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December 17, 2006

GNER hand in the keys

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Friday was a sad day for Britain’s rail industry. GNER, arguably one of the better TOCs on Britain’s rail network, has surrendered its franchise, as it is no longer able to meet its premium payments to the government for the franchise. The award of the franchise required the payment of a total of £1.3 billion over the 10 years of the franchise, starting with a net subsidy to GNER in the frst year, with a steadily rising premium payment over the remaining 9 years. At the time, this amount was seen as being very optimistic (including me), and many industry experts felt GNER would struggle to pay this, whilst retaining something in the form of profit from their operations. Add to this the current financial woes of parent company Sea Containers, and it is clear the GNER took a huge gamble with their bid, one which, it turns out, has rather disastrously not paid off. In some ways, GNER have been a little unlucky, with the 7/7 bombings putting a (possibly long lasting) dent in their passenger numbers, a rise in track access charges paid to Network Rail due to rising ‘leccy bills for the ECML, and lower compensation payments from Network Rail for post-Hatfield delays, although, should GNER have allowed some form of margin for error to take account of such things, particularly seeing as their bid was over £300 million more than than that of their nearest rival. Add to this the threat of extra competition on the ECML from Grand Central’s new Sunderland to London service, which commences in May and was rather controversially (in GNER’s opinion) allowed a York stop is liable to make a further dent in GNER’s revenues (although 3 GC trains a day vs the 30 or so trains GNER operate won’t make too much of a difference to GNER’s revenue allocation, particularly seeing as a more frequent service may actually increase passenger numbers!).

But should the Government be accepting such ambitious franchise deals, and is the treasury encouraging recklessness amongst franchise bidders, going for quantity over quality? The recently let South West Trains and First Great Western franchises have premium payments totall £1 billion +, so is there any risk of these going tits up either? The latter is particularly worrying, as FGW operates many rural branch lines, particularly in Devon and Cornwall, few of which turn any profit at all. The question is, can FGW make enough profits on its not-particularly-well-performing ‘Intercity’ and London suburban operations to cover losses made here and still meet it’s high premium payments. Could this be another GNER-to-be?

Anyway, GNER will continue to operate the franchise for the next 18 months (under revised terms) until a new franchisee is found. Then we face the prospect of First East Coast (and, as good as a 225 set would look in First Neon livery, the fewer rail franchises they have the better, in my opinion) or Virgin East Coast. The latter may be a Competition Commission headache, but, then again, competition on Britain’s railways? Don’t make me laugh!

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