FirstGroup beats Stagecoach in West Coast franchise battle

The share price of transport provider FirstGroup has risen by almost a third over the last month, suggesting it was favourite to win the lucrative InterCity West Coast rail contract, and so it has proved.

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 Department for Transport (DfT.

Virgin Rail, which is 49%-owned by transport company Stagecoach, has operated the route since 1997.

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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.

Tim O'Toole, Chief Executive said the success of its bid marked a good deal for both the company and the public.

"We will be making significant improvements including reduced journey times and introducing new direct services. We will improve marketing and deliver a smart ticketing system, refreshed and improved train interiors, station upgrades and even better catering. In support of our commitment to generate increased passenger growth we will be reducing Standard Anytime fares by 15% on average."

The firm also gave assurances that it will also be taking on more staff, amid warnings from unions and rail campaigners that the government is not doing enough to provide both workers and the public with fair conditions.

Rejected bidder Stagecoach said that as much as it and Virgin Rail were committed to winning the new franchise, it would only bid "on terms that resulted in an acceptable risk-reward profile" and one which would add value for Stagecoach shareholders.

"We understand that Virgin Rail Group was the DfT's second choice bidder and that the reason it failed to secure the new franchise was because another bidder contracted to pay significantly higher premium payments to the DfT," Stagecoach said.

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.

"However, Virgin Rail Group was able to assess these risks and its bid was positioned accordingly," Stagecoach said. "In addition, we were also mindful of the risk that a default on one franchise can result in a default in all franchises in which it has an interest, which in turn could result in significant contingent liabilities crystallising."

Sir Brian Souter, Stagecoach Group Chief Executive, added that he was "bitterly disappointed" with the decision and described it as a "blow" to everyone involved with Virgin over the period of the contract.

Stagecoach is currently short-listed to bid for the Greater Western and Thameslink rail franchises and said it continues to progress its bids for these franchises and in addition, it will consider other franchise opportunities as these arise.

NR