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Britain's most expensive rail franchise will spend at least 18 months under public ownership, according to government plans to nationalise the £1.4bn east coast contract.
The Department for Transport is planning to take over the London-to-Edinburgh route from National Express, the troubled transport group, in mid-December and will not re-let the contract until the summer of 2011. In a briefing with trade unions, the government said it would "challenge the status quo" in the rail industry. However, its vision of a better-run franchise is limited so far to new staff ties and station signs that will excise all mention of National Express from one of the UK's most prestigious routes.
In a bid to assure staff that there will be "very few differences" between the new and old east coast franchises, the government said: "Everything is being managed to ensure that there is a smooth transfer of ownership. The most noticeable outward difference will be the change of name ... The exterior of trains will be re-branded and the signage at franchise-owned stations will be de-branded to reflect this change; some aspects of staff uniforms and badges will alter." The franchise will operate under the pared-down title of East Coast, compared with lengthier former titles such as the Great North Eastern Railway.
In the week that Britain's most expensive rail fare was revealed - a £1,000 return trip from Cornwall to the Highlands - the government also ruled out steep fare cuts to help recession-hit passengers. East coast's new government-backed owner will operate "within the current system of fares regulation" and, should the loss-making business turn the corner, all profits will be returned to the public purse. By taking the franchise back from National Express and holding it for more than a year the government is losing out on payments of £179m that were due under the contract in 2010/2011, putting further strain on a state rail budget that is already pumping an estimated £500m into struggling franchises in the form of revenue support over the next two years.
The franchise will be owned by a new company called Directly Operated Railways, whose chief executive is Elaine Holt, former head of the First Capital Connect franchise. "DOR will be responsible for the East Coast main line operations and will then continue to manage the franchise until it is re-let again to a new private operator – anticipated in mid-2011."
Analysts warned that the move would pave the way for a legal battle over the remaining National Express rail businesses and place further question marks over the group's urgently-needed rights issue. National Express has debts of £977.5m and, according to market watchers, needs to raise about £350m to avoid breaching covenants before the year end. National Express's two other rail franchises, c2c and National Express East Anglia, generate about £30m a year in earnings before interest, tax and amortisation for a balance sheet that is struggling with borrowings and the loss-making east coast deal. The transport secretary, Lord Adonis, is determined to strip National Express of its rail franchises under cross-default guidelines that are triggered when a franchise owner such as National Express walks away from a contract.
"The risk of losing that revenue stream is currently a complicating factor," said Douglas McNeill, analyst at Astaire Securities. However, McNeill added that the group's UK coach and bus divisions, along with its US school bus unit, generate strong enough cash flows to placate investors considering a rights issue, or lenders mulling a refinancing. National Express is working on a rights issue amid protests from its largest shareholder, the Cosmen family, which has antagonised institutional shareholders by calling for an independent review of the company's strategy. The Spanish family, who abandoned a private equity-backed takeover of National Express last month, was dismayed when National Express subsequently rejected a bid approach from Stagecoach, a rival public transport group.
The RMT union, which received the document in a briefing with Holt, urged the government to nationalise East Coast permanently.
Bob Crow, RMT general secretary, said: "Now that the government have set out a clear timetable for renationalising the East Coast Main Line from the 12th of December RMT is demanding an absolute assurance that this will be a permanent move that recognises the chaotic failures of privatisation on this prestige route on the UK rail network. It would be a total waste of taxpayers money and staff time and energy to have a third gamble on privatisation in 18 months time."
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