This year has been a big one for high-profile rail franchise awards. In May, London-listed Go-Ahead (GOG) secured the Thameslink Southern and Greater Northern rail franchise via its 65 per cent-owned subsidiary company Govia. Rivals FirstGroup (FGP) and Stagecoach (SGC) were overlooked. But the latter won the sought-after East Coast Mainline franchise last week, which runs the length of the country between London and Edinburgh. Stagecoach snared the contract through its joint venture with Richard Branson's Virgin Group, Inter City Railways (ICR). The line will run under the Virgin Trains East Coast brand, although Virgin owns just 10 per cent of ICR. Stagecoach is the majority owner.
The companies will pay the government a £3.3bn fee and invest £140m during the course of the eight-year contract which begins in March 2015. The reprivatisation of the line has incurred criticism from politicians and trade unionists. The franchise has been state-run, and performed strongly, since operator National Express (NEX) abandoned the contract in 2009. The market, by contrast, took the news well. Shares in Stagecoach rose nearly 10 per cent the morning the news came out. Analysts claim the new franchise will be minimally earnings enhancing for Stagecoach in 2015, and more significantly thereafter.
But investors in FirstGroup were left disappointed. The stricken transport operator has failed to snag a single new franchise contract this year. And the loss of East Coast rail not only followed a defeat over Thameslink, but also the loss of FirstGroup's existing ScotRail franchise to Dutch operator Abelio. The morning the East Coast bid was announced, shares in FirstGroup fell almost 5 per cent.
FirstGroup's deal to run the West Coast franchise was scrapped in 2012 following "significant technical flaws" in the bidding process and "mistakes" by Department for Transport (DfT) staff. The line was handed back to Virgin Trains - also owned by Branson's Virgin Group - and remains in its hands. Admittedly, competition concerns could mount over Virgin's monopoly over both the West and East Coast lines.
