National Express wins East Coast line

National Express secured an eight-year franchise yesterday to operate the East Coast railway network, defeating the incumbent operator GNER with a pledge to pay the Government £1.4bn over the term of the contract.

The transport company, which will take over the routes in December and run them until March 2015, promised to cut journey times from London to Leeds, York and Edinburgh, but also warned it would impose price increases above the rate of inflation.

National Express said it expected the franchise to generate £600m of revenue in its first full year and described its £1.4bn bid as "ambitious, deliverable and structured to generate shareholder value".

Regulated ticket prices will rise by up to 1 percentage point more each year on top of inflation, increasing to an extra 2.1 per cent plus inflation on unregulated fares.

The rail industry uses a fares formula based on the retail price index rather than the lower consumer price index taken as the headline inflation rate by the Bank of England. This means fares could rise by up to 5.9 per cent, based on the current rate of RPI inflation.

In return for higher ticket prices, National Express has promised to introduce up to 25 extra train services by 2010, with an extra 14,000 seats each day. It also said it would cut journey times, with several services a day between London and Edinburgh, for example, taking less than 4 hours 20 minutes.

The franchise win represents a breakthrough for the National Express chief executive, Richard Bowker, who has been under mounting pressure this year. The group has already missed out on several other franchises allocated in recent months and currently operates just two contracts, having once run nine.

However, analysts warned the company could have over-bid for the franchise in its determination to secure a high-profile contract. Joe Thomas, an analyst at Investec, said: "We believe that meeting a £1.4bn premium payment to the Government could prove challenging in the longer term."

Adam Walker, National Express's finance director, rejected the warnings. "We wouldn't have put in a bid we didn't think was deliverable," he said. "This is a different competition from previous ones that have taken place on this franchise."

National Express's victory upset rival bidders Arriva, FirstGroup and GNER itself, which had mounted a campaign to retain the franchise despite being forced to surrender it last December.

Transport ministers rejected GNER's request to renegotiate what had been supposed to be a 10-year contract, after the company warned it would not be able to make payments in full to the Government that were due to begin in May this year under the terms of the original contract.

The franchise had been awarded just 18 months earlier, in March 2005, when GNER agreed to pay the Government £1.3bn over 10 years in return for its second contract to run London-to-Scotland services.

However, the rail operator was subsequently hit by a drop in the number of passengers following the London Tube bombings last summer and also faced difficulties relating to the financial problems of its parent company, Sea Containers, which was forced to file for protection against creditors in the US.

GNER also lost a legal challenge last summer to the Government's decision to allow a rival operator to begin running services linking a number of East Coast towns to London.

Despite the problems, GNER was one of four bidders for the new franchise and yesterday said it had been disappointed not to win. Its bid for the contract focused on the fact that it had increased passenger numbers by 50 per cent since first taking responsibility for the East Coast line in 1996.

"Over the past 11 years, we have transformed this railway and built up considerable goodwill amongst passengers and our many stakeholders," said chief executive Jonathan Metcalfe. "We will do everything we can to ensure a smooth and professional handover."

Yesterday's announcement was also a serious blow to Virgin Rail, which along with Stagecoach had formed a joint venture with GNER to bid for the franchise. Last month, Virgin was stripped of the contract to run services on the CrossCountry rail network.