Britain's highest-earning rail line to be nationalised

Britain's highest-earning rail service will be nationalised after National Express announced it would default on its operating franchise.

The East Coast Main Line, the country's busiest inter-city route, will be taken into public hands for "about a year" while a new company is found to run it.

Announcing the move today Lord Adonis, the Transport Secretary, said nationalisation was "highly regrettable" and stated that there would be no limit placed on the amount of taxpayer money that would be allocated to the nationalised service to ensure it continued to run as normal.

Talks between the Government and National Express over the franchise, which runs the London to Edinburgh route, broke down last week. The company wanted to renegotiate the contract and this morning announced it would hand back the service to the Department of Transport when its funding runs out later this year.
Lord Adonis said: "The Government is not prepared to renegotiate rail franchises. I am simply not prepared to bailout companies that are unable to fulfil their commitments.

"If you did so all the other train operating companies would want a bailout."

He said that it was now "possible" that the Government could also take control of National Express's other two rail franchises. The terms of the agreement signed by the company allows the Government to take control of every franchise held by a company if it defaults on any one of them.

He added: "What the company has said is that it will not commit additional resources to the franchise from the holding group. National Express are defaulting on the terms of their contract.

"We have to pay out whatever it takes to ensure services continue.

"All tickets will be honoured. There will be no disruption to services. The staff will be retained. We are concerned to ensure there is continuity."

A spokesman at the Department for Transport added: "It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."

In an interview the BBC's Today programme Lord Adonis suggested that National Express was in financial difficulties and that its Richard Bowker, its chief executive, had left as a result.

National Express today confirmed that Mr Bowker was leaving, to work for a rail group in the United Arab Emirates, but angrily denied Lord Adonis's comments.

"We are not in default on any of our commitments. There are no financial problems at group level and Richard Bowker has not left because of financial difficulties," Ray O'Toole, the chief operating officer, said.

The company's stance means the Government is facing a legal battle over whether it can also nationalise its two other franchises - East Anglia and C2C - which remain profitable.

National Express had agreed to pay the Government £1.4 billion over seven and half years, the highest premium of all the franchises.

In simple terms, the East Coast route is highly profitable, with passengers paying far more in fares than it costs to run the service. The average East Coast passenger pays more than those on any other route towards subsidising loss-making parts of the network.

But National Express East Coast has lost £20million between January and June this year because the company has had to pay instalments of its £1.4 billion premium.

National Express claims that it is abiding by its contractual terms even though it was no longer willing to pay the DfT the £1.4 billion. The contract does allow for a company to hand back a franchise in return for surrendering a performance bond, which in the case of East Coast is £32 million.

It is unclear whether the clause that allows the Government to seize all franchises held by a company is triggered simply by the act of handing back one franchise. National Express has, however, made clear it intends to fight any attempt to take away its other agreements and the matter is now likely to be settled in the High Court.

The company, which could lose up to £72 million from the collapse, said its funding for the East Coast would run out by the end of the year.

Shares in National Express fell 10.5 per cent, down 32.5p at 277p, after the announcement. The group said that the recession had hit all of its operations, which include West Midlands buses and the East Anglia rail franchise.

The East Coast Main Line carries 17 million passengers a year and employs 3,100 staff. National Express has been in talks with the Government since January about a management contract to replace the existing franchise.

As a result of the recession, revenues from the operation grew by only 1 per cent during the past six months. When agreeing to pay the Government £1.4 billion by 2015 for the franchise National Express assumed 10 per cent annual growth.

Both the DfT and National Express insisted today that ticket prices and services for passengers would not be affected by the end of talks. Ticket prices are fixed as part of the contract.

The failure of talks marks a big setback for National Express, which has been battling to secure its financial future.

It has embarked on a £40 million cost-cutting drive that could involve job losses among its 43,000 staff.

It rebuffed a takeover approach from its larger rival, FirstGroup, earlier this week and is expected to pursue a rights issue of up to £400 million in order to repair its finances.

Source:The times