Prepare for 'multiple failure' of rail operators, MPs warn

The financial condition of some of Britain's train operating companies is so parlous that the Government needs to make contingency plans for keeping the railways running "in the event of multiple failure", a cross-party committee of MPs warned today.

Some of the companies running rail franchises around the UK were already earning significantly less from the contracts than they expected and some could fail if the recession further eroded passenger revenues, the Commons Public Accounts Committee (PAC) said. Edward Leigh, its chairman, added: "Revenues are likely to fall for the companies and the Department for Transport should develop robust contingency plans to keep services running if a number of train operators fail financially."

Under the rail franchises awarded by the Department for Transport (DfT) between 2005 and 2007, train operators pay to offer services, or in some cases receive subsidies, with the terms of the contracts based on projections of how passenger volumes and revenues will grow in the years ahead. However, the contracts were signed before Britain began sliding into an economic downturn and many companies are now finding the projections they made were over-optimistic.

Despite the changing economic environment, the PAC said franchise holders should not be allowed to renegotiate contracts. Mr Leigh added: "The DfT should hold train operators to their contract terms, even where the original bid might have included revenue assumptions which now look too rosy."

That conclusion will upset National Express, which runs the East Coast Main Line and is the most high-profile casualty of the downturn so far. National Express, which in December 2007 agreed to pay £1.4bn to run trains between London and Edinburgh until 2015, is currently lobbying the Government for a relaxation in the terms of its franchise. Earlier this month, it said passenger revenues grew by only 0.3 per cent in its last financial year, compared to the 9 to 10 per cent forecast when the franchise was awarded.

Most rail franchises do have provisions for less demanding financial terms if passenger revenues fall short of expectations, but the concessions only kick in after a minimum period, typically four years. FirstGroup, for example, which runs services to the West Country, received a £50m Government subsidy last year after its revenues came in well below expectations.

Douglas McNeill, a rail analyst at broker Blue Oar, said almost all franchise holders were suffering from the downturn. "Passenger numbers were buoyant until quite recently but they are now on their way down," he said. "The other problem is that people are travelling in standard class rather than first class, or planning further ahead to save money on fares."

Nevertheless, Mr McNeill said fears of multiple failures among rail operators were likely to prove exaggerated, because of the support written into franchises after the minimum period elapses. "Companies are unlikely to incur losses indefinitely," he added.

However, the PAC also warns today that, even without failures, financial pressures threaten customer service, with some operators likely to scale back their plans to tackle overcrowding, or to withdraw service they are not legally obliged to provide.

The MPs added that the DfT's efforts to reduce the burden of financing the railways borne by the taxpayer had seen costs to passengers rise sharply. Unregulated fares rose by up to 20 per cent in January, it pointed out.

Mr Leigh accused train operators of over-complicating fare structures and denying some passengers access to the cheapest tickets, by making them available only to those booking online.