Cash-crisis rail firm stripped of franchise

The operator of a main London to Scotland rail route was today stripped of its franchise after its parent company ran into financial difficulties.

The Department for Transport said it was inviting expressions of interest to operate the East Coast Mainline route which has been run by GNER since the late 1990s.

A new franchisee is expected to be in place in 12-18 months time and until then GNER will operate the franchise on behalf of the DfT under a no-fee management agreement deal.

GNER's parent company Bermuda-based Sea Containers has filed for bankruptcy protection in the US and has been suspended from the New York Stock Exchange.

Its financial problems were worsened by the fact that under the terms of its franchise, GNER had to pay back £1.3 billion to the Treasury over 10 years.

Transport Secretary Douglas Alexander said today: "The Government made it clear that rail operators that fall into financial difficulty should expect to surrender the franchise and not receive financial support. To do otherwise could set the precedent that we are willing to bail out operators at extra cost to the taxpayer.

"This agreement protects the interests of both passengers and taxpayers. It will ensure services operate as normal until a private sector franchise operator can be put in place."

GNER has faced competition on the line with rail regulators - to some people's surprise - allowing the Grand Central company to start services from the north of England to London.

GNER chairman Bob Mackenzie, who is also Sea Containers chief executive, said: "GNER has a new management team in place which is now delivering revenue growth in line with the original bid.

"While we are not in breach of the current franchise agreement, GNER will not be able to meet the significant increase in franchise premium obligations due from May 2007.

"We would have preferred a renegotiation of the current contract, but that was not available. The management agreement is therefore a sensible solution for all parties.

"It enables GNER, which is recognised as a first class rail operator, to continue to deliver the high level of customer service for which it is known, and allow passengers to continue to benefit from this commitment. It also limits the exposure for Sea Containers, which is important in our financial restructuring process."

He went on: "Our original bid was bullish, but we were knocked sideways by the July 2005 bombings, the hike in electricity prices and regulatory approval for Grand Central, which will compete for our passengers calling at our stations on the same line, but will not have the same charges imposed upon them."

Today's move by the Government follows a similar stripping of a franchise in 2003 when Connex South Eastern was taken over by the now-defunct Strategic Rail Authority, much of whose powers have now passed to the DfT.

The South Eastern franchise was eventually absorbed into a new, privately-run Kent Integrated Franchise.

The GNER position contrasts sharply with that of Virgin Rail which earlier this week was able to announce a new franchise deal with the Government for the West Coast Main Line which includes subsidies.

There are now bound to be questions asked about the fairness of the franchise system with some train operators getting Government money and others asked to pay large premiums.

GNER operates 124 weekday train services along the East Coast Main Line, linking London King's Cross, the East Midlands, Yorkshire and Humberside, North East England and Scotland, carrying almost 17 million passengers a year.

The East Coast line was often referred to as the "flagship" rail route in the days of British Rail and rail experts believe GNER has done a good job.

The DfT said today that under the new agreement GNER will continue to deliver train services and will help ensure a smooth transition to the holder of the new franchise.

Most of the net worth of the company passes to the Government and GNER has agreed to cover the Department's costs of re-letting the franchise early.

For passengers and staff, services will continue to operate as normal. All tickets will be valid and passengers can book and reserve tickets in exactly the same way they do today.

The Rail Maritime and Transport union called for the franchise to be brought back in-house to safeguard jobs and services.

General Secretary Bob Crow said: "Priority number one must be for the Government to tell GNER today that its plans to cut jobs across the franchise will not be allowed to proceed.

"Sea Containers have defaulted on what was always an absurd franchise agreement. GNER's operations should be brought back in-house to harness the revenue for the benefit of the whole industry.

"Sea Containers' disastrous tenure have destabilised a key part of Britain's railways and it makes no sense to continue handing them guaranteed risk-free profits on a management fee contract.

"Allowing Sea Containers to stay in charge for even one more day sends a signal to other privateers that if you get into financial difficulties you too will be bailed with public money.

"The franchising process is now in complete disarray and there should be an immediate moratorium on the whole process."