Rail firms on the line with £1bn losses feared
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