Rail Franchises – Where To Now?

Earlier this week, the beginning of the end was signalled for the East Coast Main Line (ECML) rail franchise awarded to National Express (or more precisely, NXEC Trains Ltd. – but more of that later). The furore this has generated – at least in the railway world – is substantial. This is the second time this line’s franchise has been in this state, and broadly the reasons are similar. Back in late 2006, GNER was asked by the British Government to surrender the franchise after its parent company, Sea Containers, filed for Chapter 11 bankruptcy in the US, and it became obvious that GNER would be unable to meet the financial terms of the franchise. National Express has also apparently over-estimated how much revenue the franchise would generate for them, and has decided that they will stop providing financial support to NXEC Ltd, in the belief that “the Secretary of State would have a duty to reassume control of the franchise” ( from the National Express Group Statement)

So why the big fuss – surely the franchise will be re-awarded, and it will be business as usual in the same way as in 2006/2007? Well, maybe, and maybe not. It does appear that two large companies have made a hash of their predicitions for the potential of the ECML (although admittedly National Express have had the impact of the recession to deal with). Are potential frachisees going to make the same mistake a third time? It always seemed that ECML was the “jewel in the crown” that the Government could look to extract a premium from, and it was promised over £1.3 billion from both companies over a period of ten years or less. However, it would be a brave assumption that anywhere near that sum is achievable on current trends, and many of the potential franchisees are already facing tough times in their existing franchises. That may beg the question as to why the Government have been unprepared to negotiate with NXEC – surely a compromise that suited both parties could be found? Unfortunately, if the Government were to take that approach, they could find that all franchisees ask for concessions – and with that, as the Transport Secretary Lord Adonis stated, the whole franchising process would have collapsed.

Let’s consider some of the other issues that this week’s announcements have thrown up:

  • As National Express Group Statement makes clear, the franchise system is set up in such a way that a standalone legal entity is responsible for the franchise commitments, not the National Express Group. This of course helps prevent issues with the parent company from necessarily affecting the franchise.. However, it does mean that the parent can choose to pull out with no consequences if the return on its investment in the franchisee are not to its liking. Unfortunately, like so many private-public deals, it does appear that the Government (and its political predecessors) have had to bend over backwards to secure private financial involvement in public undertakings – to the point where it can be argued that there is little private risk.
  • National Express Group plc have been at pains to point out that they do not have financial problems, even issuing a separate statement to this effect. However, they have come under criticism for introducing reservation fees and reducing restaurant car services across both ECML and another of its franchises. Both measures have widely been seen as an attempt to shore up revenue within their rail operations, yet bizarrely, the cutbacks in restaurant cars will reduce the appeal of the service to the very sectors of the market that National Express state have been abandoning its services, namely first class and full fare.
  • Finally, where does this leave the longer franchise aspirations of both the rail industry and the Government? Pretty much from the start of rail frachising in the UK it has been argued that the length of rail franchises to be awarded were too short to encourage bidders to consider long-term rail strategy as part of their bid. For example, the ECML franchise has never been awarded for longer than ten years, yet some of the rolling stock on the route will be between thirty and forty years old when it is finally retired. Chiltern Railways, with the longest franchise awarded of twenty years, has felt able to commit money to infrastructure projects which are likely to deliver a return within this extended period. However, if franchisees are indicating their inability to deliver less than two years into a ten year or less franchise, what appetite will shareholders have for a longer term exposure?
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