It's not been a great few days for Sir Richard Branson after his Virgin Trains business lost its prestigious West Coast rail contract to rival firm FirstGroup, prompting the business magnate to attack the government's 'insanity'.
The billionaire described Virgin's bid as strong and deliverable, adding that he was "extremely disappointed" over the Department for Transport's (DfT) decision to reject it.
Writing on his personal blog, Branson said: "Based on the current flawed system, it is extremely unlikely that we would bid again for a franchise."
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
FirstGroup will take over the contract from December 9th of this year and operate the service until 2026, supplanting existing operator, Virgin Rail Group, after placing a higher bid with the DfT.
Latest Videos FromMoneyWeek
Virgin Rail, which is 49%-owned by transport company Stagecoach, has operated the route since 1997.
FirstGroup expects the route to generate an operating margin of around five per cent over the life of the franchise, enabling it to return a premium of £5.5bn at net present value to the government, which has previously invested £9.0bn in the service.
FirstGroup unveiled plans to add 106 new Pendolino coaches by the start date of the contract, as well as 11 new 125mph six-car electric multiple units to operate on Birmingham-Glasgow services, which it says will free up the Voyager trains to deliver direct services and improve connectivity to more destinations.
In Branson's eyes, this will all come at too great a cost to passengers, saying Virgin's bid was "a strong and deliverable bid based on improving customers' experience, increased investment and sustained innovation".
He continued: "To have bid more would have involved dramatic cuts to customer quality and considerable fare rises which we were unwilling to entertain."
Stagecoach said it saw a number of risks to the operating company of the franchise, including the longer duration of the franchise and the additional challenges that presents in predicting revenues and costs, the current economic situation, and the replacement of the revenue share/support arrangements with a GDP sharing mechanism, something Stagecoach considered to increase the risk for the train operating company in terms of revenue falling short of the expectations reflected in the bid.
Underling this, Branson went on: "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 and we only hope they will continue to drive dramatic improvements on this line for years to come without letting everybody down."
He added: "On the past three occasions [that we have been outbid in a rail tender], the winning operator has come nowhere close to delivering their promised plans and revenue, and has let the public and country down dramatically."
Rail minister Theresa Villiers doesn't appear to see any risk of that, saying the new franchise would bring about "big improvements for passengers, with more seats and plans for more services".
She added: "The West Coast is the first of the new longer franchises to be let by the coalition which has helped us secure real benefits for passengers by encouraging First West Coast Limited (as the company will be named) to invest in the future of the service."
In the view of Panmure Gordon, FirstGroup's double-digit revenue growth forecast looks "aggressive" and significantly higher than Virgin's 8.5%.
The broker believes that combined with the replacement of the revenue share/support mechanism with a GDP sharing mechanism, there are "substantial risks" of revenues coming in short of expectations.
"Premium payments, however, are likely to be back-end loaded and in the short to medium term this franchise should provide an attractive contribution to FGP's bottom line," it said.
But for Branson there is no question as to how the situation will pan out, saying: "Insanity is doing the same thing over and over again and expecting different results. When will the Department for Transport learn?"
NR
