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Stagecoach 80% profit dip linked to ‘onerous’ VTEC contract losses

Stagecoach Group has admitted to “disappointing” losses across its Virgin Trains East Coast (VTEC) operation, which forced the parent company to take out a £84m ‘exceptional pre-tax charge’ to reflect the “onerous” nature of the franchise contract.

Profits at the parent company dropped by a staggering 80% in 2016-17 after the operator was forced to take out the major charge to balance out larger-than-expected losses in the VTEC contract. Its overall profit in 2017 was of £17.9m compared to £104.4m the year before.

Martin Griffiths, Stagecoach’s chief executive, said the company is currently engaged in talks with the DfT “regarding our respective contractual rights and obligations under the current VTEC franchise and reflecting the reprioritisation of Network Rail’s infrastructure programme”.

“However, separately we have made financial provisions to reflect the short-term outlook for that business over the next two years, including in view of the weak growth environment affecting the UK rail sector as a whole,” said Griffiths.

“We are disappointed to report losses at VTEC. However, I am confident that we can return the business to profitability and build on the significant benefits we have delivered to date for customers and taxpayers.”

The company, which is currently in the race for a handful of new franchises including East Midlands, South Eastern and the West Coast Partnership, estimated that VTEC will become profitable from 2019. But it has been, and will continue to be, a challenging few years until then, with the franchise incurring losses under the current contract and pushing Stagecoach to loan VTEC up to £165m as a result of insufficient passenger revenue growth.

“While revenue trends showed some improvement in the second half of the year to 29 April 2017, revenue is not growing as strongly as we anticipated and most recently revenue has been adversely affected by increased terrorism concerns and political uncertainty,” the company’s report said. “In addition, the amounts payable to and receivable from Network Rail in respect of operating performance remain volatile and uncertain.

“Our bid for the franchise reflected forecast financial benefits of new rolling stock and enhanced railway infrastructure. While we and the DfT continue to expect improved rolling stock and infrastructure, the scope and timing of those have been reprioritised such that they are not consistent with what was assumed in our franchise bid and then contracted.”

Revenue growth for its UK rail division as a whole was lower over the last 18 months than was generally seen in the preceding years. Stagecoach owed the reduced rate of growth to a number of factors, including poor Network Rail operating performance impacting train companies; increased car and airline competition; slower UK GDP growth and weakened consumer confidence, especially in light of Brexit; and the effect of changing working patterns.

It also revealed that revenue has been weaker in recent weeks as a result of the horrific terrorist attacks in Manchester and London, as well as political uncertainty due to the general election. This in turn increases the uncertainty in forecasting revenue for the weeks and months ahead, the report said.

Franchising concerns

Despite the weak outlook, Stagecoach guaranteed that it will continue to consider rail bidding opportunities where possible and beneficial.

“We take some encouragement from how the UK franchising model is developing. The parent company of a franchised train operator is required to commit loan facilities, which can be drawn down by the train operator where necessary to meet contractual obligations or funding needs,” said Stagecoach.

“We are encouraged by early signs of moderation in the amount of such loan commitments. We are also encouraged to hear that the DfT recognises that the risk sharing arrangements on franchises awarded in recent years leaves train operators too financially exposed to risks outside of their control – in that regard, we welcome moves towards something more akin to a full sharing of revenue risk rather than just risk sharing arrangements based on specific macroeconomic measures.

“We remain, however, concerned that the department may continue to expect train operators to bear significant financial risks in relation to the availability of the train paths required to operate the train services that an operator planned in its franchise bid and/or in relation to Network Rail’s delivery of infrastructure improvements.

“Both of these risks are affected by events outside of a train operator’s control yet can have substantial financial consequences.”


Andrew Gwilt   28/06/2017 at 20:23

Guess that the East Coast franchise could be taken over by Abellio, Trenitalia, MTR or Japan Railways Co. I think our railways has been overtaken by foreign rail companies that want to make more money and to introduce new trains and services to keep passengers using the trains and to commute and to get people off roads and to use trains. RIP British railway industry. #BringBackBritishRail.

Rick   02/07/2017 at 17:52

So have I got this right? GNER make an optimistic Bid and are succesful, but due to recession and other factors profits fall short - have to return Franchise. National Express make an optimistic Bid and are succesful, but again outside influences destabilise profits and they have to hand Franchise back. Stagecoach make a wildly over-optimistic Bid and again Profts are hit, so they get further golden handshake from Taxpayer? How fair and commercially beneficial Franchising is for everyone (unless you are a taxpayer!)

Paul   03/07/2017 at 13:23

So Stagecoach win the franchise with a business plan that is over optimistic and fundamentally flawed and then go crying to the DfT to renegotiate, I wonder would they do this if they were making excessive profits. Get real this is business if you lose money you are either incompetent, overpriced or have a poor business model I think you have all 3. You cannot keep providing a poor service and keep saying that the Azuma is coming and will change things for the better. The previous franchise made money and that was a government owned one so if they can make the line profitable why cant you?

Dan   06/07/2017 at 11:48

@Paul, Didn't the government charge the state owned railway considerably less money to run the line, 30% less I believe... Rail franchising is flawed. Not just the franchise bids that are being presented to the DfT but also (and maybe even more) how the DfT evaluate these bids. Are the DfT taking into account how realistic a bid is or do they just look at the bottom line and pick the one with the biggest number?

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