SOURCES close to Arriva Trains Northern last night denied that its handling of the strike by conductors had lost it the Trans-Pennine franchise.

A source close to the company, which has admitted being disappointed by the Strategic Rail Authority's (SRA) decision not to grant them an extension to the lucrative contract, said they believed the strike had not played a part in the announcement.

Instead, it said, it had lost out on the bid because its was too expensive compared with the two rivals vying for the franchise - First Group and Connex.

Arriva services have been hit by a long-running pay dispute involving conductors and station staff.

Pat Sikorski, of the union RMT, said she was in no doubt the company's "shamefully inept handling" of the dispute had influenced the SRA's decision".

"We hope that we can look forward to more sensible industrial relations with whoever takes over the Trans-Pennine franchise - and, for that matter, whoever ends up running the rest of the northern franchise," she said.

But both Connex and First Group have been dogged by their share of controversy.

First Group is in dispute with its drivers in the North- West, and Connex has been criticised for poor punctuality and the running of the South Central line in London.

Yesterday, First Group, which has submitted a bid with its French partner Keolis, said they had "comprehensive and robust" proposals for the Trans-Pennine route, which connects the North-East with Manchester and Liverpool. It has offered a 19 per cent pay rise to drivers over the next two years and said of the RMT dispute with Arriva Trains Northern - which it may inherit if it is not resolved: "We hope that the matter will have progressed and that by that time there would be some settlement agreed.

"We are very pleased that we are still in the hunt for the franchise."

The contract for the Trans-Pennine franchise will be for eight years, with the option to extend for five years at the discretion of the SRA.

An announcement for the preferred bidder is expected in the New Year.

Meanwhile, the SRA is continuing with its proposals for a Northern Rail franchise which would incorporate rural and urban services currently operated within Arriva Trains Northern and First North Western networks.

The SRA said it would restart the competition for Northern Rail in order to incorporate the benefits of its new franchising policy, announced yesterday, and to enable potential new bidders to express an interest in the franchise.

The policy was described by SRA chairman Richard Bowker as being "passenger focused" with performance indicators designed to assess aspects such as cleanliness and passenger information.

But top performing train companies could find their excess profits skimmed off and ploughed back into the rail network.

Frances Critchley, deputy secretary of the Rail Passengers' Committee for the North-East said: "We are pleased with the announcement because we feel we are one step nearer to getting a long term (Trans-Pennine) franchise."

The SRA said it would be negotiating with Arriva for an interim franchise until the Trans-Pennine contract starts late nex year and the Northern Rail franchise starts in the summer of 2004