Friends of the Rail Forum

Rail crisis: National Express pulls out of London-to-Edinburgh route

Rail operator relinquishes east coast franchise and announces departure of chief executive Richard Bowker

Dan Milmo, transport correspondent
guardian.co.uk, Wednesday 1 July 2009 07.51 BST


National Express confirmed this morning that it would put the £1.4bn east coast rail franchise back into public ownership as it announced the departure of Richard Bowker, the chief executive who sanctioned the bid for the London-to-Edinburgh route.

In a serious blow to the government's franchise policy, National Express said it would work with the Department for Transport (DfT) "to ensure an orderly handover and ensure that passengers, services and employees are unaffected".

The group expects to relinquish the contract later this year, once its funding commitments for the financial year run out.

National Express rejected government warnings that it might have to hand back its c2c London-to Essex service and National Express East Anglia franchises under cross-default guidelines. The group said a defeault on its east coast (NXEC) franchise would have no material effect on the other franchises and therefore would not qualify for cross-default.

The transport secretary, Lord Adonis, has been adamant that the franchise secured by Bowker in 2007 cannot be altered.

But in a warning to the minister, the group said: "National Express has taken and received clear and detailed advice from leading legal counsel upon its, and its subsidiaries', positions under the east coast and other franchise agreements and is confident that the implication of any NXEC default should be confined to the NXEC franchise. The group would oppose any attempt by the DfT to cross default, in order to protect shareholder value." A government source said the DfT was "pursuing legal options" this morning.

The group said Bowker resigned to take up the chief executive post at the Union Railway in the United Arab Emirates. His position became increasingly precarious in recent weeks as the government rebuffed attempts to renegotiate Britain's most expensive rail contract.

The National Express chairman, John Devaney, will take on Bowker's responsibilities until a replacement is found.

"We would like to thank Richard for all his efforts in leading National Express over the past three years," said Devaney. Bowker's resignation was confirmed officially this morning in a pre-close trading update.

The new chief executive will arrive too late to co-ordinate a positive solution to the east coast contract now that National Express has signalled it will hand it back. Ahead of this morning's announcement, analysts said the deal would have to be renegotiated or returned to the DfT by the end of the month when the group faced a test on its banking covenants. National Express requires a rights issue of about £400m to pay down its £1.2bn debt burden, according to market watchers, and investors are understood to be against the move unless the east coast situation is resolved.

Bowker oversaw the record £1.4bn bid for the London-to-Edinburgh route, which committed the group to annual payments that rise from £85m in 2008 to £395m by 2015, leading to industry speculation that his departure would also be a precondition to a rights issue.

The contract has become a financial millstone that is expected to lose the company £90m over the next two years. In order to meet its targets, the franchise requires passenger revenue growth of about 10% per year, but the latest figures showed a 0.3% increase in turnover as the recession hits demand and forces business passengers – a key earner for the route – to trade down to standard class tickets.

Further discussions between National Express executives and DfT officials on Monday night yielded no further progress, leaving the group with the option of scrapping the east coast deal amid shareholder pressure to reach some kind of resolution before the first half of its financial year ends on 30 July.

National Express is up against the boundaries of a debt covenant that limits its borrowings to no more than 3.5 times its earnings before interest, tax, depreciation and amortisation (EBITDA). Faced with rising east coast payments and the burden of an underperforming Spanish coach business, National Express is widely expected to approach shareholders in a cash call before December, when its debt guidelines are tested again.

The group is also a takeover target, having announced the rejection of a nil-premium approach from rival FirstGroup earlier this week. National Express said it did not consider it appropriate to enter into talks with FirstGroup while it dealt with its borrowings and the east coast contract.

However, analysts believe that a deal could be attractive to both sets of shareholders if the east coast contract is scrapped or renegotiated before a takeover is agreed.

The effective default on the NXEC franchise means the DfT will have to plug a £1.4bn hole in its rail budget in the depths of a recession or hand over the running of the franchises to an interim operator while it waits for the market to recover.

£30bn shortfall threatens rail and road plans

Leak reveals transport funding crisis as east coast mainline nationalised

Dan Milmo, transport correspondent
guardian.co.uk, Wednesday 1 July 2009 21.30 BST

The full scale of the funding crisis facing Britain's transport system was exposed today as the country's most expensive rail contract was nationalised, while details emerged of a potential £30bn spending gap.

A leaked industry memo seen by the Guardian warned of "looming spending cuts" on major transport projects after Department for Transport officials described the consequences of restoring order to public finances. There are now fears that major schemes could be delayed, reduced or scrapped in an expenditure freeze. They include:

• The £16bn Crossrail scheme linking Heathrow airport to Canary Wharf and Essex, which could be delayed.

• A £6bn road building programme including the extension of the hard shoulder on Britain's motorways, which could be cut.

• A proposed high-speed rail route could be pushed back by a decade.

• The rail fare cap of inflation plus 1% could be lifted, raising fares.

The DfT's financial constraints were exacerbated as National Express announced it will hand back its £1.4bn east coast contract at the end of the year, the second time in three years that a company has bid more than £1bn for the route and then quit after admitting that it could not afford it. GNER gave up its £1.3bn contract in 2006, only for National Express to place a higher bid less than a year later.

The east coast withdrawal marked a new low in the tense relationship between struggling train operators, who are battling to honour expensive contracts signed before the recession, and the transport secretary, Lord Adonis. He warned that National Express would be barred from the rail market amid uproar that the company was preparing to avoid fulfilling its £1.4bn pledge.

"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging," he said. The heavily indebted group also rejected claims by Adonis that it had financial problems and that they had contributed to the sudden departure of its chief executive, Richard Bowker, who shocked colleagues with his resignation shortly before announcement.

It also emerged that the DfT is braced for a reduction in its capital expenditure plans that could total £28.9bn over the next decade. The permanent secretary to the DfT, Robert Devereux, told a private industry conference recently that the chancellor, Alistair Darling, expected the public finances to be brought into line over the next 10 years.

In a presentation described as "very stark" by one person familiar with its contents, Devereux indicated that future growth in capital expenditure would be flat and would no longer include a 1.25% annual increase, limiting the outlay on new projects to £7.4bn per year. A transport industry memo produced after the seminar calculated that without the 1.25% escalator, the DfT would have £28.9bn less to spend than expected on new projects over the next 10 years.

The memo added: "We have been expressing concern for sometime now that spending cuts post-2010 could be significant. What was said at this meeting confirms our worst fears."

Transport experts said the constraints on capital expenditure could force the government to delay the completion of the £16bn Crossrail project, which will build twin rail tunnels under London, and also to consider road pricing as a means of funding new road schemes.

Stephen Glaister, professor of transport and infrastructure at Imperial College London, said: "Transport is always the department that tends to get the tough end of the cuts because it is capital intensive and you can do short-term cuts without the results being visible for quite a while. And that's against the picture of a growing market in road and rail. Just to stand still we have to spend a lot of money and that is looking quite unlikely."

The Office of Rail Regulation, which monitors expenditure on Britain's rail networks, has admitted that putting together the next five-year budget for the railways will be "tough" due to the state of the public finances.

There is also speculation within the industry that the £3bn-a-year rail budget will have to be propped up by an increase in rail fares above the current regulated limit of inflation plus 1%.

The DfT said the calculations in the memo referred to the department's "long-term funding guideline" and not to actual budgets, which will be set in the next comprehensive spending review.

"These calculations in no way represent final budgets for the periods referred to and therefore it would be misleading to make assumptions about future spending based on them in isolation," said a DfT spokesperson. The department added that its £6bn roads programme was "progressing".

The industry memo warned, however, that a new comprehensive spending review by a Labour or Conservative government will almost certainly target the DfT. It said: "It has historically often seemed less painful to target transport spending, rather than more 'sensitive' programmes such as health, education and social security."

There is widespread speculation within the rail industry that a legal row between the DfT and one of the largest operators, Stagecoach, is driven by the need to conserve funding within the department. Stagecoach is claiming that it is owed at least £200m from its South West Trains contract and has accused officials of behaving inconsistently over the dispute.

Wrong route for the railways

The Guardian, Letters, Friday 3 July 2009

Shock horror: National Express has given up the prestigious east coast mainline because it's losing money, but the public and media seem incapable of seeing the real story - or rather they are just beginning to. The public think these main rail routes are subsidised by the government. In fact it's the other way round: the greedy Treasury wanted more than £1bn from this operator for the privilege of running this route. Gordon Brown was inflexible in the face of a recession which has severely hit the more expensive fare grades. Result: first GNER (the previous very good operator) and now National Express were driven to the wall.

New Labour wants for its own reasons to be seen to be punishing these train operating companies; talk of corporate greed pleases their supporters. Odd when it is Brown's greed that has caused the crisis and he flung countless billions at banks etc. The other factor is overcrowding. British Rail would have simply rolled spare stock our of the sidings for summer Saturdays and other peaks. The companies are charged a fortune by rolling stock companies for rolling one yard. That's why people are standing from Durham to Southampton while lines of perfectly good stock lie hidden in old airfields and military bases round the country. It's the logical outcome of an illogical system.

Now the government has got what it wants, a temporary nationalisation, a deal will eventually be struck that could have saved either company. Playing politics with our railways, again. Bad enough when the Tories created the useless Railtrack in the first botched privatisation.

The good news is that this superb railway will keep running whatever deals are done. The reason it is so reliable, fast, environmentally friendly etc is entirely down to British Rail - the track, electrification and trains were BR's last great fling of modernisation. The privatised firms have added diddly squat, apart from some style, in the case of GNER. So take the east coast line for the loveliest mainline in Britain. Book well in advance and reserve a seat and you will have a joy, a bargain and a scenic experience you will recall with pleasure for years to come. And forget who the operator is or isn't, nationalised or not. The real shock is that it doesn't make any difference.

Benedict le Vay
Author, Britain from the Rails

One largely overlooked factor in the east coast mainline mess is that the convoluted system of regulation has delayed the introduction of additional services by the franchised operator while promoting "competition", not on a level playing field but on an uneven and very muddy one. The franchisee's cash flows have suffered in consequence. Moreover, the legal framework controlling access to the tracks has become so rigid that significant revision of the timetable is a slow and compromise-riddled process. The railway's own forecasting tools suggest that an integrated timetable based on good European practice would yield millions of extra revenue and benefit passengers and the environment. Is not this more evidence that the present franchising model is too discredited for the department simply to go round the course yet again and that a model more obviously in the public interest should be considered?

Jonathan Tyler
Principal, Passenger Transport Networks

A few years ago my wife and I relocated from Newcastle to Brussels. At the time she was worried because much of her work involves frequent travel to London and the south-east. As it has turned out, not only is it significantly faster to travel from here instead of Newcastle, it is also on average much cheaper and takes place on trains which are not overcrowded and where a seat is guaranteed. Unless there is significant investment in rail infrastructure in the UK, the only thing that will encourage people to use trains instead of cars is overcrowding on the roads

Alan Craig
Brussels

These franchise fiascos will be avoided when the EU railway directives are finally adopted for passenger services, as for freight. We would then get away from the byzantine funding arrangements. Network rail should be responsible just for intercity routes. The rest of the rail system could be put under local control, to meet local needs.

Professor Lewis Lesley
Liverpool

National Express East Coast franchise

Statement by: Rt Hon Lord Andrew Adonis, Secretary of State for Transport

Date delivered: 01 July 2009

Statement type: Oral

My Lords, with leave I will make a statement about rail services on the East Coast main line. The House will understand that, because of the imperative for the Government to respond immediately to the trading statement made by National Express when the markets opened this morning, it was also essential for me to make a Written Ministerial Statement earlier.

For some months now National Express have been seeking to renegotiate the terms of the franchise agreement to operate services on the East Coast main line between London, West Yorkshire, the North East and Scotland which they signed in 2007. My position has been consistently clear – that the Government does not renegotiate rail franchises. That remains the position today.

This morning, National Express Group announced that they will not provide the further financial support necessary to ensure that their subsidiary, National Express East Coast, remains solvent. As a consequence, National Express East Coast is no longer able to continue operations to the full term of its franchise, and expects to become insolvent later this year.

The decision of National Express to break their contract is regrettable and disappointing. All other rail companies are fulfilling their contracts, despite the economic downturn. It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging.

My first and overriding obligation in this situation is to ensure continuity of service to passengers, with no disruption or diminution of service standards. When the Government has had to step in to protect rail services in the past, there has been no such impact on passengers.

I have therefore established a publicly owned company, which will take over this franchise from the point at which National Express East Coast ceases to operate. We will agree an orderly handover with National Express.Until that date, National Express will operate services on the current basis; after that date the new public company will do so. There will be no interruption of services. Existing operational staff – who continue to provide a good service – will transfer to the new East Coast Main Line company; so will the assets necessary for the continuation of the service. I can assure the travelling public that services will continue without disruption and all tickets will be honoured. I have today appointed Elaine Holt, until recently managing director of First Capital Connect, a major train operating company, as chief executive designate of the new East Coast Main Line Company.

The failure of National Express East Coast obviously entails the loss of some future premium payments to which the company was contractually committed. However, while the franchise is under public control, the Government will receive the full revenues of a business which continues to make an operating profit. We will also gain the benefit of any premium payments from the new franchise once it is re-let. This represents a far better deal for the taxpayer than the only alternative course of action, which was to renegotiate the franchise in an exclusive manner with National Express, with no recourse to what is a highly competitive market for rail franchises. The cost of re-letting the franchise will be met from the performance bond of £32 million, to which the company is contractually bound in the event of termination.

National Express also operates rail services on the East Anglia main line and associated commuter routes. The company has said that it does not intend to default on its obligations in respect of these franchises. Notwithstanding this, the Government believes it may have grounds to terminate these franchises, and we are exploring all options in the light of the Group’s statement this morning. In the meantime, we expect National Express to meet its obligations on these franchises in full.

The Department’s procurement procedures test a company’s track record and their ability to deliver a franchise and to demonstrate value for money in so doing. It would clearly be reasonable not to invite a company to bid for future franchises in circumstances where it had recently failed to deliver on a previous franchise. A company which had defaulted in the way National Express now intends would not have pre-qualified for any previous franchises let by the Department. I note that the parent groups of previous franchise failures are no longer in the UK rail business.

It is the Government’s intention to tender for a new East Coast franchise operator from the end of 2010. The specification of the new franchise will reflect my concern to secure better passenger services and facilities. In particular I will be seeking to secure significant further improvements to service quality, including to station security, bike and car parking facilities at stations, bus interchange facilities and train catering. This will ensure a step change improvement for passengers from a new East Coast franchise. I intend to consult fully on the new franchise specification, including with passenger groups, parliamentarians and the Scottish Executive.

My Lords, I have explained the action I have taken to ensure that passengers are not affected by the decision of National Express Group, and the consequences for that Group of their decision.

Let me also put these events in a wider context. No other train operator has defaulted on its franchise or indicated to us any intention to do so. Nor has any other company sought to renegotiate their franchise. Today’s events do not represent the failure of the system, but the failure of one company. The rail franchising system was examined by the National Audit Office last year. It was found to deliver good value for money. The National Audit Office also concluded, and I quote: “The Department’s arrangements for identifying and managing risks, including handling the failure of a train operator, are well planned and follow good practice.” It is that good practice which we are following in today’s announcement, and I would welcome a further examination by the National Audit Office once the franchise is re-let.

In respect of rail services at large, they are steadily improving. Passenger numbers are at their highest levels since the 1940s, punctuality is over 90 per cent and overall passenger satisfaction is rising, as shown in the latest independent National Passenger Survey, published yesterday. Moreover, the revenue from rail franchises is enabling us to make record investment in upgrading the network and services on it.

We saw this as recently as last month in the award of the new South Central franchise for services on lines through south London, Surrey and Sussex. This was conducted during the recession yet yielded a winning franchise bidder – the existing operator – committed to paying a premium of £534 million to the taxpayer over nearly six years, in place of the previous contract under which the operator was subsidised by the taxpayer. This bodes well for future franchise awards, including for services on the East Coast main line.

Department for Transport

Lord Pannick advising National Express in rail portfolio row

Lord Pannick QC, one of the "stars at the bar", is advising National Express in what is developing into a bitter legal row with the Government over the retention of its rail portfolio.

Telegraph
By Alistair Osborne and Helia Ebrahimi
Published: 9:50PM BST 04 Jul 2009


The eminent QC, 53, whose high-profile cases include representing Camelot in its challenge to the National Lottery Commission and Pfizer against the Health Secretary in arguing that GPs should be allowed to prescribe Viagra on the NHS, has a reputation for taking on the Government.

National Express said last Wednesday it had "taken and received clear and detailed advice from leading legal Counsel" that has convinced the company that Transport Secretary Lord Adonis has no grounds to strip it of all three of its rail franchises.

Lord Adonis last week said he was taking control of the company's troubled East Coast franchise via a temporary nationalisation later this year because the company was poised to default on its contract.

He added that under cross-default rules, the Government had the powers to force the company to give up its other two franchises – C2C and East Anglia.

The company insists that, just because its East Coast subsidiary got into trouble, Lord Adonis has no legal grounds to seize the other franchises, which have fulfilled all contract conditions.

National Express said last week that its chief executive Richard Bowker had quit for another job after signing a highly onerous contract in 2007 that committed the company to pay £1.4bn to the taxpayer by 2015 for running the East Coast services from London to Scotland. The bid was predicated on passenger revenue growth of 9pc-10pc a year – way ahead of the 1pc it is currently getting as the recession deters travellers.

The loss of its East Coast franchise and chief executive has left National Express vulnerable to a further takeover attempt by predator FirstGroup. On Monday, National Express rejected a nil-premium, all-share bid approach from its larger rival, but analysts expect FirstGroup to make another assault.

It has also emerged that a number of prominent National Express shareholders have put pressure on the company to open talks with FirstGroup or find a white knight after making it clear they would refuse to back a fund raising to keep it independent.

Insiders suggest the group, which has debts of £1.2bn, may have to find £400m from investors.