstGroup, they are veteran losers in past east coast franchise battles, the last of which saw National Express victorious in 2007.

However, monopoly concerns over the same firm running both east and west coast main lines could still count against them, despite some experts arguing that it could help streamline cross-Border operations.

Arriva, which won the CrossCountry franchise from Virgin two years ago, and another former east coast challenger, has fared less well, reporting on Tuesday that slackening growth would dent its half-year results.

Other interest is likely to come from European rail firms, such as Dutch Railways, which jointly runs Merseyrail and the Northern franchise with Serco, and Deutsche Bahn, which operates the Chiltern franchise, as well as Britain's largest rail freight firm, DB Schenker.