FirstGroup consortium wins UK's South Western rail franchise

FirstGroup has won the seven-year contract from the UK Department for Transport to operate trains on the South Western rail franchise, with rival Stagecoach among those missing out.

This is the first franchise awarded since Transport Secretary Chris Grayling set out his plans for "a new era in joined up working" between train operators and Network Rail.

Analysts calculated the franchise could be worth £170m to FirstGroup shareholders.

FirstGroup, which made the bid as part of a 70:30 joint venture with Hong Kong's MTR Corporation, has agreed to pour £1.2bn of investment over the course of the franchise into a fleet of 90 new trains and stations along the routes, which include the London-Portsmouth, Bristol and Exeter plus London suburban routes, reaching out to home counties destinations including Windsor and Reading.

The new franchise will operate from 20 August 2017 until at least August 2024 and there potential eleven month extension at the DfT's discretion.

First MTR South Western Trains has pledged to offer simpler fares and make mobile and smart ticketing available, including flexible season tickets, new lower fares for 16-18 year olds and an easy-to-use ‘delay repay’ compensation claim scheme for the first time on the network.

For London commuters, the JV has promised 22,000 extra seats into London Waterloo each morning peak and 30,000 extra seats out of Waterloo each evening peak, while further capacity at Waterloo will be introduced at the end of 2018 when the former Waterloo International platforms are fully redeveloped and brought back into use.

From December 2018 the operating company plans to deliver faster journey times to many stations, double the service to both Reading and Windsor, double the off-peak service between Southampton and Portsmouth and re-introduce through services between Portsmouth, Southampton, Bournemouth and Weymouth to aid regional connectivity.

Journeys to London will be eight minutes faster from Southampton, the DfT said, plus five minutes faster from Portsmouth, 10 minutes faster from Reading, 12 minutes faster from Hounslow and 11 minutes faster from Salisbury.

Together with earlier first and later last trains, including between London and Twickenham, Hounslow, Windsor, Reading, Epsom, Guildford, Portsmouth and Salisbury, more than 400 extra Sunday trains will run across the network too.

Grayling said: “We are delivering the biggest rail modernisation programme for over a century and this franchise will deliver real changes for passengers, who can look forward to modern trains, faster journeys and a more reliable service.”

FirstGroup chief executive Tim O'Toole added: “Passengers can look forward to new and better trains, more seats and services, quicker journey times, improved stations and more flexible fare options.”

Broker Shore Capital said it expected FirstGroup to provide more details on its financial targets for the franchise at a conference call at 8.30am this morning.

"Our early estimate is that based on 6% per annum turnover growth (capacity is going to increase remember) and a margin of 4% over the life of the franchise, this franchise award could be worth c£170m to FirstGroup shareholders," said analyst Martin Brown.

But even without this win, he believed FirstGroup "stands on the cusp of the long waited inflection point in its earnings and cashflow", forecasting a net free cash flow yield to March 2018 of 11.5% and an imminent return to the dividend paying list.