East Coast losses

Government delivers a timid response to latest franchise failure

It’s another franchise bailout as the Stagecoach-led consortium, with Virgin as minority partner, has concluded that there is no prospect of the promised premiums in the current East Coast contract being affordable. Significant losses based on the current year premium of £ 325 million have been recorded, and this is before the payment curve ramps up each year to £ 594m in 2023 to bring a total commitment of £ 3.3 billion.

I don’t think you’ll find many qualified observers who thought that premium payments at this level were possible, with the business plan suggesting passenger numbers would increase by 50% in the eightyear contract period from March 2015 with revenue growth of close to 10% annually to reach £1.4bn in 2023. As a comparator, Office of Rail and Road statistics for 2016-17 show that for long-distance services classified as InterCity, the number of journeys increased by 3.8% and revenue by 3.9% - a long way short of the projected trend.

It might be questioned why Virgin has been able to achieve higher levels of growth on the West Coast Main Line, but there the background market and product factors are much more favourable.

The failure of the Advanced Passenger Train project meant that in the BR period InterCity had to continue using obsolete, locomotive-hauled coaching stock dating from 1966 in timings, that resulted in the loss of higher-value travel in favour of domestic air services.

The situation became so difficult financially that in 1987 BR considered concentrating daytime Anglo- Scottish services on the East Coast route (once electrified), curtailing services from Euston at Preston with Regional Railways asked to run a substitute stopping service over the northern section of the WCML. Stakeholders in Scotland were able to deflect the idea, but passenger numbers for the route remained poor and in the final year before Pendolino operations (2001-02) passenger numbers stood at 16 million.

When Pendolino trainsets became available and Network Rail completed the £ 8bn route modernisation project, the product offer was transformed with the introduction of the Very High Frequency timetable that included providing three trains per hour between Euston and Manchester with a journey time of a little over two hours. This coincided with regeneration of the Greater Manchester economy, which has overtaken Birmingham as Britain’s most important economic hub after London. Passenger growth has followed, with 36 million West Coast users in 2016.

In contrast, the East Coast route implemented a timetable based on the availability of 125mph High Speed Trains in 1977 and electrification in 1991, providing a further boost to product quality and service frequency. As a result, market share was gained and Anglo-Scottish services operated in competitive timings. But the size of market did not increase greatly, and for Newcastle in particular there was a decline in economic output and a static population.

The planners who worked on the successful bid for the current East Coast franchise may not have recognised the differences with both the product and the market, compared with that which Virgin has delivered on the West Coast.

There is a new fleet of trains in the offing, but the Intercity Express Programme (IEP) trainsets do not represent the type of product enhancement that the replacement of 110mph locomotive- hauled rolling stock did on the West Coast, with 125mph trainsets equipped with tilt to speed up their point-to-point timings. On East Coast the trains being replaced are the popular 125mph High Speed Train formations and Class 91/Mk 4 vehicles, which have had a significant interior upgrade to meet passenger expectations.

It would be good to say that the IEP trainsets are a step-change in the product offer, but there is a growing feeling in the industry that they are not. It is clear a conclusion has been drawn that the type of demand surge that took place after the introduction of West Coast Pendolinos is not going to happen with this equipment.

It is also clear that the Department for Transport was unimpressed by the idea of curtailing the franchise contract and bringing in its operator of last resort SNCLavalin (formerly Interfleet), or of reverting to the Government- controlled format of Directly Operated Railways that ran East Coast services between 2009 and 2015.

There is already a body of public opinion that believes the period of private sector franchise ownership has run its course. This, it might be observed, is not surprising given the increasing dominance of stateowned railways from overseas that are being awarded contracts.

The Government was clearly not keen to encourage this lobby, and therefore a different solution has been found. There is to be a halfway house between sustaining ‘private sector’ train operations and greater Government involvement, with the creation in 2020 of a new East Coast Partnership that will eliminate the premium payments due in the final three years of the current contract, that total £1.7bn.

The media message is there will be a merger of the NR route management organisation and a newly appointed private sector or state operator from abroad with single leadership. The suggestion is that this will be a more powerful directing mind compared with the supervisory boards that are being established to co- ordinate the activities of NR and relevant train operators on specific routes.

This is an idea that has no ambition, and a big opportunity has been missed. If the Government wants an integrated railway it should have the courage to go forward with that, by amalgamating the Network Rail route and the associated franchised train operator into a company that can be offered for sale to the private sector.

The drawback is that the structure could be seen as having the potential for an abuse of market power that would disadvantage other franchised, open access or freight operators using the route. If such issues did emerge, they would fall within the jurisdiction of the Competition and Markets Authority to resolve.

NR will not be able to finance all of the £ 48bn Control Period funding settlement between 2019 and 2024, and will need private sector input. There is likely to be a much greater appetite for such investment if the relationship with income generated can be demonstrated in an integrated company.

“This is an idea that has no ambition, and a big opportunity has been missed.”