Express Exit

HOW does the franchise work? The franchise is sub-let by the Department for Transport (DfT) allowing private operators to compete to run it. Operators of certain franchises pay the Government so-called “premium payments” for the privilege of operating trains on what the Government believes should be profitable routes. National Express secured the franchise after agreeing to pay £1.4bn over the duration of an eight-year contract, ending in 2015. The company can set its own ticket prices – ones that are not regulated by the Government – and also operates the stations on the route, including York, Darlington and Newcastle.

The rail infrastructure belongs to and is managed by not-for-profit Network Rail.

WEREN’T the railways in public ownership before? Yes they were. Once all the railways were operated by the Government under the old British Rail. However, the industry was privatised by the last Conservative government and effectively broken up, allowing private firms to operate individual services as part of franchises.

The Government retains the power to take back individual franchises into public ownership if it is unhappy with how they are being run or if terms of contracts cannot be met.

WHAT is the problem here? When National Express secured the East Coast Main Line franchise, its bid was based on rising passenger numbers and, according to analysts, annual revenue growth of up to ten per cent was needed for it to be profitable. Initially, the number of passengers increased – from 17 to 18 million over the first year or so of the franchise – but the economic downturn has seen these numbers stall, hitting revenues and growth of only 0.3 per cent was reported in the first quarter of this year.

This means that the company is not making enough money and it is forecast that the franchise will lose £20m in the first half of this year.

At the same time, the premiums it must pay to Government are reportedly due to rise from £85m last year to £395m by 2015.

The company has attempted to mitigate its situation by raising ticket prices to bring in more cash, but is limited in what it can do and some prices are to be frozen by the Government next year anyway. Faced with such a big financial commitment, it had been in discussions with the DfT to amend the terms of the franchise deal, but the Government refused to do this, saying it did not renegotiate franchises and also not wanting to be seen to give preferential treatment to any one company.

WHAT is happening now? National Express has said that as it has been unable to reach agreement with the Government it may hand back the franchise later this year, should economic conditions not improve.

The Government said it will take the franchise back into public ownership with a view to inviting bids from other operators from the end of next year.

WILL any of this affect me, the passenger? No, for the time being passengers will not notice any change. Services will not be affected and all tickets will be honoured.

However, there could well be changes if a new operator is chosen to run the franchise.

HAVEN’T we been here before with East Coast? Yes. Previous operator GNER also gave up the franchise, having run it for 11 years from 1996.

It signed a deal in 2005 to run the railway for another seven years, agreeing to pay the Government £1.3bn in premium payments. However, it too banked on the assumption that passenger numbers would grow and also that it would be able to increase the number of services it ran to help meet its financial commitments.

It was hit by a “perfect storm” – the 7/7 bombings in London affected the number of people using the railway and it was hurt by rising electricity prices. It also could not persuade rail regulators to allow it to increase services.

Meanwhile, its parent company, Sea Containers, was also in financial difficulties, filing for bankruptcy protection in the US.

While the circumstances are not exactly the same for both firms, the thing both GNER and National Express have in common is that they agreed to pay the Government too much money in their desperation to run the franchise and, in doing so, hugely overburdened themselves.

WHAT is likely to happen next? It is doubtful National Express will continue to run the line in the long term. The Government will also not want to retain public control of the franchise for too long, having defended the franchise system and previously rejected re-nationalisation. The most probable outcome is that the franchise is re-let at some stage to whoever wants to pay the most for it – although it is unlikely that figure will be near the £1.4bn National Express paid.

WHO could take over? All the usual suspects are likely to be in the running.

Virgin, which previously failed two bids for East Coast, has already declared an interest along with transport group First, another company that has previously bid. North- East-based Arriva is another name likely to be in the mix. It is also possible that a foreign operator may wish to bid.

WHAT about the staff? Again they will be unaffected. Should there be a change of operator a so-called Tupe transfer would take place with all staff transferring over on the same terms and conditions.

Assets with the franchise would also transfer.

WHY is the franchise so important? It links the North-East to London and Scotland and is one of only two main line routes which run the length of the entire country, West Coast being the other. It is hugely popular with business travellers, in particular, and also stops at many of the region’s major towns and cities, York, Darlington and Newcastle for example.