East Coast pairing is a dream ticket

ANALYSTS say Virgin and Stagecoach can go far with rail franchise, writes Martin Flanagan.

ANALYSTS say Virgin and Stagecoach can go far with rail franchise, writes Martin Flanagan.

Fresh from winning last week’s East Coast Mainline bidding war, Perth-based Stagecoach and Virgin Group will hope the track runs more smoothly for the franchise in future than during a troubled history since the rail sector was privatised in the mid-1990s.

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Twice in the past decade private sector operators have had to give the keys back because of financial and operational difficulties. The hapless GNER, owned by Sea Containers, was awarded the franchise in April 1996, and retained it in 2005, only for mounting financial problems to see the franchise switched to National Express the following year.

National Express fared no better, and after its passenger growth and related financial assumptions were derailed by the last recession it retreated ignominiously from the contract at the end of 2009.

However, the quietly impressive performance of the line between Edinburgh and London over the past five years, after it was taken back into state ownership via Directly Operated Railways (DOR), shows there is nothing inherently vulnerable about the East Coast service.

DOR returned £1 billion to the taxpayer in five years, £235 million in its last year as a state-run enterprise, while earning passenger plaudits for an improvement on what had become an abysmal National Express performance.

Even so, some City analysts believe that, while the public sector rail managers did a good job holding the fort, they failed to achieve the passenger growth seen elsewhere in Britain’s rail network, and that Sir Brian Souter’s Stagecoach and Sir Richard Branson’s Virgin Group have the better chance of success.

The new East Coast company will be called Inter City Railways, and will begin its eight-year franchise – for which Souter and Branson will pay £3.3bn to the Treasury – next spring. The company will be badged Virgin Trains, but Stagecoach will own 90 per cent of the new business, with Branson 10 per cent.

“I think Stagecoach in particular is a very good company and operator. They know their stuff. They know how to bid for franchises,” John Lawson, transport guru with broker Investec, said. “They have been in the game for a long time. And the package they have put together looks impressive.”

The offer that got Stagecoach and Virgin the Whitehall nod over rival bidders FirstGroup and a Keolis/Eurostar consortium controlled by France’s state-owned rail company SNCF does indeed look impressive. There are substantial promises on new rolling stock, seating, improved wi-fi and punctuality.

Douglas McNeill, a top transport industry analyst, said he did not think the winners had paid through the nose for the franchise even though Whitehall sources suggest it was 15 per cent above the nearest rival offer.

“I would not say they have overpaid … it looks a properly thought-through, commercial deal,” McNeill said. “I think £3.3bn is a pretty realistic price if they can get the crucial passenger growth.”

Eyebrows were raised at the decision to award the prize to Virgin and Stagecoach because their other 51/49 per cent joint venture, Virgin Rail, already runs the West Coast Mainline between Glasgow and London.

Critics, not least trade unions angry at the re-privatisation of the franchise when DOR had made a decent fist of things, say that it means Souter and Branson have a monopoly of inter-city services between London and Scotland.

One industry figure noted wryly: “If British Airways had an air monopoly of routes between London and Edinburgh, do you really think Branson’s Virgin Airlines would say nothing about it?”

The Competition and Markets Authority (CMA) confirmed this weekend that they will look at the franchise, as they do whenever one changes hands. But it is unlikely the regulator will reverse it on competition grounds. The handful of franchise decisions the CMA has looked at in recent months have led to no regulatory problems.

Stagecoach and Virgin contend that the East and West Coast services do not compete against each other. Martin Griffiths, chief executive of Stagecoach, said: “These are self-defined markets and our primary competition is the car, coaches and airlines.”

Lawson at Investec agrees: “Not many people would travel from down south to Glasgow via Edinburgh or to Edinburgh via Glasgow. The routes are serving different passengers.”

Still, it is seen as unfortunate at best that Transport Secretary Patrick McLoughlin, now a vocal cheerleader for the winning bid, said in the prospectus for the East Coast franchise competition: “We want to see a revitalised East Coast railway; one that rekindles the spirit of competition for customers on this great route to Scotland and compete with the West Coast on speed, quality and customer service.”

The apparent contradiction certainly hasn’t placated the unions. Mick Cash called the ban on DOR bidding for the franchise on a permanent basis “a national disgrace”. And it does seem a little politically dogmatic that the government is content for subsidiaries of foreign state-owned groups to run a swathe of British railways, but the UK public sector is frozen out.

Frances O’Grady, the TUC general secretary, said it showed the rush by the government to flog off the East Coast line before next year’s election was a case of “politics trumping logic”.

However, Branson and Souter won’t mind a following wind from political ideology if it delivers, as seems likely, a commercial plum into their hands.