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Lengthening Pendolino is a key test of DfT Rail's direction of the railway
Back in July 2002, the Strategic Rail Authority rescued the two Virgin franchises. Under what is known as the Letter Aggreement, Virgin Trains would run the franchises to a budget agreed with SRA, and now DfT Rail, in exchange for a percentage of the revenue as a management fee – 1% in the case of Cross country, 2% for West Coast.
This arrangement would hold until new franchise terms could be agreed. In the case of Cross Country, if agreement could not be reached by February 2004 the franchise could be re-let. But for West Coast, failure to agree would see th e Letter Agreement continuing up to the end of the franchise in 2012.
Why the difference? Well, Virgin had negotiated the Passenger Upgrade 2 (PUG2) contract with Railtrack for a 140mile/h high capacity West Coast Main Line. Devised by Tom Winsor this contract committed Railtrack, and Network Rail which inherited PUG2, to severe penalties for failure to deliver.
While calling in PUG2 would not bring Network Rail down, it would certainly impose highly visible damage and embarrass the Government. So DfT Rail has to treat Virgin Rail Group (VRG)(49% owned by Stagecoach) with respect since Sir Richard Branson and Stagecoach boss Brian Souter are quite capable of going nuclear.
While new terms for Cross Country got nowhere and it is now being restructured and relet, West Coast is Virgin's until 2012. At the start of 2005 SRA and VRG agreed that there was not much point in discussing the future of the franchise until the effect of a full year of Pendolino operations was available to inform negotiations.
It was agreed to reconvene in September 2005. Negotiatipons got off to a slow start, but since the end of 2005 VRG has put a series of proposals to DfT Rail, the latest of which was submitted at the end of June. There is optimism within VRG that a decision could be reached soon.
Virgin Trains Chief Executive Tony Collins is sure that the credibility of the latest, and hopefully final, proposal has benefited from the commercial performance of both franchises while being run under management contracts. He claims that the out-turns over the past four years have demonstrated increasingly accurate cost and revenue forecasting by Virgin.
Similarly, backchecks of earlier proposals for the re-instatemewnt of the West Coast franchise have also validated Virgin's ‘challenging' revenue forecasts. We should not forget that Virgins original business pl;an for the West Coast franchise assumed a doubling of ridership, with each passenger generating a premium to Government of £10 in the fifteenth year.
In its latest proposal Virgin continues to take a robust view of the revenue growth which can be generated by the classic combination of speed, frequency and reliability. This would be marketed in terms of rail providing the ‘most valuable travel time'.
This is not unique to Virgin, of course. All the intercity operators are offering productivity aids ranging from power plugs for lap tops to on board wi-fi connectivity. Once the train is competitive door to door, then for business travellers the uninterrupted train journey becomes more productive than the multi-stage air competition.
If only Network Rail could provide a seven day a week railway, which could be available from 2009, then Virgin believes that its ‘most valuable travel time' could also translate to the leisure market, for example through inclusive holiday packages.
That said, while the business market is going well, there are still large numbers of empty seats outside the peaks and north of Preston . When Birmingham and Manchester have a three trains an hour service in 2008, Virgin West Coast will have another 10 million seats a year to fill. ‘We've got to put bums on those seats' says Tony Collins and the marginal cost of doing so is a feature of the business case.
At the same time, overcrowding is becoming an issue in the peaks. ‘Virgin does not want to be associated with overcrowded trains' Mr Collins. After a rocky start, the trains operation has made a positive contribution to the overall brand over the past two years.
But projected volume growth over the next 10 years, beyond the end of the current franchise, it is going to be an issue for the Virgin brand because ‘we don't want to be part of a product that goes the other way again' A recurring message from Sir Richard Branson and his team is ‘we don't want to see overcrowded trains, we want to see this business developing further'.
Originally specified as eight car units (two four car half sets) the 53 Class 390 Pendolinos have already been lengthened to nine cars. In the current negotiations, DfT Rail has asked Virgin for priced options for the addition of a 10 th car. Virgin has complied but made the counter proposal to increase the formation to 11 cars.
Obviously Virgin is looking towards retaining the franchise in 2012. But it argues that, whoever takes over, with more capacity in place DfT Rail will have a more valuable franchise to let.
Here the stately pavane of franchise renegotiation trips over the unyielding realities of money, aluminium and traction. Commercially, according to Virgin, the 10 th car starts to make a return on the investment by around 2012 – the end of the current franchise. An 11 th car does not start to ‘wash its face' until 2016 – possibly halfway through the successor franchise.
These figures are conservative because they assume that there is no life extension of the fleet. In this case the extra cars would have a shorter working life and thus increased finance costs.
But there is also a crucial technical issue. A 10 th car would be a simple trailer vehicle. But if an 11 th car were to be introduced, an additional set of powered axles would be needed to maintain performance.
One of the vehicles would carry the traction package, the other the transformer. But, for various reasons, it is not practicable to add a 10 th car, with provision, say, for installing a transformer, and add the 11 th powered car later.
So the irrevocable choice is between DfT Rail's 10 car formation or Virgin's preferred 11 car trains. And a decision is needed by the end of October
Why the rush? Because the first window of opportunity to lengthen the Pendolinos opens at the end of 2008,
What determines this window? Well, while modern trains are very clever, they are also very inflexible: you can't cut another coach into a rake, couple up the brake pipes and power lines and enter service as you could with IC125.
With a modern smart train all the computers in an additional vehicle have to be introduced to the central controller and the brakes, traction, doors, air conditioning, tilt authorisation and PA systems checked for compatibility, the software, safety critical and otherwise, validated in the new formation and so on.
You also have to find a time in the maintenance and overhaul cycle when the inspection periodicity of the new coach will be in synchronicity with that of the existing vehicles. If the lateral dampers have to be tweaked very 500,000 km and you add a new vehicle when a train has run 750,000km the new coaches are going to need separate maintenance schedule.
In the case of Pendolino the magic distance is 2.4 million kilometres when the H2 examination restarts the maintenance cycle for the bogies and other major components. The first H2 is expected to fall due in December 2008, starting at one train per month, then building up rapidly to one every nine days from April 2009.
So if Pendolino is to be lengthened the first new cars must be at Manchester ready for insertion 28 months from now. The longest lead time is for the aluminium extrusions for the bodyshells. These produced on a small number of giant presses, capacity on which will have to be booked by the end of October.
But, apart from retaining a common maintenance regime for all vehicles in a train, the timing of the H2 overhaul, roughly six years into the life of the fleet, is also commercially significant.
Despite claims from ministers, Pendolino is a weight conscious train. Even with 3 MegaJoule energy absorption the end vehicle bodyshell weighs a competitive 7.5 tonnes.
But such efficient structural design requires a specified fatigue life and for Pendolino this is currently 30 years. Alstom reckon that they can extend this by six years.
This would improve the residual value of the new cars and reduce leasing costs. But taking the life out to 42 years to allow the 11 th car to be added at the 2015 H2 exam is not an option.
So, if DfT Rail goes for the 10 th car, that will determine the formation for the rest of the fleet's working life. But if a deal to reinstate the franchise cannot be reached would even a 10 th car be deliverable?
While the fleet could be lengthened under the letter agreement, the delivery risk would be firmly with the taxpayer. And glossing over the fact that DfT is at war with the Rolling Stock Companies, I can't see the Treasury taking on responsibility for funding £75million of new Pendolino vehicles, even if a deal could be structured.
Thus two key issues in the current negotiations are how to transfer the delivery risk of additional vehicles away from the taxpayer and how to fund them until the forecast growth in ‘bums on seats' starts generating the additional revenue which provides the payback on the investment. Work to date by Virgin suggests that both are achievable.
But manufacture of the extra cars is not a case of pushing a button. Alstom will have to set up a new Class 390 production line probably at the former Fiat plant at Savigliano in Italy .
While mechanical parts and traction should not be an issue, the addition of fitting out the UK specification interiors, previously carried out at the now closed Washwood Heath production line in Birmingham , will mean setting up a new supply chain for toilets, air conditioning, interior trim and so on.
Gearing up this production system is going to be costly and teeth are already being sucked over the prices being quoted. Spreading the set-up costs over 106 rather than 53 cars would improve the economics. But once the line is running why not build some extra trains?
However, this is getting into fantasy railways. Back in the real world we have to ask whether DfT Rail and Virgin can strike a deal to reinstate the franchise, with a premium profile which both represents better value to the taxpayer than continuing with the letter agreement and rewards Virgin for commercial risk, including lengthening Pendolino. And all by the end of October. It's a big ask.