THE DEPARTMENT FOR TRANSPORT is struggling with a looming deadline as West Coast negotiations continue with Virgin Trains. The existing franchise expires in a month from now, but so far the DfT has been unable to reach agreement with the only operator which seems to be in a position to carry on.
Following the collapse of the West Coast competition on 3 October, when the award of the intercity contract to FirstGroup was withdrawn, the transport secretary said on 15 October that the DfT was "commencing negotiations with Virgin Rail Group with a view to them remaining as operator of passenger services for the West Coast Main Line for a short period, of around 9 to 13 months while we run a competition for an interim franchise agreement".
The present franchise expires at 02.00 on 9 December, and if agreement cannot be reached with Virgin the only alternative will be for the DfT's subsidiary Directly Operated Railways to take over. But it remains unclear whether DOR is still attending the mobilisation meetings which would be necessary if West Coast is to change hands in a month's time.
Some industry sources are suggesting that Virgin is taking a tough stance over the proposed emergency contract, and point to the fact that the talks have now reached the end of their third week without agreement.
The Department is also facing the possibility of a claim from FirstGroup, whose shares fell by 20 per cent immediately after the cancellation was announced and has now reported a dramatic drop in profits over the past six months. Profits fell by 42.4 per cent to £48.7 million pre-tax, although First said the comparison was 'skewed by a large exceptional credit at the same point in 2011'.
Analysts are predicting that dividends could be halved, and are also watching the possibility that First could resort to a £400 million rights issue to aid its balance sheet in the shorter term.
First's chief executive Tim O'Toole said his company was still seeking explanations from the DfT about why the competition was cancelled, with the result that First lost a contract which should have been worth £5.5 billion to the Government.
He is suggesting that the DfT over reacted to the crisis, saying: "The issues could have been remedied another way, and that’s really what we are trying to understand.”
It is also understood that First is currently in talks with the DfT about extensions to its First Capital Connect and First Great Western franchises, both of which had been due to be replaced in 2013. However all work on franchise replacement, including the re-award of National Express's c2c contract, is on hold until Eurostar chairman Richard Brown completes his inquiry into the DfT's franchise processes. His report is not due until the end of this year.
'With only Virgin left, the DfT has placed itself in the precarious position of
being the buyer in a sellers’ market in which there is only one seller. '
New Railnews blog: West Coast's crucial countdown