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Blackfriar: Poisoned chalice as top rail franchise heads for buffers


Published on Thursday 7 May 2009 09:52

There is something about the East Coast franchise, linking Yorkshire to London and Scotland, that doesn't bode well for rail operators.

Renowned as one of the prestigious rail routes in Britain, it also beginning to look like a very expensive white elephant.

Now we hear that the current incumbent National Express may walk away from the franchise as it no longer makes commercial sense.

If it does, it will be the second time in three years that the line's operator has walked away.

Great North Eastern Railway (GNER) had its contract terminated in December 2006 after it could no longer keep up with payments.

To paraphrase Oscar Wilde – to lose one rail operator may be regarded as a misfortune...to lose both looks like carelessness.

This line is in danger of becoming a poisoned chalice. Ideally, National Express would like the Government to soften its stance and allow the group to renegotiate the terms of the deal.

Its favoured outcome would be a management contract whereby it operates the line for a fixed fee.

But the Government was adamant last night that the franchise will not be renegotiated, increasing speculation that National Express will walk away from the contract, Britain's most expensive franchise.

The National Express deal involves paying the Government 1.4bn over the eight-year life of the franchise. Some 87m is due this year and 140m in 2010. The group won't receive subsidy payments until December 2011.

In February National Express warned that the East Coast franchise was exposed to recessionary impact, with a high fixed-cost base and no revenue underpin until 2011.

But if the Department for Transport keeps to its guns – and there are no signs of it caving in at the moment – then we could well see the East Coast Main Line being run by three different operators in as many years.

Edward Stanford, co-head of European Travel and Leisure Research at Cazenove, believes that if the department refuses to budge the only option open to National Express management would be to terminate the franchise or "hand the keys back" as it is known in the industry.

In this case the group would have to give over the working capital in the business to the new operator and would also have to pay a performance bond.

There is also a worrying "cross default mechanism" built into rail franchise contracts which means the group would have to forfeit its other rail operations.

Some analysts believe the Government may waive the mechanism – after all it is unlikely to want to re-let National Express' other rail franchises, East Anglia and c2c.

But others say the Department for Transport will not want to open the floodgates to other rail operators who secured rail franchises at the same time as East Coast.

After all if it lets National Express off the hook, why shouldn't Arriva and Stagecoach demand similarly favourable deals?

Mr Stanford expects National Express to be required to pay its contractual liabilities in full which he estimates to be in the region of 80m to 100m for the East Coast.

He adds that National Express will be a much more attractive investment once it's got rid of its rail operations. Once the rail business is gone, the group should get its rights issue away with no problems.

So, three operators in three years could well be on the cards.

Backbench MPs are calling for the route to be renationalised, but this is highly unlikely.

The line will probably be retendered on far more favourable rates and once again we'll have to get used to another operator and its own way of doing things.


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