The outsourcing firm’s 15-year franchise until 2030 will be terminated in June, transport minister Jenny Gilruth announced on Wednesday.
She said she had rejected the company’s proposal to “rebase the franchise agreement” because it was not value for money.
The move prompted a claim by the Scottish Conservatives that it was politically motivated after the Scottish Government scrapped Abellio’s ScotRail franchise in a separate funding disagreement and nationalised the operator in April.
The Sleeper had previously been part of ScotRail, which was run by a series of private operators between 1997 and 2015 before being split into separate franchises.
The SNP and Greens welcomed the opportunity for the Sleeper to be taken back into public ownership, which rail unions have already urged.
Caledonian Sleeper managing director Kathryn Darbandi said previously that passenger numbers in May had reached their highest level since Serco took over the service.
It followed a significant fall during the Covid pandemic, which Serco said had not been completely offset by emergency Scottish Government funding, and bookings on the Glasgow-London route remained depressed.
The firm said ticket sales in 2020-21 had plunged from £26 million to £6m, which “resulted in a significant underlying loss despite the emergency measures agreements that are in place with Transport Scotland, and no dividend was paid to the shareholders.” The service also connects London with Edinburgh, Aberdeen, Fort William and Inverness six nights a week.
Serco, which took over the franchise seven years ago, introduced a new fleet of trains in 2019 with funding support from the Scottish and UK governments, which got off to a disastrous start due to wide-ranging faults such as electronic and water problems, although the operator has said they have now been largely rectified.
Gilruth said the franchise agreement would be terminated on June 25 2023.
She said: “Work is underway to determine arrangements for the continued provision of Caledonian Sleeper rail services beyond June 25 2023 and this will be updated to Parliament once determined.
"It is worth noting that Serco Caledonian Sleepers Limited has, broadly, delivered well and significantly improved Caledonian Sleeper services over the last seven years.”
John Whitehurst, managing director of Serco’s transport businesses, said the franchise agreement included a “rebase clause” that meant it could present “alternative financial arrangements” to ministers after seven years for the remainder of the franchise.
He said: “The Scottish Government and Serco were not able to reach agreement on these revised terms and accordingly the franchise will now end in June, at which point, unless other arrangements can be agreed, Serco will hand back the management of the Sleeper to the Scottish Government.”
Whitehurst said the Sleeper had made a loss since the start of the contract and Serco’s proposals were to put the service ”on a more sustainable financial footing”.
He also highlighted that rejection of its proposals had not been down to any performance issues, and pledged to “continue to deliver a world-class service for our guests”.
Linlithgow SNP MSP Fiona Hyslop said the “termination presents an opportunity for the Scottish Government to consider bringing the iconic service into public hands.
“It has already successfully brought ScoRail under public ownership and doing the same with the Caledonian Sleeper presents an opportunity to continue to improve the service provided to those travelling overnight.”
Scottish Greens transport spokesperson Mark Ruskell said: “This would seem to be a logical opportunity to look again at the potential to bring the Caledonian Sleeper operations into public ownership.
“In particular at such a time of acute financial hardship for people up and down the country, and when our climate actions have never been more important, this seems a sensible and progressive idea to be looked at.
“We have already seen a warm and encouraging reception to ScotRail services being brought under public control."
Scottish Labour transport spokesperson Neil Bibby said: “This is a chance to bring the iconic Caledonian Sleeper into public hands and back into the ScotRail network.
“The broken franchising model has failed Scotland’s rail passengers for years – we need to build on the nationalisation of ScotRail by following suit with these services.”
But Scottish Conservatives transport spokesperson Graham Simpson said: “This appears politically motivated.
"The SNP and Greens see this as an opportunity to nationalise the sleeper service.
“This is despite the fact that the transport minister admits that Serco has run a good service.
“She needs to spell out why she now wants to get rid of them and why she thinks the SNP would be better at giving travellers a good night’s sleep.
“It is more likely to be the stuff of nightmares given their woeful track record of nationalising the likes of Prestwick Airport, Ferguson Marine and ScotRail.”
Kevin Lindsay, Scottish secretary of train drivers’ union Aslef, repeated his call for nationalisation
He said: “We welcome the decision to strip Serco of the Sleeper franchise.
“It should now join ScotRail as part of Scotland's public railway.
"The railways in Scotland should never again be run for the benefit of shareholders over passengers.”
Mick Hogg, Scottish secretary of the RMT, the largest rail union, described himself as “ecstatic and delighted with the decision - something we have fought for for years”.
He said: “The reckless decision to privatise our Sleeper trains was wrong in 2015 and the RMT has waged a robust campaign to convince the Scottish Government this was the wrong decision.”