RAIL firm GNER has lost its franchise to run trains on the East Coast Main Line.

The Government asked the company - which only last month was voted Britain's best rail operator - to surrender the franchise, and is now inviting fresh bids to operate trains from York to London and Edinburgh.

The new operator is expected to take over within 12-18 months, with GNER continuing to operate services until then under a temporary management agreement to help ensure a smooth transition.

The Government stressed today that services will continue to operate as normal.

"All tickets will be valid and passengers can book and reserve tickets in exactly the same way they do today," said a spokesman.

He said companies had been asked to submit expressions of interest in the franchise by January 15, with short-listed bidders later asked to lodge bids against a specification.

GNER chairman Bob Mackenzie, who is also Chief Executive Officer of its troubled parent company Sea Containers Ltd, said GNER would not have been able to meet a big increase in franchise payments to the Government due from next May.

He said the company's original bid for the franchise had been "bullish," adding: "We were knocked sideways by the July 2005 bombings, the hike in electricity prices and regulatory approval for Grand Central, which will compete for our passengers calling at our stations on the same line, but will not have the same charges imposed upon them.

"We would have preferred a renegotiation of the current contract, but that was not available. The management agreement is therefore a sensible solution for all parties.

"It enables GNER, which is recognised as a first class rail operator, to continue to deliver the high level of customer service for which it is known, and allow passengers to continue to benefit from this commitment. It also limits the exposure for Sea Containers, which is important in our financial restructuring process."

Transport Secretary Douglas Alexander said the Government had made it clear that rail operators which fell into financial difficulty should expect to surrender the franchise and not receive financial support.

"To do otherwise could set the precedent that we are willing to bail out operators at extra cost to the taxpayer," he said.

"This agreement protects the interests of both passengers and taxpayers. It will ensure services operate as normal until a private sector franchise operator can be put in place."

GNER said the management agreement was expected to run for 15 months until March 31, 2008.