Stagecoach pleased with DfT direction for rail franchises, others cry 'bailout'

Stagecoach Group issued a statement on Wednesday welcoming the planned “new direction” for the UK rail network, as announced by the Secretary of State for Transport.

Transport Secretary Chris Grayling unveiled a new 'strategic vision' for rail, which included a raft of changes, including a new public-private partnership for the East Coast mainline, reopening of some mothballed lines, and creating single management teams to control the train operations and the railways on which their routes run.

Changes included a number concerning franchises currently operated by Stagecoach, including the introduction of the ‘East Coast Partnership’ - a joint venture between the public and private sector, operated by a single management, from 2020, where the operation of the InterCity East Coast franchise will be combined with responsibility for infrastructure.

The government is currently in discussion with Stagecoach's 90%-owned joint venture with Virgin Group, which runs the existing East Coast franchise under the brand name Virgin Trains East Coast (VTEK), with the aim of putting in place new contractual arrangements soon to enable the transition to the partnership model over the next two years.

VTEK outbid rivals for the eight-year franchise by agreeing to pay £3.3bn in premiums to the government through to March 2023. However, Stagecoach’s promise of such large premiums was based on compounding interest and by last year's final results revenues had become badly decoupled from the company's target, with a dip in traffic the company blamed on "the effects of weakening consumer confidence, increased terrorism concerns, sustained lower fuel prices, the related effects of car and air competition, slower UK GDP growth and slowing growth in real earnings", making it increasingly difficult for VTEK to pay the government the agreed premiums.

NEW PROPOSALS

New changes proposed by the Department for Transport on Wednesday would also include the next competitively-tendered East Midlands franchise being operated by a joint team under an alliance.

The DfT previously exercised its pre-contracted option to extend Stagecoach’s East Midlands Trains franchise to March 2019, with plans for a further direct award franchise from March 2019.

“We look forward to hearing the detailed plans beyond that for a franchise operated by a joint team under an alliance agreement,” the Stagecoach board said in its statement on Wednesday.

In addition, the DfT published the invitation to tender for the new South Eastern franchise on Wednesday, for which Stagecoach is shortlisted.

The Government had indicated that the new franchise would be headed by a new alliance director, with a joint team responsible for the day-to-day operation of train and track.

“Stagecoach has championed a more integrated and customer-focused railway over many years and we are encouraged by the positive new direction for Britain's railway,” said group chief executive Martin Griffiths.

“We welcome the Secretary of State's clear statement of intent to seek to negotiate new terms for the East Coast franchise with Virgin Trains East Coast and we are hopeful of reaching an agreement through to 2020 within the next few months.

“We look forward to exploring further with the DfT its vision for the franchise from 2020, leveraging our knowledge and expertise from the South Western Railway deep alliance and our longstanding interest in greater vertical integration of UK rail.”

Stagecoach also confirmed that it would announce its half year results on 6 December, as previously indicated.

GOVERNMENT BAIL-OUT?

Andrew Adonis, the former Transport Secretary and now chair of the National Infrastructure Commission said on Twitter on Wednesday that the government is "bailing out" Stagecoach/Virgin on East Coast because the pair "overbid" for the franchise.

"National Express asked me for a bail out on East Coast in 2009. I refused & nationalised the franchise rather than do so," he added. The publicly owned East Coast company turned out the need less public subsidy help than any privately run rail franchise and added around £1bn to the exchequer between 2009 and 2013.

And in the House of Commons, Andy MacDonald, the shadow transport secretary, said that the government's announcement was “a total smokescreen”.

He said: “The real issue is that the East Coast franchise has failed again and the taxpayer will bail it out.”

Pointing to the Stagecoach's share price rise on Wednesday, MacDonald said: “Markets don’t lie. The secretary of state has let Stagecoach off the hook for hundreds of millions of pounds. He’s tough on everyone except the private sector.”