Let's take Virgin, which was this week awarded the West Coast InterCity franchise, as a starting point. In year one Virgin will get paid pounds 76.8m by the Government to run this service. By the end of the 15-year franchise period, however, it will be paying the Treasury pounds 220m a year and still, under its business plan, be making a whopping great profit on top. To make the figures stack up, Virgin is assuming it will be able roughly to double passenger traffic on the route. Given Virgin's marketing acumen and its undoubted entrepreneurial skills, it stands a very good chance of hitting this target.
Indeed, the target is not as ambitious as it might seem. Passenger traffic hit these kind of levels after the last upgrade of the West Coast line in the early 1970s. Once Virgin has reduced journey times with the introduction of its new tilting trains, it is more than possible passengers will return from air and road in sufficient numbers to vindicate these targets. So Virgin, driven on by the spirit of Swampy, may well get there. The same cannot be said of some of the other franchisees, many of whom are basing their business plans on equally heroic assumptions for revenue growth.
It doesn't take a rocket scientist to figure out that while some franchisees may be able to double their passenger levels, not all of them will - not in any case unless government policy is used to force people off the roads. Cost cutting provides an alternative way of making the numbers stack up but as Stagecoach has already discovered with South West Trains, such measures often prove a zero sum game. With some of these franchises, notably Scotrail and the high-subsidy commuter routes, it is going to be next to impossible to grow the market by anything significant. The result is that a number of franchisees are going to fail.
As a general rule of thumb, the most vulnerable are going to be those with the highest rates of declining subsidy relative to turnover. National Express and Prism look particularly exposed. And if franchisees start failing that means the railways will be a continuing burden on the public finances for long after they were meant to be.Reuse content