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INFORMED SOURCES August 2003

Virgin franchise support – another £282million needed

Talking of returning Rhode Island Reds, fiction has become fact

You may recall that last September this column reported on the financial rescue of the two Virgin franchises by the Strategic Rail Authority. The terms of the rescue, known as the July Agreement, are reprised below

Now VRG is a Virgin/Stagecoach joint venture and commenting to a City press conference on the agreement, which included an additional £106million to tide over West coast and Cross Country for the remaining eight months of 2002/03, Stagecoach Director Graham Eccles said that total support to April 2004 would be between £231million and £465million.

At which point SRA's spin machine took umbrage and tried to discredit Stagecoach. Don't ask me why, they just did. The figures were ‘fiction' and ‘as close to a lie as you can possible get'.

So who was right? Graham Eccles – summa cum laude from the Bob Reid school of hard nosed railway management - or the SRA? I did a quick and dirty analysis on the known facts and came up with Table 1

Table 1 VRG franchise support costs (£ millions)

1) Eight accounting periods

2) Estimate. Assumes increasing losses plus 2% management fee

3) Estimate Assumes increasing losses plus 1% management fee

Source: Informed Sources September 2002

From which you can see that my estimate – at £357 million for the two years up to April 2004 – was in the middle of Graham's best and worst case scenarios. But don't ask me why the SRA went gonzoid when Stagecoach revealed the range of the likely outcome. I suspect it was something to do with Richard Bowker's sensitivity at being perceived as bailing out his former employer.

Update

Anyway, when Stagecoach released its preliminary results for 2002/03 on June 25 we got an update on the VRG franchise support situation. Obviously, more money will be needed, since negotiations are still on-going for both franchises. Table 2 shows the outcome.

Table 2

Virgin Rail financial support 2003/04 (£ millions)

Before you get too excited, I should warn that the second line isn't really Virgin's money. When the new track access charges were set by the Rail Regulator in April 2001, it was decided to link them to investment on a TOC's routes rather than jam-spread the total across all 25 franchises. This meant that Virgin's track access charges went up dramatically, but the company simply passed the bills through to the SRA under Schedule 18.1 of the track access agreement.

What counts is the ‘additional support' line where you see the total is £282.1 million. Note also that despite needing extra support the franchises are still receiving subsidy/paying a premium. Thus, West Coast will pay the SRA £54.9 million but get an additional £155.7m support.

Why pay the premium when you get the money back? Well, it keeps the franchise agreement legal, just in case the SRA wanted to do a Connex.

So my quick and dirty calculation was heavy on Cross Country and light on West Coast. But it was not too far out and if a failed engineer could get that close to the eventual out-turn you do wonder what all the teddy hurling was about.

And you add last year's £106million to the latest official figures you get £388 million. Now given that the £465 million which sparked all the unpleasantness was the doomsday, worst case scenario, £388million should be good news for the cash strapped SRA.

Where do the two franchises go from here? Well, as the Iron Duke said at Waterloo , ‘Hard pounding, gentlemen, let's see who can pound the longest'. Even when an agreement with SRA is reached, VRG will continue to play hardball on the West Coast franchise where, unlike the pusillanimous First and Connex with their feeble judicial review threats, Richard Branson and Brian Souter have the ultimate weapon – the Passenger Up Grade 2 contract with Railtrack, the liabilities now inherited by Network Rail.

And when you get into minutiae of the SRA's West Coast strategy document – ably reviewed by George Hudson elsewhere in this issue, you note a welcome note of caution when it comes to the September service date for 125mile tilting operation. The Report also says that work on the 2004 timetable ‘is indicating' (note the tense) that the forecast initial demand from the upgraded InterCity services can be met within the Pendolino train order of 53 nine car trains. I still reckon that, even before the decision to stop manufacture at Washwood Heath, having all 53 trains ready for service by September 2004 is a big ask.

With VRG already seeking damages from Alstom over late delivery, Network Rail can't be far behind.

How did that line go from ‘Dirty Brian', sorry, Harry? ‘ Being as this is a Winsor & Bowker contract, the most powerful contract in the world, and would blow your business clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya punk'?

Continues.........

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