Government tightens railway screw

Arriva and First Group promise heavy investment in 'Northern Powerhouse' railways despite the government's belt-tightening.

by Adam Gale
Last Updated: 11 Dec 2015

Who’d be a train operator in 21st-century Britain? The UK’s semi-nationalised model, where private operators using state owned tracks bid for franchises so highly regulated they can’t set their own prices, doesn’t exactly seem fertile ground for the profit hungry capitalist. In the age of austerity, it seems even less so.

Two franchises were awarded today in the north – Arriva took the Northern franchise from continental rival Abellio, while First Group retained the Transpennine Express. The government predictably made a song and a dance about how the deals would boost its Northern Powerhouse initiative (despite the delays in electrifying the lines) by improving capacity and connectivity between the northern cities.

As part of its bid, First Group promised to invest more than £500m by 2023, boosting capacity at its busiest times by 80%, while introducing 220 new vehicles and increasing connections by 55% by 2019.

But what does it get for its trouble? First Group will lose its government subsidy (officially to run loss-making services to remote areas), which by 2017-18 will turn into a premium paid by the firm to the government for the right to run the services, totalling £303m over the life of the franchise. Erm, thanks?

Deutsche Bahn subsidiary Arriva meanwhile will get a reduced subsidy of £140m over its nine year contract, in exchange for spending £1bn to replace slow and unpopular Pacer trains with air conditioned carriages, among other improvements.  

There is still money to be made in the railways of course, even if conditions are tightening as the austerity state demands more bang for its buck. In its first half to September 30, First Group’s rail division made £32.9m operating profit off £608.9m revenues, which is hardly a terrible margin.

Shares rose 1.3% to 104.5p by lunchtime as investors weighed up the renewed contract (hurray) and the harsher terms (boo).

It was a different story at rival Stagecoach. Jittery investors sent shares down as much as 15% to 301p this morning as the firm announced its first half results to September 30.  

After a few pesky exceptional items and asset expenses, pre-tax profits fell 7.6% to £90.8m, which doesn’t seem that bad except for the trading update the firm snuck into the release, warning of the adverse impact of the Paris terror attacks on intercity rail services and ‘softer than expected’ bus revenues.

That may prove a temporary blip, but as a group the rail franchisees are clearly being squeezed. The government wants to increase the premium they collectively pay it above last year’s £802m (the DfT subsidises the overall rail system by close to £5bn, but this goes to the publicly-owned fund track operator Network Rail; those operating the services mostly pay for the privilege).

Given political pressure against fare increases, it’s hard to see profit margins improving significantly unless the operators can find new efficiencies or benefit from the scale of their investments (totalling over £600m last year) – which is of course the whole point of involving the market in the first place.

Time will tell whether it will work, but everyone in the north or otherwise better hope it does. The last time the World Bank looked at it, Britain's infrastructure was the 28th best in the world, marginally ahead of Namibia. That doesnt' exactly scream 'powerhouse', does it?  


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