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INFORMED SOURCES May 2001

Hatfield hammers Virgin Trains – who pays?

With business fares up 9.5% and Saver cuts clawed back Virgin Trains is in the doghouse again

There we were on 2 April, up bright and early for Deputy Prime Minister John Prescott's press conference at the Department of the Environment, Transport and the Regions head quarters near Victoria . The press conference had been called at the last moment, presumably to clear the decks in advance of the political four week purdah before an expected May 3 election. Which Tony Blair then called off.

Never mind, this was ‘the first working day of the government's 10 year transport plan' and John Prescott described it as a ‘fresh start for railways'.

So, obviously, the news from the railway front got worse. Despite getting its £1.5billion early in exchange for some very minor concessions, Railtrack saw its shares plummet to under £5, not far off the £3.80 for which they were sold five years ago.

Stagecoach held onto its SWT franchise (cue London media apoplexy/ Siemens jubilation). Virgin/Stagecoach and Sea Containers were asked to re-re-bid for InterCity East Coast on the basis of partnership in a private finance deal or Special Purpose Vehicle as Sir Alastair Morton calls it (cue cries of delight from Virgin which is already a partner in the successful National Air Traffic Service PFI)

Then the news leaked of Virgin Rail's decision to raise fares by up to 9.5% from the new timetable on May 20. and that really made the Government's week.

Regrettable

Transport Minister Lord Macdonald described the decision as ‘regrettable' and ‘not the way to attract passengers back to the railway'. Predictably he asked the Strategic Rail Authority to investigate the price rise – well he had to do something.

Equally predictably the SRA replied that it was all legit'. So, in the spirit of private enterprise Lord Macdonald suggested that passengers should look at alternative modes if rail fares were too high. ‘It's really for passengers to look at it and say well can we get to Manchester more quickly by air or by coach or by car. Is there an alternative service we can take?'

Cue commentators asking whether this is the same Government that is committed to getting more passengers on rail? Cue also people saying that winding up Tony, John and Gus and Alastair is not the cleverest of ideas when Virgin is about to enter a shoot out for the InterCity East Coast franchise.

So why did Virgin do it? Because they need the money, of course.

Mission: possible?

Up to last October Virgin Train's ridership and revenue were in line with, perhaps a tad above, the franchise business plan. This, you will recall, culminates in 2012 with ridership doubled over the 15 year franchise and Virgin paying the SRA £10 per passenger for the privilege of owning the franchise.

In the long climb from subsidy to premium, the first big step comes next year when Phase 1 of the West Coast Route Modernisation, 125 mile/h Pendolinos and Voyagers all over Cross Country coincides with a switch from £55m subsidy to £4m premium on Virgin West Coast alone (Table 1). With Phase 1 running late and completion switched from June to October, Virgin Trains was expecting to carry a loss for a year or so until all the shiny kit started pulling in more business.

Then the aftermath of Hatfield effectively made chunks of the rail network so slow as to be unusable. The former InterCity businesses were the worst hit and Cross Country worst of all.

Since then, Virgin Trains, which made a £30m profit in 1999/2000 has seen passenger revenue drop by over £100million in the 2000/01 financial year just ended. Under the Schedule 8 Performance Regime in its track access agreement with Railtrack, compensation totalled £50m.

Why the difference between loss and compensation? Simply that Schedule 8 was calibrated for the occasional bad day. An embankment collapse, floods, dewirement. But Hatfield so affected the network that people stopped travelling altogether, something those responsible for Schedule 8 never foresaw.

Even worse, Informed Sources suggest that revenue losses will continue during the current year, perhaps as much as another £50m until Railtrack's on-going Gauge Corner Cracking recovery programme stops hitting journey times and reliability.

Even to a big group like Virgin, these are massive losses, even more so to smaller partners Stagecoach, which has a 49% shareholding in Virgin Trains.

That's your lot

And, according to Virgin Chief Executive Chris Green, ‘the shareholders have taken all the hit they can absorb in the last year'. Meanwhile Railtrack is adamant that it has paid compensation in full. The £400m already set aside to cover compensation payments to train operators is a ‘substantial and robust figure' that meets the company's obligations ‘in full' .

Further claims will be resisted. My legal chums charging a million pounds a day reckon that there are secret trap doors in the Track Access Agreement structure through which millions of pounds will drop – if you know the trick. We shall see.

But legal redress will take time, which is no help to organisations at the end of their financial tether. With the SRA and Government standing aloof, Virgin Trains sees the only source of additional revenue coming from the passenger. Cue howls of outrage.

Howls of outrage from people like the Chairman of the Rail Passenger's Council who has forgotten that this is not a state railway, but a privatised industry reliant on private funding to cover losses. Is Virgin trying to exploit Hatfield to try and make an easy buck? I don't think so.

I can't recall Chris Green being so downbeat. When he talks of Virgin ‘handing back the keys' if the compensation issue is not resolved, I think he means it.

Who takes the hit? First, unregulated full fares are to increase by 9.5% - that means the business traveller who can drive, fly or not travel at all and have a conference call at the desk.

With 50% of revenue attributed to Saver Fares Virgin is putting these up by 9.3%. This increase is made up of 2.3% under the RPI-1 allowed under regulation plus the recovery of the 7% fares cut made last year, which is also permitted.

These are desperate measures and what they will do to the business plan is anyone's guess. But before anathematising Virgin consider one thing. When MTL Trust Holdings began losing money on its franchises it was rescued by Arriva. National Express rescued Prism from the same situation. Who would take up the challenge if Virgin handed back the keys?

Answers by e-mail please. Potential candidates should bear this Government Health Warning, taken from the Statement of principles agreed between HMG and Railtrack, in mind.

The government stands behind the rail system but not behind individual rail companies and their shareholders, who need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face.

Meanwhile, Virgin informed sources are confident that if Railtrack delivers its recovery programme to schedule and services are back to normal in May ridership will recover. Back on financial track by the first anniversary of Hatfield is the mantra. But can Railtrack deliver? That question is rhetorical

Subsidy Profile