Garnett heads for the exit at GNER

Departure follows loss of east coast monopoly. Board mulls legal action against regulator

The chief executive of one of Britain's flagship train operators is set to quit amid signs his company's franchise is falling apart.

Christopher Garnett, the head of Great North Eastern Railways (GNER), is expected to step down within the next year - possibly within the next few months.

The move comes in the wake of a decision by the Rail Regulator to allow competition on the intercity east coast route, drastically cutting his company's revenues.

Mr Garnett, 60, is understood to be a prime candidate for a senior post at the transport giant National Express, possibly as head of its rail division or even to replace its £990,000-a-year chief executive Phil White, who is about to retire.

While GNER insisted last night that Mr Garnett was not "set to move", senior industry sources said he was "on his way out".

The sources estimated that GNER's revenue just a year after it retained the licence to run the east coast main line, is 2 percentage points below the predicted increase in turnover of 8 per cent because of the 7 July bombings in London.

A decision by the Office of Rail Regulation (ORR) to allow Grand Central to run trains from London to Sunderland, preventing GNER operating extra services to Leeds, has made the situation considerably worse. Mr Garnett has warned ministers privately that the £1.3bn premium he has promised to the Exchequer over the next 10 years is unlikely to be met. It is understood that the company is seeking a rebate of at least £100m. Despite his protests the Government is so far insisting that the terms of the franchise must not change.

In the wake of the regulator's decision, the Department for Transport released a hardline statement on the issue to all train operators and potential bidders. The key sentence says: "The Department will insist that a franchisee which is unable to operate to the price it bid should surrender the franchise."

Much of the industry believes the franchise should be re-tendered. It is understood that rival bidders for the route were "marked down" for including a caveat in their proposals in case a competitor was allowed to run services. The GNER chief executive is understood to argue that he was told by the DfT to take a similar caveat out of his bid.

While Mr Garnett will contend that his decision to move to National Express is a natural progression, it will be seen as a sign of his exasperation with the rail regulator and the Government.

It draws attention to the Government's controversial policy towards the railways which in effect awards franchises to the highest bidder, arguably irrespective of the plausibility of the financial projections.

It is thought ministers will have to forgo a sizeable chunk of the £1.3bn or award the franchise to an operator prepared to promise such an enormous sum of money based on poor initial returns. The board of GNER, a subsidiary of the New York-listed Sea Containers, is considering legal action against the ORR and Mr Garnett is furious at the Department for Transport for allegedly misleading him.

The chief executive of GNER told a private lunch meeting that the department had misled him over the possibility of a competitor taking advantage of "open access" policies to run services on routes covered by the GNER franchise. He claimed he was told to "ignore" such a threat.

Mr Garnett's expected departure will come as a blow to Sea Containers, which recently announced it was in breach of its banking covenants. It is understood that the DfT is monitoring the group's financial position.