Can FirstGroup keep £5.5bn West Coast franchise on the rails?

FirstGroup has won the auction to run West Coast mainline rail services, outbidding incumbent Virgin Trains by £700m.

by Andrew Saunders
Last Updated: 06 Dec 2012

FirstGroup, which is the UK’s largest train and bus operator by revenues, bid £5.5bn to seal the deal, more than Virgin’s £4.8bn but rather less than the £6bn some had been predicting.

It’s the fourth rail franchise bid in recent years that Virgin Trains - the Branson/Stagecoach joint venture which has run West Coast services since 1997 – has lost. Branson has reacted angrily to the news, criticising government ‘insanity’ and citing the sorry example of the East Coast franchise. This remains in government hands after not only GNER but also National Express group found that they had overbid and could not make the routes pay. ‘When will the Department of Transport learn?’ he writes in his blog.

Branson clearly fears a repeat performance, and he may have a point. Only last year FirstGroup handed back the £1.1bn First Great Western rail franchise, admitting that the economic downturn meant it could not turn a profit on the deal. The West Coast route is lucrative –its 30m passengers bringing in around £900m a year in revenues, but FirstGroup’s ability to make its contract payments and still turn a profit rely on predicted traffic growth of 10.4%.

That’s a pretty tall order in these straitened times, especially given that many industry watcher reckon that the firm will also have to put up fares, too. For although part of the deal is a commitment to reduce the Standard Anytime fare by 15%, such is the complexity of rail ticket pricing that this headline figure leaves plenty of wriggle room for fare rises elsewhere.

One other factor that will doubtless come under pressure is costs, and it seems a racing certainty that staff levels and pay will be cut. Reducing costs is not a bad thing of course, but customers generally expect to see it reflected in lower prices. Cutting staff, raising prices and still expecting double digit growth would be a pretty optimistic plan.

FirstGroup has committed to service improvements, with more direct trains to destinations including Blackpool, Bolton and Telford, 11 new six car electric trains and a reduction in the London-Glasgow journey time of 15 minutes. It will also refurbish several stations and improve wi-fi access on its Pendolino trains.

So who’s right? Only time will tell for sure but what does seem clear is that the cash-strapped government isn’t looking that much further than the juiciest headline figure when awarding these franchises at the moment. Best value for the taxpayer and all that. But there are a few issues with this approach – for starters, the lion’s share of those 30m passengers are also UK taxpayers, whose opinion of best value might be rather less narrow than that apparently taken by the authorities. And if Branson et al turn out to be on the money and the franchise does end up back in government hands, you can bet that the costs to the Treasury will mount up pretty smartly.  

Is this any way to run a railway? Let us know what you think.

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