Friends of the Rail Forum

National Express in talks over scrapping east coast franchise

* Dan Milmo
* guardian.co.uk, Sunday 3 May 2009 22.27 BST

National Express is in talks with the Department for Transport to scrap its east coast rail franchise after admitting that the £1.4bn contract is unsustainable.

It is understood that the rail and bus group is preparing to switch the franchise to a management contract, which will see it operate the London-to-Edinburgh route for a fixed fee. If a deal is agreed, National Express will become the first casualty of a downturn in the rail market that is threatening several franchises.

The group won the east coast franchise in August 2007, days after the French bank BNP Paribas signalled the beginning of the credit crunch. National Express committed itself to paying £1.4bn in excess profits to the government by 2015 with an annual payment schedule that rises from £85m last year to £395m by the end of the contract. However, the recession rendered the contract untenable and an outline agreement between the group and the DfT to scrap the franchise was reached last week. National Express is expected to follow the deal with a £400m rights issue to help reduce debts of more than £1bn.

The DfT and National Express declined to comment today but rail industry sources said they expected the contract to be retendered, with the management contract representing a short-term fix for the government. The National Express chief executive, Richard Bowker, said that the east coast franchise would secure a much smaller windfall for the taxpayer if it was put back on the market.

Meanwhile, the competition for another major franchise has narrowed to three companies exposed to the industry downturn after the government sidelined a train operator that has so far survived the recession unscathed.

It is understood that NedRailways UK, a subsidiary of the Dutch national rail service, has failed to convince with its bid for the Southern franchise that operates the London-to-Brighton route. The selection process for Southern appears to have been pared down to National Express, Stagecoach and Go-Ahead Group.

National Express signals rail passenger slump

More pain for train and bus group on London to Edinburgh route as analysts speculate the number of travellers has fallen by up to 5% this year

* Dan Milmo, transport correspondent
* guardian.co.uk, Wednesday 6 May 2009 12.22 BST

National Express signalled further distress at its east coast rail franchise today after indicating that passenger numbers on the London to Edinburgh route were falling.

The rail and bus group said revenue growth at its rail businesses showed a "continued slowdown" in the first three months of the year. Turnover on the east coast service was up only 0.3%, prompting analysts to speculate that passenger numbers had fallen by between 2% and 5%.

"The terms of our east coast franchise were agreed in a very different economic climate in 2007," the group said. National Express has agreed to pay the government £1.4bn over the course of its seven-and-a-half-year contract, but it is now locked in urgent talks about it with the Department for Transport.

One option under consideration is to scrap the franchise and replace it with a management contract, under which National Express would operate the route in exchange for a fixed fee.

However, the group runs the risk of being thrown out of the rail business altogether if it tells the DfT that the contract is unsustainable.

Ministers could strip the group of the franchise and hand it over to a rail consultancy – as it has done in the past – as well as imposing a "cross default" clause that would also strip National Express of its East Anglia and c2c contracts.

The rail minister, Lord Adonis, reiterated yesterday that the government would not renegotiate onerous rail contracts. "There is no question of that," he said. "We are not in the business of renegotiating franchises that were freely entered into by the operating companies."

National Express added in an interim management statement published today that it was continuing to examine options to reduce its £1.2bn debts. The group's loan conditions will be tightened on 30 June, limiting its borrowings to no more than 3.5 times its earnings before interest, tax, depreciation and amortisation. National Express is expected to hit this limit by the end of the year, analysts have warned, and the group is cutting its dividend and axing jobs in order to avoid a breach.

Elsewhere in the statement, National Express said revenue growth at its UK bus and coach business was up 4.1%, with its North American school bus arm increasing turnover by 9.4%. However, its Spanish coach business saw revenue fall by 3.2%.

I noted that when the Swiss Railways tried to enter the British Railway arena, it was turned down as unsuitable!