It’s all change on the London to Scotland line. For the last 15 years, Virgin has operated west coast services through a joint venture with Stagecoach. But now government is looking to award a new 14-year franchise contract, and Virgin’s offer has been upstaged by almost £1bn by rival FirstGroup.
FirstGroup is believed to have made a £6.5bn-7bn bid for the new contract, in comparison with Virgin's £6bn. Fears are that this would leave so little margin that the move has been called a ‘suicide’ offer by industry insiders.
There is also a danger that FirstGroup will be forced to cut short its franchise arrangement if it ends up making a significant loss. This is exactly what happened to both GNER and National Express: the operators were forced to abandon the East Coast Main Line when their bids proved unviable. And FirstGroup has been guilty of taking loss-making contracts off the rails before. It handed back the First Great Western franchise three years early after the economic downturn hit profits. FirstGroup offloaded the loss-making contract onto government. Cost to the taxpayer: almost £830m.
So why has the government apparently made this decision? For starters, an extra billion quid will come in handy. But there's also the small matter of the McNulty Report (which sounds like a case history from The Wire), which outlines a number of cost-cutting recommendations for the rail industry.
Rail minister Theresa Villiers explains: ‘The most effective way to respond to passenger concerns about fare levels is to bring the cost of running the railways down. Our reform plans - which the McNulty report has contributed to - aim to deliver £3.5bn in efficiency savings while continuing to expand services for passengers. Savings on that scale will enable us to end above inflation fare rises.’
‘Efficiency savings’ usually mean job cuts, especially in the rail business where 80% of costs are fixed. And Branson has threatened to push for a full judicial review if FirstGroup’s bid is successful (the first of it’s kind in the rail industry), insisting that the company will have to ‘drastically cut the quality of services’ in order to run a business on such tight costs.
Despite the storm of controversy, the winning bid will doubtless come down to the numbers, and FirstGroup’s bid is predicted to make the Treasury £500m a year in royalties. Unless Branson can make a big enough fuss to render a deal with the rival outfit impossible, MT reckons transport minister Justine Greening will vote full-steam ahead for FirstGroup.
Look out for vending machines and microwaves instead of the old buffet car on the 7:20 to Birmingham New Street in a few years time...