Comment: Virgin has justified concerns on axed West Coast franchise
VIRGIN’S allegation that the government’s decision to strip it of its West Coast franchise and hand it to arch-rival FirstGroup is insane can be partly put down to natural corporate sour grapes.
After what has been a fiercely fought franchise bid battle, it must be highly disappointing to Sir Richard Branson and his Virgin Rail joint venture partner, Stagecoach, to lose out, having run the Glasgow to London Euston route since the late 1990s.
Particularly since, after a distinctly bumpy start to the Virgin West Coast adventure, with slack punctuality and reliability, it is widely seen as having got its act together in recent years.
Emotions are running high. But there is enough blood on the tracks of Britain’s privatised rail industry to suggest Branson’s criticisms raise justifiable public concerns as well as suggesting business egos have been bruised.
As he is quick to point out, two companies that outbid Virgin Rail for the East Coast mainline franchise, GNER and National Express, came a cropper and led to the service being renationalised.
Revenue projections that underpin rail bids and investment promises are at risk of being undone by events, as National Express’s were by the extended economic downturn since 2008.
In the case of the new West Coast franchise, there are two other risky imponderables. One is the extended nature of the franchise, running from December this year to 2026.
The longer the franchise the more difficult it is to assess how much traffic volume will underpin revenues. Secondly, the West Coast is being switched to another operator during what is likely to be an extended and nearly unprecedented period of austerity in Britain, with some quite simply unknowable facts about future rail demand.
Depending on which figures you use, FirstGroup is offering between £5.5 billion and £6bn for the West Coast line compared to £4.8bn from Virgin and Stagecoach.
A gap of at some £700 million on what the two main bidders felt the franchise was worth is a pretty aggressive one. No wonder rail unions are getting restive about the possible implications for jobs under FirstGroup, and consumer groups are looking askance at the deal.
Aberdeen-based FirstGroup also does not have an unblemished record in intercity services already, with its First Western service to the English west country and Wales regularly lambasted by consumers in surveys.
The Scots firm had some good things to say yesterday on its successful latest bid, however. It plans to introduce more than 100 additional Pendolino coaches by the start of the franchise and 40,000 extra seats by 2016.
Good news for Scotland is that there will be 11 new six-coach trains on services between Glasgow and Birmingham. FirstGroup’s sales and margin projections also look aggressive rather than crazy over the course of the franchise.
Even so, a slow-starting but eventually successful incumbent looks to have lost out on purely financial grounds against the backdrop of a government strapped for cash in a very prolonged downturn.
It is a government’s duty to get the best taxpayer returns possible. But there is now an established track record with the East Coast line of the figures on the page not giving the best taxpayer deal in the long term.
Yesterday’s decision is not quite a rail industry SPAD (signal passed at danger). But it undoubtedly carries significant risk.
Standard still faces US Iran deal investigations
STANDARD Chartered’s $340 million (£217m) squaring of the New York banking regulator over its dealings with Iran does not draw a line under the damaging episode. The UK-listed bank faces other investigations relating to banned Iranian dealings by other US regulators.
But shareholders in Standard should not blow the affair out of proportion. Standard has been shown to have dirty hands, as have many of its peers, but its operations are overwhelmingly skewed to Asia and emerging markets. The US regulatory rap on the knuckles is chastening, but even with probable added regulatory financial hits, the issue is likely to carry far less impact than the industry’s payment protection insurance provisions in the UK, for example.
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