Brexit and terrorism meant franchise will ‘have to be reset’, says third private operator of London to Edinburgh line in 11 years

This article is more than 3 years old

This article is more than 3 years old

The London-to-Edinburgh rail line is facing its third crisis of private ownership in 11 years after Stagecoach clashed with the government over the terms of its East Coast franchise. Stagecoach has also admitted that in hindsight it overpaid for the £3.3bn contract, blaming factors including Brexit and terrorism for underperformance that punched an £84m hole in its finances.

The difficulties facing Virgin East Coast, 90% owned by Stagecoach and 10% by Virgin, prompted renewed calls for nationalisation of the railways.

East coast mainline: profitable and publicly owned – so why sell it? Read more

The transport group said it expected to renegotiate its £412m-a-year contract with the Department for Transport in the light of state-owned Network Rail’s failure to deliver infrastructure upgrades and an expected delay in the arrival of new trains.

“The franchise will have to be reset because the terms and assumptions no longer apply,” Martin Griffiths, the chief executive of Stagecoach, said.

But the DfT said it expected Stagecoach to “honour its financial commitments”. It insisted that 65 new Hitachi trains would arrive on schedule in 2018, but did not comment on stalled infrastructure improvements.

The dispute raises the possibility that Stagecoach could end up paying something closer to the £235m that state-owned Directly Operated Railways (DOR) did in the final year of a franchise it took on in 2009, when the government seized control from National Express.

National Express became the second private company to taste failure on the East Coast route after shipping and transport group Sea Containers went bust in 2006.

How workable – and how expensive – might Labour’s renationalisations be? Read more

Andy McDonald, the shadow transport minister, said the East Coast line – the scene of a dispute between Jeremy Corbyn and Virgin East Coast about overcrowding – showed privatised rail was “dysfunctional, broken and needed to be brought to an end”. The RMT union said re-privatising the line had been a “gamble doomed to failure”.



Griffiths pointed to Stagecoach’s £140m expenditure on improving services, which he said would not have happened under state ownership, adding that taxpayers could still expect a “significant return”.

But analysts said it was possible that Stagecoach, which is losing money at present but expects to make a profit on the line by 2019, could become the third private operator to abandon the franchise.



“If they can reach agreement with the DfT and their financial provisions are suitably conservative, that won’t come to pass,” said Gerald Khoo of stockbroker Liberup Capital. “But if they don’t reach agreement, or something else [goes] significantly wrong with the franchise or the wider economy, then all bets are off.”

The East Coast line has underperformed in its first two years, forcing Stagecoach to take a one-off charge of £84m for the “onerous contract”. Operating profit in its rail division, which also includes the East Midlands and South West franchises, slumped from £67m to £31m.

The company blamed factors including low consumer confidence related to Brexit and the general election, terrorism, and low fuel prices encouraging people to drive or fly.

Griffiths said: “Hindsight is a wonderful thing. We would have liked to have bid less now, but I can’t change that.”

Asked if Stagecoach could end up walking away like National Express, he said: “We have a contract, we are honouring our contract and supporting the business. I don’t like announcing losses, but the circumstances are what we’re dealing with.”