UK - Railway firms ask for state aid

[John Ashworth]

Railway firms ask Hoon for state aid as years of growth hit the buffers

Dan Milmo, transport correspondent
guardian.co.uk, Wednesday 21 January 2009 01.28 GMT

Britain's train operators face a "potentially devastating" blow from the economic downturn and need government assistance to stave off disaster, public transport chiefs warned ministers yesterday.

The heads of the five largest train companies – Stagecoach, National Express, Go-Ahead, Arriva and FirstGroup – urged the transport secretary, Geoff Hoon, to consider shortening trains, rewriting the financial terms of franchise agreements and putting up state funding for an extra 1,000 staff across the rail network.

The unprecedented call for state help came in a meeting with Hoon in which the rail operators warned that rail contracts forged during an economic boom could soon become untenable. Under that scenario, the government would be forced to strip train operators of their contracts and take control of the franchises.

According to a briefing document seen by the Guardian, the industry expects passenger volumes to fall over the next two years, bringing years of growth to a sudden halt. An industry source said some franchises had seen falls in season ticket renewals of up to 10% in January.

"The more pessimistic forecasts will result in significant impacts on all train companies," reads the briefing document.

"At the most pessimistic end of the range, the severity of the downturn would be completely unprecedented and have potentially devastating effects on the finances of some train companies. Given that forecasts seem to be continually worsening, this must be a material risk."

According to the document, the rail executives want the Department for Transport (DfT) to fund 1,000 extra "customer-facing" staff for the railways, in the same month that the industry has announced plans to shed 1,500 people.

The most critical section of the document lays out "contingency plans" for a "very challenging environment", which include: shortening off-peak trains by removing carriages; easing borrowing rules so train operators can offset poor ticket sales; demanding that the government shoulders a larger share of losses on contracts; and requiring that Network Rail cuts some of the costly expansion programmes.

The contingency plans are likely to cause controversy among passenger groups and commuters with their suggestion that trains could become smaller despite years of protests over overcrowding. It also poses a serious challenge to ministers by explicitly asking for a renegotiation of franchise terms – taboo at the Department for Transport.

The government is determined the train operators should honour contracts that, in some cases, are worth more than £1bn each to the transport ministry. National Express East Coast, South West Trains and First Great Western have pledged at least £1bn each to the government over the next decade, but the latest industry data indicates that they face a struggle to meet the payments.

Passenger growth slowed sharply last year, according to figures revealed to the Guardian, with commuter numbers increasing by less than 5%, down from 7.8% in 2007. Fare income has risen by just 4% in recent months, far below the double-digit increases that are thought to be vital for some franchises to meet their financial targets.

The DfT has the right to strip a train operator of all its contracts if it defaults on a single franchise. Between them, the so-called "big five" train operators control most of the UK rail network, so under that scenario, the state could effectively renationalise the franchise system.

[John Ashworth]

Downturn may derail some train firms

Dan Milmo, transport correspondent
The Guardian, Thursday 22 January 2009

A "small number" of railway franchises are in difficulty due to the economic downturn, the civil servant in charge of Britain's train services admitted yesterday.

The admission came after train operators warned in a confidential memo that the industry faced "potentially devastating" consequences if the most pessimistic economic forecasts are borne out over the next two years. Mike Mitchell, director general of rail at the Department for Transport, told MPs that some franchises were on a "red light" in the "traffic light" system that monitors the financial health of franchises.

"A small number of companies are showing red," said Mitchell, who declined to name the franchises in question. A number of train operators have signed contracts that guarantee the government payments of at least £1bn over the next decade, including National Express East Coast and Stagecoach's South West Trains. However, no franchises have made public admissions of financial difficulty, including NXEC and SWT.

Mitchell said the economic downturn was "having an effect" but revenues across the industry were "holding up reasonably well".

Mitchell, who was speaking at a hearing of the public accounts committee in the House of Commons, said he expected passenger numbers to carry on growing despite a dip in growth to less than 5% in 2008, down from a 7.8% increase in the previous year.

A unilateral industry attempt to alter franchise terms emerged this week in a memo circulated among railway bosses before a meeting with the transport secretary, Geoff Hoon.

The note, which states that it "focuses on the rail issues which the DfT have agreed to discuss", lists a number of contingency plans for the industry including: shortening trains; the government shouldering a greater share of losses on contracts; state funding for an extra 1,000 jobs on the network; and an easing of borrowing restrictions on contracts.

The Association of Train Companies, which drafted the memo, said the "specific ideas ... were not raised with the department." The DfT added that no train operating companies had approached the department for service cuts or additional financial support.

ATOC refused to comment on the specific contents of the detailed memo.

The document, which warns that passenger numbers might fall this year and in 2010, includes a warning that fares levels might have to be re-examined. "We should also jointly consider what the implications for fares of government rail policy and the terms of franchise agreements would mean should the more pessimistic economic forecasts realise," it said.

It is understood that a major concern among franchise owners is deflation. Regulated fares, which account for six out of 10 tickets sold, which are the bedrock of the industry's earnings, are not allowed to increase by more than 1% above inflation. Annual fare rises are pegged at the previous year's Retail Price Index in July. According to the investment bank Investec, RPI could hit -2.1% in July, leaving franchises with a 1.1% cut in fares.

[John Ashworth]

Whitehall puts five train operators on financial critical list

• Civil servant has firms on 'red light' watch
• Quarter of network thought to be at risk

Dan Milmo, transport correspondent
The Guardian, Saturday 24 January 2009

Five rail franchises have been put on the "red light" list of train operators in difficulty by the Department for Transport.

The civil servant in charge of Britain's railways, Dr Mike Mitchell, surprised public transport groups this week by revealing to MPs that a "small number" of franchises are red on his department's "traffic light" system that monitors the financial health of rail companies. It is understood that Mitchell later named five franchises - more than a quarter of the network - to the public accounts committee in a private meeting. The DfT declined last night to comment on what a "red light" signifies, stating that the monitoring system was "commercially and market sensitive".

Mitchell told a public hearing of the committee on Wednesday that revealing the names of the franchises in question could affect share prices, indicating that their owners are among the "big five" public transport groups: National Express, Stagecoach, FirstGroup, Go-Ahead Group and Arriva.

Renegotiation of terms is taboo at the DfT, which prefers to strip franchise owners of their contracts rather than rewrite the deals. But it also has the power to strip a company of all its contracts if it defaults on one franchise - raising the prospect of multiple defaults as the recession bites.

Mitchell's appearance at the public accounts committee on Wednesday came one day after the transport secretary, Geoff Hoon, met the chief executives of the five major transport groups and other rail franchise executives. A briefing note for the meeting prepared by the train operators warned that the recession could have "potentially devastating" consequences for the finances of some companies.

The document sets out potential changes including: shortening off-peak trains; easing borrowing restrictions; the government taking a greater share of losses on underperforming franchises; state subsidy of cost-saving initiatives such as energy metering; and deferral of Network Rail work in order to cut track access charges. It also suggests government funding for an extra 1,000 franchise staff to "help kick-start the economy".

The Association of Train Operating Companies and the DfT denied that the ideas were raised at the meeting and refused to comment on the memo. But it is understood that the memo was drawn up in order to prove that the industry is "planning proactively" but may need assistance to get through the downturn.

The eight most recently awarded franchises are expected to turn a net state subsidy of £811m last year into a state profit of £326m by 2012. However, that equation was predicated on strong passenger growth over the next five years, including an undiminished public appetite for above-inflation fare rises. According to the ATOC memo, the industry is entering "the most severe economic downturn since privatisation". Passenger numbers will be hit in 2009 and 2010, it adds, "with volume falls expected in both years".

Stagecoach, whose rail business comprises South West Trains, East Midlands Trains and co-ownership of Virgin Trains, declined to comment when asked if it had been notified of the "red light" list yesterday. Go-Ahead, owner of the Southeastern, London Midland and Southern franchises, also declined to comment, as did Arriva, owner of the Cross Country and Arriva Trains Wales services, and National Express, owner of the East Coast, c2c and East Anglia franchises.

FirstGroup, owner of four franchises including First Great Western, said it would be "very surprised" if it owned one of the "red light" franchises