The UK's largest rail operator FirstGroup is to take over the running of the west coast mainline—one of Britain's most profitable routes—run by Sir Richard Branson's Virgin Trains since 1997.
The new deal, first revealed in the Guardian, runs from December until 2026 and is the first of several long and lucrative franchises to be decided over the next two years.
FirstGroup bid £5.5bn, rising to £6.1bn if it sees out a 20-month extension, plus £250m in guarantees for the right to operate the Intercity west coast services from London to destinations including Glasgow, Manchester and Liverpool. The bid means it will have to find £390m in premiums each year compared with the £160m currently paid by Virgin.
Branson said his company would never have bid at the levels of FirstGroup because of the risk of "almost certain bankruptcy", and branded the Department for Transport's decision "insanity". Virgin tabled a bid of around £4.8bn, £5.4bn for the full term. The other shortlisted competitors, Abellio and Keolis-SNCF, are believed to have bid substantially less.
FirstGroup said it would add around 12,000 seats, with 11 extra trains, and new services to stations including Blackpool, Shrewsbury and Bolton. It will also reduce the amount of first class seating while reconfiguring the Pendolino trains to add more seats.
Tim O'Toole, chief executive of FirstGroup, rejected claims that there was excessive risk in his company's bid and said there was huge scope for growth on the line. He also categorically denied there would be job losses as unions fear, although he said many would be redeployed.
O'Toole said: "Our winning bid is a deliverable proposition that is compelling for all who want to see a greater use of our rail networks.
"We think it delivers an appropriate return. This line has had all this investment, it has enormous capacity that is yet to be taken up, and even more to come."
Longer trains and additional seating will mean 35% more seats on the line in five years, O'Toole said.
"We will be making significant improvements including reduced journey times and introducing new direct services. We will improve marketing and deliver a smart ticketing system, refreshed and improved train interiors, station upgrades and even better catering."
He would not confirm the name of the new service that will succeed Virgin — the railways' most recognisable brand — although FirstGroup has registered the name Horizon at Companies House.
O'Toole said he believed Virgin had failed to exploit the possibilities to attract customers onto the trains in quieter periods. "We believe the whole pricing structure is warped and cliff edged — if we give more products we can improve the yield."
He promised a 15% reduction in standard anytime fares over the next two years — a pledge that would see the price of a £148 single from London to Manchester drop by around £22. Overall, fares are set to rise above inflation every year for the foreseeable future.
The FirstGroup bid depends on passenger growth of 5.8% each year, a figure O'Toole said matched government predictions for trains to be at the limits of capacity by 2026, when the proposed high speed rail network should start operating. Responding to Branson's criticisms, he said: "I think he lost the bid."
Virgin Trains, which is 49% owned by the transport group Stagecoach, is believed to be considering challenging the decision in the courts. Stagecoach said that it was "disappointed" by the decision. It said it had bid for the new franchise but only on terms that offered "an acceptable risk".
"We considered that a number of the features of the new franchise increased the risk to the train operating company relative to other franchises awarded over recent years," Stagecoach said. The features included the increased length of the franchise, the method used to calculate premiums and "greater macroeconomic uncertainty" which would make it harder for the operator to make a return.
Unions and campaigners have been warning that the size of the bid – around £700m more than that of the nearest challenger, believed to be Virgin – means that the operator will have to cut services.
The RMT leader, Bob Crow, said: "It is clear that this franchise is being let on pure McNulty terms with a gold-plated, extended contract linked to massive cuts to jobs and passenger services and huge increases in fares as the winning FirstGroup looks to extract every penny that they can in profit.
"RMT will work with MPs and communities along the west coast route to stop the savage assault on staffing levels and budgets that we expect to be at the core of this new franchise arrangement."
The union also pointed to a disclaimer over "risks and uncertainties" in the bid which it claimed was "tantamount to saying whatever promises we make we are at liberty to break as and when it suits us". Transport analyst Stephen Glaister, of the RAC Foundation, said: "The big test here is that this award is going to a company that can deliver on what it promised."
He said the biggest risk was that the forecast growth in traffic would not materialise and the company could end up walking away from the franchise. Previous big bids, including the one from National Express to run the east coast mainline, ended with the company being unable to see out the full length of its contract.
FirstGroup declined to take up the last three years of its contract to run Great Western services, when it would have had to pay around £800m in premiums to the government.
The rail minister, Theresa Villiers, said: "This new franchise will deliver big improvements for passengers, with more seats and plans for more services. Targets to meet on passenger satisfaction will be introduced for the first time in an InterCity rail franchise and passengers will also benefit from smart ticketing and from investment in stations."
However, some queried how much the service and quality element played in the award, given FirstGroup's other train services have scored below Virgin in customer satisfaction ratings.
Richard Hebditch of the Campaign for Better Transport said: "Whatever the merits of either the First bid or that of Virgin, there is a fundamental problem with the way that franchises are let. The government has moved to have longer franchises to encourage more investment from train companies in the railway, but when it comes to assessing bids the only thing that really matters is who offers the most money."
This article originally appeared on guardian.co.uk
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