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Rail shares crash as government scraps franchises

The government has reduced the cap on fees for rail companies
September 21, 2020

Shares in Go-Ahead Group (GOG) and FirstGroup (FGP) slumped after the government announced that it had replaced the rail franchise model with less lucrative, more performance-focussed contracts. The government has sponsored rail losses since March after the coronavirus pandemic slashed passenger numbers, capping fees at 2 per cent of an operator’s cost base.

The Department for Transport (DfT) has extended its support package by a maximum of 18 months, reducing the fee cap to 1.5 per cent. It has replaced franchises with ‘Emergency Recovery Management Agreements’ (ERMAs), which include tougher performance goals that will require operators to work together to bring down costs. The ERMAs hint at the government’s long-term vision for rail, which will be informed by an imminent white paper from the Williams review. The review was established in 2018 to evaluate the industry after franchise failures and a botched timetable change that disrupted the Northern and GTR franchises. GTR is operated by Go-Ahead, while Northern is now publicly-run.

Rail companies will remain protected from changes in passenger demand. FirstGroup, whose share price fell by 9 per cent in morning trading, said that its passenger volumes remain nearly three-quarters below pre-pandemic levels. Go-Ahead, whose shares also fell by nearly a tenth, said that 90 per cent of its revenues were not exposed to movements in passenger demand.