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FirstGroup, the UK’s biggest bus and train operator by revenues, has been awarded the contract to manage the lucrative West Coast mainline rail franchise, from Virgin Rail after bidding £5.5bn for the 14-year franchise.
The route brings in revenues of about £900m a year, and the decision by the Department for Transport to award the contract to FirstGroup marks a significant setback for Virgin, which failed to retain its only hold on the UK rail market.
Virgin Rail, a joint venture between Sir Richard Branson’s Virgin Group and Stagecoach, has operated the route since 1997. It criticised the government’s decision to award the franchise to its rival.
“The government decision . . . is extremely disappointing for Virgin. To have bid more would have involved dramatic cuts to customer quality and considerable fare rises,” said Sir Richard.
“We also did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise as happened to GNER and National Express who overbid on the East Coast mainline. Sadly the government has chosen to take that risk with FirstGroup.”
FirstGroup’s bid of £5.5bn, to be paid over the length of the contract, was some 15 per cent higher than Virgin Rail’s offer of about £4.8bn.
“This crazy franchise lottery, where the highest bidder scoops the pot, means that passengers will have to pay inflation-busting fares increases on the busiest line in the UK for the next 14 years,” said Manuel Cortes, leader of the TSSA rail union.
“We already pay the highest rail fares in Europe and this cock-eyed lottery means they will only go even higher in the future.”
FirstGroup said it expected to earn an operating margin of 5 per cent and estimated that the new franchise would generate a compound annual growth rate of 10.4 per cent – higher than many analysts’ forecasts.
“The double-digit revenue growth forecast looks aggressive and significantly higher than Virgin Rail’s 8.5 per cent. We believe there are substantial risks in respect of revenues falling short of expectations,” said Gert Zonneveld, analyst at Peel Hunt.
FirstGroup shares fell nearly 6 per cent or 14.7p in early London trading to 244.3p.
FirstGroup was the winning bidder from a shortlist of four that included Virgin Rail and two foreign, state-backed groups – Keolis of France and Holland’s Abellio.
The West Coast line is one of the UK’s highest profile routes, transporting some 30m people a year between London and Birmingham, Edinburgh, Glasgow, Liverpool and Manchester.
As part of the deal, FirstGroup has committed to cut the cost of its standard fares by an average of 15 per cent over the first two years of the contract.
FirstGroup will also introduce 11 new six-car electric trains to increase seat capacity by 11,000 per day, and add 106 new Pendolino coaches.
Mr O’Toole denied that FirstGroup’s bid would include a raft of job cuts, and said that staff numbers on the route would stay roughly flat.
“All the dire predictions of us coming in to slash jobs and cut services are just not true,” he said, adding that the number of catering staff on the route would be increased.
Last year, FirstGroup said it would hand back the franchise to run the Great Western rail services in 2013, after declining to exercise an option to extend it for a further three years. It said the economic downturn made the existing terms unsustainable.
The franchise is currently being re-tendered in a busy period for the industry, which will see about three-quarters of franchises re-let over the next three years.