GNER wins 10-year East Coast franchise

The franchise to run the East Coast Mainline, the country's flagship rail route, is set to be retained by GNER after it agreed to increase its premium payments to the Treasury to almost £100m a year.

The franchise to run the East Coast Mainline, the country's flagship rail route, is set to be retained by GNER after it agreed to increase its premium payments to the Treasury to almost £100m a year.

Alistair Darling, the Secretary of State for Transport, is expected to announce on Tuesday that GNER, a subsidiary of James Sherwood's Sea Containers, has been selected as preferred bidder for a 10-year contract to operate the line from London to Edinburgh and Aberdeen.

GNER's payments to the Exchequer will rise from £22m last year to nearly £100m by the end of the franchise in 2015, although in the first one or two years of the concession it may receive a small subsidy to pay higher access charges to Network Rail because of improvements to the electrified section of the line.

Industry observers estimate that over the life of the franchise GNER will pay about £400m to £500m in premiums, which equates to £40m to £50m a year. The line carries 15.5 million passengers a year generating revenues of £400m. Last year GNER made a profit of £30m to £40m.

The rival bidders for the East Coast franchise were Virgin Trains and Stagecoach, which operate the West Coast Mainline from London to Glasgow, FirstGroup and a partnership between Danish State Railways and the freight operator EWS, which had offered to introduce a fleet of new 140mph Japanese-built trains had its bid been successful.

Mr Darling is thought to have been anxious not to cause any disruption to the smooth operation of the East Coast line, which is generally regarded as one of the country's best railways, so close to an election. An early day motion was signed by 45 MPs calling on GNER to retain the franchise, which runs through a large number of marginal constituencies in the North and Midlands.

The new franchise will start in May and run for seven years, with an automatic three-year extension provided performance targets are met. To afford the increased premium payments, GNER may have to raise fares and cut staffing levels. About 10 per cent of its 3,500-strong workforce are thought to be at risk of losing their jobs.

It will also have to achieve a substantial increase in passenger numbers to continue making profits from the line. Some rail experts believe traffic levels would have to rise by at least 15 to 20 per cent, and perhaps by as much as 30 per cent to justify the increased premium payments.

One rival bidder said it had not been able to make an economic case for operating the franchise based on making a £400m to £500m payment to the Treasury. "They're not the sort of sums we could make work because there is a limit to the amount of passenger revenue you can get out of the line without new trains and new track," one executive said.

GNER has not said a great deal about the details of its bid for the franchise, although it has rebuilt half its fleet of 30 electric trains to Mallard class, recalling the famous old luxury locos of the 1930s, and will complete the refurbishment programme by this autumn. It also intends to replace its diesel Eurostar trains with refurbished rolling stock bought from elsewhere on the network.