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Off the rails

Another day, another nationalisation. Following on from Northern Rock and the partial nationalisations of the Royal Bank of Scotland and the newly merged HBOS and Lloyds TSB, the government has now taken the East Coast rail franchise into state hands.


The East Coast Franchise covers the route from London to Edinburgh and is one of the UK’s major rail franchises. This was won in 2007 by National Express which agreed to pay the government £1.4bn over the eight years of the contract. This followed on from the previous incumbent, GNER, having to give up the previous franchise as they could not meet the terms required by their bid.




Lord Adonis, Secretary of State for Transport made a statement in the House of Lords on Wednesday this week which included the following: “The failure of National Express East Coast obviously entails the loss of some future premium payments to which the company was contractually committed. However, while the franchise is under public control, the Government will receive the full revenues of a business which continues to make an operating profit. We will also gain the benefit of any premium payments from the new franchise once it is re-let. This represents a far better deal for the taxpayer than the only alternative course of action, which was to renegotiate the franchise in an exclusive manner with National Express, with no recourse to what is a highly competitive market for rail franchises.”


Whilst the number of passenger journeys has held up during 2008, as the graphic below shows, the revenue per journey has actually been falling for the rail network as a whole. This has been the result of discounted fares and a probable fall in passenger journeys during this year.


Source: Office of Rail Regulation

Source: Office of Rail Regulation

The problem is that the East Coast line remains a profitable line, as Lord Adonis pointed out, but it is not sufficiently profitable for the National Express group to be able to repay the huge sums of money which they bid to obtain the franchise.


This is an ongoing problem for firms bidding for franchises and rights. These franchises can obviously be very profitable but not if you overbid in the first place. Exactly the same has happened to Setanta Sports in the last few weeks. They bid large amounts for their share of English Premier League and Scottish Premier League games but were unable to obtain the subscriber base which they needed to fund their bid and make a profit. They have since had to relinquish their rights which have now been sold on to other bidders.


“Let the buyer beware” is a useful reminder for companies as well as consumers.

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Posted in nationalisation, Transport

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