Rail firms on the line with £1bn losses feared

The Sunday Telegraph - Money & Business - - Front page - By Bradley Ger­rard and Ben Mar­low

THE rail in­dus­try is fac­ing cat­a­strophic losses of up to £1bn amid fears of fur­ther write­downs on some of the UK’S most prom­i­nent train fran­chises.

Sev­eral in­dus­try ex­perts are pre­dict­ing South Western Rail­way, op­er­ated by First Group; Greater Anglia, run by an Abel­lio-led joint ven­ture; and Ar­riva’s North­ern fran­chise, which will tem­po­rar­ily can­cel 165 of its 2,800 daily ser­vices to­mor­row, are fac­ing se­vere strains as pas­sen­ger num­bers be­gin to dip and changes in work­ing pat­terns mean fewer cus­tomers buy­ing ex­pen­sive sea­son tick­ets.

The spot­light has turned on these fran­chises af­ter the fail­ure of the East Coast main­line, which is back in gov­ern­ment hands for the third time in a decade af­ter op­er­a­tors Stage­coach and Vir­gin Trains ran out of cash for ser­vices. First Group also shocked in­vestors this week with a £106.3m pro­vi­sion against its Transpen­nine Ex­press busi­ness.

Hugely over-op­ti­mistic bids as­sumed the post-pri­vati­sa­tion pas­sen­ger boom would con­tinue but this pre­dic­tion is now un­der threat, leav­ing train op­er­a­tors pre­car­i­ously close to a fi­nan­cial black hole.

Aberdeen-based First Group has agreed a max­i­mum li­a­bil­ity of £204m against the fran­chise as part of the par­ent com­pany guar­an­tee, some­thing that ap­plies to nearly all rail fran­chises across the UK.

This means First Group’s losses on Transpen­nine could rise by an­other £97.7m on top of the £93m it would be li­able for on South Western Rail­way for its 70pc share of the con­tract it runs with Tren­i­talia.

The Gov­ern­ment asked for par­ent com­pany guar­an­tees of at least £40m from the op­er­a­tors of Greater Anglia and North­ern, ac­cord­ing to “in­vi­ta­tion to ten­der” doc­u­ments.

If these and other fran­chises be­gin to face the same strains as East Coast and Transpen­nine, a to­tal of up to £1bn could have to be writ­ten off across the in­dus­try.

Just months ago, Serco was forced to take a £47m charge on its Cale­do­nian Sleeper ser­vice af­ter it blamed the de­layed ar­rival of new trains for damp­en­ing pas­sen­ger growth.

One trans­port an­a­lyst said the write­down by First Group was “not en­tirely un­ex­pected see­ing as it out­bid Stage­coach for the con­tract”.

“My sus­pi­cion is things will get worse and I think South Western Rail­ways will have to take a pro­vi­sion,” the an­a­lyst said.

“If pas­sen­ger growth de­te­ri­o­rates in line with our worst fore­casts, it would be dis­as­trous for the whole in­dus­try.”

Liberum trans­port an­a­lyst Ger­ald Khoo said: “If in­dus­try rev­enue trends re­main at their cur­rent sub­dued lev­els [Transpen­nine] is un­likely to be the last.”

A se­nior in­dus­try source blamed overseas op­er­a­tors, many of which are state-backed firms, for in­flat­ing bid­ding costs.

A re­cent re­port by the Rail De­liv­ery Group, which rep­re­sents rail com­pa­nies and Net­work Rail, warned that very large fran­chises were “risky even for large own­ing groups and re­quire very large par­ent com­pany guar­an­tees”.

It said “new en­trants will be pre­pared to pay” but that over­all the num­ber of bid­ders for fran­chises had fallen.

Luke Pol­lard MP, a trans­port se­lect com­mit­tee mem­ber, said he had raised the ques­tion of “which fran­chises are in dan­ger” at a re­cent meet­ing.

“We want to think about the op­tions the Gov­ern­ment has and take bet­ter ac­tion than they did with East Coast,” the Ply­mouth, Sut­ton and Devon­port Labour MP said.

First Group said SWR was prof­itable and that the terms of the con­tract were a “marked im­prove­ment” rel­a­tive to how much risk the com­pany has to take. Ar­riva said it was com­mit­ted to the “big­gest rail in­vest­ment pro­gramme in the North” and would add new trains.

Luke Pol­lard MP said he had asked which fran­chises were in dan­ger at a re­cent trans­port se­lect com­mit­tee meet­ing

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