Rail franchises operators & contracts

06.02.18

Grayling: East Coast franchise could fail within months

The Virgin Trains East Coast franchise has cost majority-owners Stagecoach £200m and could be only “a small number of months” from collapse.

Appearing in parliament this week, transport secretary Chris Grayling told ministers that the government may have to take control of the failing franchise.

He claimed that the day-to-day operation of the railway would be unaffected but explained that the operator – owned 90% by Stagecoach and 10% by Virgin – had breached a “key financial covenant.”

According to Grayling, the problem was caused because Stagecoach “got its numbers wrong” and overbid on the original contract, leaving it unable to run the franchise.

However, the transport secretary said there was no current agreement in place for either the government or another company to take over.

He said: “Contrary to widespread speculation and rumour, ​no deal has been done on this railway, and I have not yet made a decision on the successor operator to run the East Coast railway until the longer-term plans for the integration of track and train can begin in 2020.

“There is no question of anyone receiving a bail-out. Stagecoach will be held to all its contractual obligations in full.”

Previously, the DfT had said that the franchise was likely to end in 2020, earlier than its initial end date of 2023, and would then be subject to the new public-private ‘East Coast Partnership’ which is likely to be similar to the model announced for the next South Eastern franchise.

While Grayling has heaped blame for the collapse on Stagecoach, Virgin founder Sir Richard Branson said much of the responsibility fell at the feet of Network Rail for failing to live up to promises of a major track upgrade.

The failure of the franchise has prompted some critics to call for nationalisation of the East Coast mainline, encouraged by the transport secretary’s admission that central control of the line is a possibility.

Handling of franchise a ‘shameful fiasco’

RMT general secretary Mick Cash said the handling of the issue so far was a “shameful fiasco” and that it should be “renationalised with immediate effect.”

Andy McDonald, Labour’s shadow transport secretary, also attacked Grayling: “The transport secretary’s failure to stand up to Virgin and Stagecoach is a disgrace. He’s supposed to protect taxpayers’ interests, not sacrifice them to private shareholders,” he stated.

“The system is broken which is why Labour will act in the public interest by taking our railways back into public ownership.”

Future plans for the franchise could see Stagecoach continue its operations on a short-term and not-for-profit basis until 2020, although Grayling has said that the company will be “held to all of its contractual obligations in full”, with “no question of a bailout.”

RTM has contacted the firm for comment.

Top image: Dominic Lipinski, PA Wire

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Comments

Andrew Gwilt   06/02/2018 at 11:23

As we public citizens would always say. #BringBackBritishRail #Renationaliseourrailways Simple.

Trevor Lewis   06/02/2018 at 11:59

Once again, it's clear that not winning a rail franchise bid is bad, but not as bad as winning it. However, Branson is right to lay some of the blame at the door of Network Rail's inability to deliver route upgrades. Those calling for the renationalisation of all the railways should remember that many of our current railway problems flow from the incompetence of already-renationalised Network Rail - but it's the public-facing TOCs that take the flak.

Keith R   06/02/2018 at 12:19

Renationalise railways to improve performance??? It is amazing how short some peoples’ memories are.

Ampox   06/02/2018 at 12:22

The rail industry is nationalised in all but name, as the government calls the shots, franchises included. Supporters of 'nationalisation' need to explain how a very complex industry can be better managed. Putting it in the hands of politicians is probably not my first choice.

Pete   06/02/2018 at 14:23

Bring back BR? No thanks. Anyone advocating that is either too young to remember or is looking at history through rose tinted glasses. For all the nostalgia, BR was pretty awful. The current system is FAR from ideal, but renationalisation is not the answer. The DfT could solve a big part of the problem by stopping accepting such wildly optimistic bids that it knows are doomed to fail – National Express couldn’t handle paying £1.8 billion over 10 years, so why did the government think Stagecoach and Virgin would be able to pay £3.3 billion over 8 years operating the same franchise with the same rolling stock?!

Neil Palmer   06/02/2018 at 14:49

I must say I agree 100% with Trevor & Keith. Those calling for East Coast to be renationalised either have the short term memory of a goldfish, or are the usual bunch who'll stretch the truth as far as they can (if they can even recognize the truth that is) trying to score political points (and yes, I'm specifically including Mick Cash in that group). The failure here is the failure to deliver promised upgrades to the ECML infrastructure (and deliver the IEP trains on time, another botched GOVERNMENT project) that were required to run more trains, to earn more revenue, to pay more premium to the DfT. SO the failure is down the the component of the railway that are ALREADY nationalised. Maybe it's time for Branson & Souter to call up their lawyers and sue the government as the false claims of a bail-out are giving their companies a bad name.

Jerry Alderson   06/02/2018 at 17:31

Given that the steady, secure but unadventurous East Coast operator (DOR) was put out to tender purely for ideological reasons all the government had to do was find a bidder willing to pay 30% more in premiums per year that East Coast made in profit in its 5 years and 3 months. Instead the government decided to be greedy and wants more than twice per year what East Coast delivered, and now it has egg on its face. Virgin is a respected brand, and does attract some custom from brand alone in a way that BR never did, but it doesn't have a magic wand. NR's failings would ultimately have made the premiums unachievable but VTEC is likely to run out of parent guarantees prior to any NR enhancements being due, and VTEC could never have recovered from its current position even if NR delivered 100% on time. As I've said to people in the rail industry, the whole basis of franchise premiums is flawed. The entire premium profile is baselined on continuously increasing revenue (and profit) from the bid time, with no opportunity to rebalance. Rather than predicting increases on a single point in time, I think franchise premiums should be based on a percentage improvement on the previous year's *actual* not predicted revenue from bid time. TOCs that overbid would still lose money but at any point in time recovery would still be possible.

Melvyn   06/02/2018 at 18:15

So Stagecoach / Virgin overbid when applying for ECML franchise .... Well tough luck pay money you promised or go bankrupt it's called " free enterprise!" not because you are free to walk away when you fancy ! The real issue is while Virgin / Stagecoach renege on ECML Chris Grayling extends Virgin franchise on WCML when surely both companies should forfeit all franchises they are part of ? Looks like Azuma will need a new name !

Neil Palmer   06/02/2018 at 18:31

Jerry Alderson makes a very sensible suggestion for changing the way franchise premiums are calculated, so obviously the DfT will pay no attention to it. And Melvyn, NO, that is not the real issue here.

Pdeaves   06/02/2018 at 22:12

Melvyn, perhaps look at it the other way round. If WC is doing OK then why not give the EC team a second chance? Ultimately the whole situation is not black-and-white but in very complex shades of grey.

Paul   06/02/2018 at 22:45

I would suggest Neil that if Lawyers were to be activated, they should be on behalf of the taxpayer in suing the whole damn lot for taking us for a ride! Virgin/Stagecoach had absolutely no chance in hell of paying the ridiculous premiums promised, but chanced their hand in exactly the same way they did on WCML years ago. Make a ridiculous bid that Dft could not refuse, fully in the knowledge that the necessary "enhancements" would not happen and they could cry foul. It's worked twice now! Similarly Dft should be chastised for appalling mis-management and crass stupidity. They seem incapable of seeing common sense and protecting the public purse. NR are increasingly taking a bunker mentality from constant sniping, in many cases rightly so, but on numerous occasions have had to try and provide madcap political promises that were uncosted and without any planning whatsoever. Jerry Alderson summarises this mess very well. To say Nationalisation is the answer I agree is benign as essentially most of the Railway is under Government control already, and so it should be when public monies are involved. However, an INDEPENDENT Control structure more allied to the Industry, similar to BR is essential in my view to provide cohesion and one voice. To say the TOC's take the flac is absolutely true...and right! They also take the profits and generate localised fragmentation and isolation!

Mark Hare   07/02/2018 at 15:25

Melvyn - clearly you have no idea how the bidding process works. Overbidding for franchises is not only expected it is positively encouraged, or it certainly has been in years gone by. Combine that with improvements to infrastructure that would provide enhancements to services and hence increased revenue that were promised but not delivered then it's pretty clear to see why Virgin/Stagecoach can't make the numbers add up. Put it this way: if you rented a house and paid more than the market rate because the landlord promised to redecorate throughout, fit a new kitchen and bathroom and build a conservatory on the back, and then failed to carry out any of that work you'd feel pretty hard done by wouldn't you? No doubt you would try to negotiate a reduction in your rent due to the broken promises. And Andrew, the railways aren't going to be renationalised. Nobody is going to 'bring back British Rail', and why would they want to? Privatisation is here to stay although it's clear that in some cases the franchise system is failing and changes need to be made.

Andrew Gwilt   08/02/2018 at 00:50

Well others do want British Rail back.

Anonymous   08/02/2018 at 16:41

Might I suggest the BR knockers remember that BR was systematically and deliberately starved of investment by governments of both sides for decades? And were thus forced to close/single lines, withdraw services, sweat assets and rely on overtime. Despite this they ran a tight ship and actually saw passenger figures start rising again in the 1980s through the sector business model. If they had been received support like the modern railway things could have been very different.

Cliff.   08/02/2018 at 17:27

All those that mock BR should remember that it was BR that electrified the East Coast,and introduced the HSTs and Class 91s and Mk 5 coaches to the route.These trains are still being used today. One can only imagine what BR could have done with all the money being sloshed around the network these days. We wouldnt have the farce of the Sheffield Tram Train and Great Western electrification costs spiraling out of control.We as taxpayers pay more for the railways today in real terms than we ever did under BR.(Walk on fares London-Manchester now £300 would be £90 under BR 1996 fares adjusted for inflation!!!)

Foaming Stoat   15/02/2018 at 12:33

Cliff, I'm sure that it was sausage-finger syndrome, but for the pedantic among us, the East Coast uses MkIV coaching stock, not Mk 5. F. Stoat (Miss)

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