Insiders say fares will rise from 2020 on busy line as unions fear job cuts and changes to staff terms
FirstGroup is close to securing the prestigious west coast rail franchise, with an announcement pencilled in for next week that is likely to provoke angry reactions from the current operator, Virgin Rail, and trade unions.
It is understood that the Department for Transport has set Tuesday as the provisional date for declaring the winner of the contract race on the London-Glasgow line and FirstGroup remains the frontrunner on price, having bid an estimated £6.5bn-7bn for the 14-year franchise.
The other bidders – Abellio, Keolis/SNCF and Virgin Rail – are no longer in active talks with the DfT, it is believed.
However, a victory for FirstGroup, which is thought to have bid 20% more than Virgin, is likely to bring objections from Sir Richard Branson, the rail unions and Labour MPs.
Rail industry insiders believe FirstGroup will have to increase fares significantly from 2020 onwards because the west coast line will be full to capacity by then and it will not be possible to increase revenues by carrying more passengers.
The new-look west coast franchise could also include changes to staff terms and conditions or staff cuts, bringing the threat of industrial action from unions and objections from opposition politicians.
Branson, who co-owns Virgin Rail with Stagecoach, the bus and rail group, said in a recent letter to the transport secretary, Justine Greening, that the only way FirstGroup can meet the premium payments is to “drastically cut the quality of services”.
Virgin, which has been operating the west coast line for 15 years, pays about £160m a year to the DfT in premium payments – or excess profits – but a bid of £7bn implies annual payments of about £500m. If the route is at full capacity, the premium payments under the new franchise will have to be met by revenue growth rather than passenger increases.
It is thought that the first few years of the new contract will be heavily subsidised by the taxpayer or, at best, will require low premium payments, particularly if, as expected, there is an industrial standoff over cost cuts. A recent independent review into the rail industry led by Sir Roy McNulty, the former chairman of the Civil Aviation Authority, recommended that franchises should have leaner costs.
FirstGroup, which is based in Aberdeen and also owns Greyhound buses in the US, declined to comment, but a recent filing at Companies House indicates that the group is gearing up to take over the line in December.
Having registered the name of First West Coast, the new company posted a filing on Monday announcing that Richard Parry, former acting boss of London Underground, is now managing director. However, it is thought that the official name of the FirstGroup-operated franchise will not be First West Coast.
According to one report, FirstGroup will be required to underwrite the franchise with a performance bond of £70m and a shareholder loan of £300m, payable if the franchise owner hands back the keys to the route – as National Express did in 2009 on the £1.4bn east coast contract.
The DfT has also been considering a cross-default clause, which would see FirstGroup lose its other rail contracts – including First Great Western and First Capital Connect — if it reneged on the London-to-Glasgow deal.
Analysts at JPMorgan Cazenove said this week that if reports of a £300m loan were true, then, with FirstGroup already owing £1.8bn, “it is likely to increase investor fears that FirstGroup may be overbidding for west coast”.
They added that FirstGroup’s record with other franchises points to a strong record in holding down costs and meeting the ambitious-looking premium target. They said: “We share these fears if the bid depends on cutting costs in the absence of government support to do so. However, FirstGroup has a good reputation in UK rail, with costs in Great Western/Capital Connect reducing.”
The DfT appears to have decided that both Virgin and FirstGroup’s bids can be delivered, with FirstGroup’s bigger financial offer giving it the edge in the post-McNulty era.