Founder hits out after DfT disqualifies partner from bidding for three franchises

This article is more than 1 year old

This article is more than 1 year old

Sir Richard Branson has said Virgin trains could disappear from Britain’s railways by the end of the year after more than two decades following the government’s decision to block the renewal of its West Coast franchise.

The Department for Transport has barred Stagecoach, Virgin’s joint venture partner, from bidding for three new franchises – including West Coast – in a row over rail staff pensions.

“I received the news this morning that the Department for Transport (DfT) has decided to disqualify our bid for the West Coast Partnership,” Branson wrote in a blog on the Virgin website. “This means that Virgin Trains could be gone from the UK in November.”

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Virgin’s trains have run on the London to Glasgow line for 22 years but its joint venture with Stagecoach is due to expire on 31 March 2020 at the latest. The government is to award the next franchise this June and, if the winning operator says it can start running a service by November, the handover would be brought forward.

Stagecoach said it had been informed that its bids were not compliant with the government’s terms, triggering an outpouring from its longstanding partner on the West Coast route.

“I am devastated for the teams who have worked tirelessly to make Virgin Trains one of the best train companies in the UK, if not the world,” Branson wrote.

“We’re baffled why the DfT did not tell us that we would be disqualified or even discuss the issue,” he added, referring to a dispute between Stagecoach and the government over how much of rail staff pension liabilities the company is willing to share. “They have known about this qualification in our bid on pensions for months.”

Virgin Group, founded by Branson, owns 51% of Virgin Trains, while Stagecoach owns 49%.

Last year, Virgin started a separate rail business in the US. A spokeswoman for Virgin declined to comment on whether the company had plans to bid for future franchises in the UK.

In a statement, Virgin Trains said: “We’re very disappointed by the DfT’s unexpected decision. We’re studying the DfT’s decision carefully to understand why they’ve taken this action and would like to reassure all our customers that they can still book and travel as normal.”

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By next spring at the latest, and possibly even earlier. The contract Virgin has for the West Coast line, which is in partnership with Stagecoach, expires officially on 31 March 2020.

But Virgin could disappear from railways for the first time since March 1997 in November if a new operator has been found by then. Why has this happened?

Stagecoach, which owns 49% of Virgin Rail Group Holdings, has had three rail bids blocked by the Department for Transport (DfT), including one to renew the West Coast franchise.

This is because none of their offers met pensions standards. The DfT did not mention Virgin in its ruling, but said Stagecoach “repeatedly ignored established rules”. As well as the West Coast route, which it operates in partnership with Virgin, Stagecoach had its bids for the East Midlands and South Eastern franchises rejected. The deadline for bids has passed, so Virgin Group cannot put in a bid with a new partner. Who will take over the West Coast franchise?

There are two bids still in the running for the route, now that Virgin Trains has been excluded.

First, Trenitalia West Coast Rail is a joint venture between Aberdeen-based FirstGroup and Italian state operator Trenitalia SpA. First Group won the West Coast franchise back in 2012 but then lost out after a legal challenge from Virgin Trains over how the government had awarded it. The second contender is MTR West Coast Partnership. This is a joint venture between MTR Corp, which operates Hong Kong’s public transport network, and Guangshen Railway, which operates one of China’s biggest railways. MTR operates South Western Railway as a joint venture with FirstGroup. Will the Pendolinos still be operating?

For the foreseeable future. The Pendolinos are not owned by Virgin Trains and will transfer to new owners – with different branding, of course.

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Stagecoach is “seeking an urgent meeting” with DfT about the ruling. The Virgin Group boss, Sir Richard Branson, has said he is “devastated”. However, barring a change in the DfT’s rules or a legal challenge, Virgin Trains faces a spell in the sidings.



As part of the DfT ruling, Stagecoach was also blocked from renewing the East Midlands rail franchise, which it has run since 2007. Stagecoach’s bid for the South Eastern franchise was also blocked. The decisions follow another dramatic move last year when the DfT was forced to step in to run the East Coast franchise, after Virgin Trains admitted it could not keep up with payments to the government under its contract.

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The government’s row with Stagecoach centres on a big deficit in the Railways Pension Scheme. The Pensions Regulator has said up to £6bn may be needed to plug the gap, but the train companies have insisted that the government should support the scheme.

Stagecoach said the private sector should not be expected to bear long-term funding risks for parts of the Railways Pension Scheme, which invests more than £20bn for railway employees.

Branson said: “The Pensions Regulator has warned that more cash will be needed in the future, but no one knows how big that bill might eventually be and no responsible company could take that risk with pensions.

“We can’t accept a risk we can’t manage – this would have been reckless. This is an industry-wide issue and forcing rail companies to take these risks could lead to the failure of more rail franchises.”

Martin Griffiths, Stagecoach Group’s chief executive, said he was shocked that the government had rejected its bid and he was heavily critical of the DfT’s process.

He said he was seeking an urgent meeting with the DfT to discuss the bid, with Stagecoach management only informed that they had been disqualified in a phone call from a civil servant late on Tuesday.

Griffiths said: “We are … extremely surprised that the government still expects private operators to take risks they are not best placed to manage, despite the recent difficulties experienced by a number of operators of outsourced public sector contracts.”

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However, the government hit back, saying Stagecoach was responsible for its disqualification.

A DfT spokesman said: “It is entirely for Stagecoach and their bidding partners to explain why they decided to repeatedly ignore established rules by rejecting the commercial terms on offer.”

The Labour party, whose policy is to nationalise the railways, criticised the government’s handling of the franchises.

Andy McDonald, Labour’s transport spokesman, said: “The transport secretary has a woeful track record in awarding public contracts so it’s hard to believe today’s rail announcements will be any different.

“The expulsion of Stagecoach from the rail industry for not backing future pensions payments once more highlights the vulnerability of the system. Rail franchising is bust.”