Ministers will pull the plug on the East Coast rail line franchise in days after heavy losses for operators Stagecoach and Virgin.

An announcement is expected before the end of the week, according to two people close to the situation, some 14 weeks after the transport secretary, Chris Grayling, conceded that the existing franchise was unsustainable.

The termination of the contract would represent the third time in under a decade that the government has been forced to intervene on the flagship line from London to Edinburgh.

Mr Grayling has the option of either nationalising the line temporarily or else renegotiating a temporary not-for-profit management agreement with the two existing operators.

The latter option is considered more likely given the minister’s aversion to nationalisation — one of Labour’s flagship policies.

The East Coast main line franchise is a joint venture of Stagecoach, which owns 90 per cent of the franchise, and Virgin, which holds 10 per cent.

The deal was signed in 2015 but passenger numbers — and therefore revenues — have undershot expectations, pushing the franchise into heavy losses.

Mr Grayling announced in November that the franchise would be replaced in 2020, three years earlier than expected — allowing the companies to escape large premium payments. In February he admitted that the consortium had breached a key financial covenant and would only be able to continue for “a very small number of months”.

Ministers have denied that the companies are being bailed out, saying that they will lose a £165m performance bond and face other penalties.

Mr Grayling will be expected to announce a short-term solution for the next two years. Beyond 2020 the government will introduce a new “public-private partnership model”.

The public accounts committee found last month that the passenger growth forecasts by Virgin and Stagecoach had been “wildly wrong” and proved that rail franchising was a “broken model”.

Recommended Network Rail and train operators shunted towards closer integration

Meg Hillier, the MP who chairs the committee, said she found it fantastical “where an operator says, ‘We can’t deliver what we promise but we’ll still run the railway with taxpayers’ money.’ We were amazed at the chutzpah.”

Virgin Trains East Coast said it had “met or exceeded all of our contractual commitments on the East Coast”. It added: “We believe we are best placed to continue the transformation already under way on East Coast . . . and provide a smooth transition to the new East Coast Partnership.”

The transport department declined to comment.

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