Bus firm that took the fast route into trouble

When the bus company Stagecoach won the franchise to run South West Trains just over a year ago, its chairman, Brian Souter, paid a visit to his new business. He was amazed to discover that SWT received 40,000 letters of complaint a year from passengers. The Stagecoach chairman said his bus companies received virtually no such letters, adding: "We judge customer satisfaction by the number of bricks we get through the window."

The glass is still intact at SWT's offices in Blackfriars Road, a stone's throw from Waterloo station, but the brickbats are flying thick and fast.

How different it all seems to February last year, when Stagecoach became the first private company to take over one of the country's 25 rail franchises. John Watts, Minister for Railways and Roads, greeted "this historic announcement as excellent news for passengers".

Stagecoach trumpeted plans to introduce more services: "We firmly believe the route to success lies in attracting more people to our services and this means more, not less trains."

Thirteen months on, the crisis SWT has run into is all too predictable, according to railway managers. Although Stagecoach was granted a generous subsidy deal - it will receive pounds 368m over the life of the franchise - it had its work cut out to make a profit while surviving on a declining level of taxpayers' support. By 2003, the Government says it will have saved pounds 243m by privatising SWT.

"With a service like SWT, there are limits to how much you can push revenues," says one railway executive. "It is difficult to grab a bigger share [of the market], so you have to rely on the overall market growing, and that is not happening."

SWT decided to do the obvious thing - maximise fare income from its existing passengers, while cutting costs.

Critics now say SWT is under-managed. "The general problem is the lack of managers," says one observer. "The system is left to run itself."

An example of SWT's management style was an attempt to appease irate customers by offering free travel for a day to compensate for the recent spate of cancellations. The offer was only intended to apply to SWT's lines but ticket offices began handing out free travel everywhere, including Eurostar services to Paris, until a frantic message was sent out from SWT headquarters instructing staff to limit availability.

But the biggest cost-saving measure so far, and the cause of SWT's current predicament, is the axing of 70 drivers, a tenth of the total, through a voluntary redundancy programme. At the same time, it decided to begin shifting trains between depots. For instance, those operating on the Reading-to- Brighton route were moved to the Basingstoke depot. As the drivers there were unfamiliar with the route, SWT had to hire in "pilot drivers" from another private train operator.

It would not have mattered had Stagecoach been able to treat SWT like one of its bus companies. Outside London, the bus industry is not only privatised but deregulated. Operators can axe services and even run buses for free to drive out the opposition. In 1993, a Monopolies and Mergers Commission report found the company's Southdown subsidiary charged uneconomic fares in Bognor Regis. In 1994, Mr Souter gave an undertaking of "good behaviour" to the Director General of Fair Trading for two of Stagecoach's bus companies. Last year, after the MMC investigated Stagecoach's activities in Darlington, it concluded the company had acted in a manner which was "predatory, deplorable and against the public interest".

The City has bought the Stagecoach success story, so far. Mr Souter started the company with his sister, Ann Gloag, 26 years ago, with pounds 25,000 and two coaches. When the business was floated on the stock market in 1993 it was worth pounds 100m. It is now valued at pounds 1.8bn.

But the acquisition of SWT and the equally controversial pounds 825m takeover of the train- leasing company Porterbrook, last summer, have come at a hefty price. As of last October, Stagecoach had borrowings of pounds 750m against shareholders' funds of pounds 143m.

And there are signs of nervousness on the stock market. Shares are down from their year-high of 799p and yesterday lost another 23p, to 733.5p.

A chairman's chant

"If you go down to Marsham Street, you'll never believe your eyes

If you go down to Marsham Street, you're sure of a big surprise

The Porterbrook sale was never expected

Poor Sir George is feeling rejected

And Mr Watts will never be re-elected!"

Brian Souter, executive chairman, in a speech to rail executives last September was reported to have sung this ditty to the tune of the `Teddy Bears' Picnic'