Special Report: West Coast Mainline – The changes in detail

THE Government has pledged that the change in operator for the West Coast Mainline rail service will lead to new trains, more seats and better services for commuters – but what will these look like. TheBusinessDesk.com’s West Midlands deputy editor Duncan Tift looks at the pledges and proposals.

Confirming FirstGroup would take over responsibility for the WCML from Virgin Rail in December, Rail Minister Theresa Villiers said: “This new franchise will deliver big improvements for passengers, with more seats and plans for more services. Targets to meet on passenger satisfaction will be introduced for the first time in an InterCity rail franchise and passengers will also benefit from smart ticketing and from investment in stations.”

She pledged the benefits would include:
•       More Seats:  Eleven new six-car electric trains will deliver circa 12,000 extra seats a day, from December 2016. This is in addition to the 106 extra ‘Pendolino’ carriages which are currently being introduced, delivering over 28,000 extra daily seats.
•       More Services: Initially new operator First West Coast Ltd will follow the current Virgin Rail timetable but the firm is looking to introduce a number of new trains including a London Euston to Blackpool service from 2013 and from 2016, services from London to Telford Central, Shrewsbury and Bolton.  
•       Improved Services: Journey time improvements between London and Glasgow are planned, as well as additional services from London to Preston.
•       Fares: First West Coast Ltd is changing its Standard Anytime fares and reducing them by an average of 15% over the first two years of the franchise.
 •       Improved Stations: First West Coast Ltd is taking over responsibility for maintenance at 17 of their stations and will spend at least £22m on a station investment programme.  
•       Smart ticketing technology: First West Coast Ltd will introduce ITSO based smart ticketing to improve speed and convenience.

The DfT said bids for the franchise were received from: Abellio InterCity West Coast Ltd – NV Nederlandse Spoorwegen), First West Coast Ltd – FirstGroup plc, Keolis / SNCF West Coast Ltd – Keolis SA and SNCF and Virgin Trains Ltd – Virgin Group Holdings.

Virgin Trains has operated the franchise since 1997 and the existing contract expires on December 9, 2012. The new franchise will operate for a core term of 13 years and 4 months, with an option to be extended to up to 15 years.

The DfT said the proposed Train Service Specification for the West Coast service represented a relaxation on previous, more rigid timetable specifications.

Nevertheless, it said the new service would retain all obligations protecting key elements of service, such as principal first and last trains and minimum numbers of station stops per week and per day.

It said the change marked a significant shift from the highly detailed requirements featured in previous franchise specifications.
 
To support its bid, First West Coast Ltd has provided £10m of Shareholder Capital, a £45m Performance bond agreement and a subordinated loan of £190m. This is in addition to the requirement to provide a Season Ticket bond of circa £5m and a £15m Parent Company Guarantee to ensure the new Station Facilities maintenance obligations are met.

The extended length of the franchise is designed to encourage investment in assets such as stations by extending the period over which commercially attractive schemes can pay back.

For its part, FirstGroup has pledged substantial improvements in the quality and frequency of services, which it said would attract far greater numbers of passengers, enabling the West Coast service to achieve a modal share comparable to other intercity franchises in the UK.

“This growth will create greater long term opportunities for employees; generate solid returns for shareholders and justify the substantial Government investment of £9bn that this railway has received by providing better value for taxpayers,” it said.

The West Coast route is unique in the UK because it has a considerable amount of unused capacity. FirstGroup said this would expand with the addition of 106 new Pendolino coaches by the start of the new franchise.

“This capacity exists on the key growth corridor for the UK economy, linking a number of the UK’s largest and growing major urban areas including London, the West Midlands, Greater Manchester, Liverpool and Glasgow,” it added.

“We will add to that capacity through the introduction of 11 new 125mph six-car electric multiple units to operate on Birmingham-Glasgow services, which will free up the Voyager trains to deliver direct services and improve connectivity to even more destinations.”

The route, which currently has annual revenues of around £900m, is expected to generate an operating margin of approximately 5% over the life of the franchise, and will return a premium to the Government of £5.5bn at net present value over the franchise term.

Over the past 10 years revenues on the franchise have increased at a compound annual growth rate (CAGR) of 10.2%, despite limited incentive to increase passenger revenues as a result of revenue share/support arrangements during the last five years.

For the new franchise a CAGR of 10.4% is expected, which FirstGroup said was supported by passenger and revenue-focused operating investment and backed by substantial capacity increases.

“Improvements to drive additional passenger growth will be supported by operating investment of £350m in the first five years of the new franchise,” it added.

Tim O’Toole, FirstGroup chief executive, said: “With a strong focus on service quality we will continue to invest in front line staff and look forward to welcoming new employees to the Group, providing them with long term opportunities from an enhanced and reinvigorated railway.

“Our bid also delivers value for taxpayers by returning premiums to the
Government underpinned by sustainable growth in passenger numbers and revenues from the utilisation of significant available capacity. The new franchise will provide an economic return for our shareholders and is value enhancing from day one.”

It has expanded on the benefits outlined by the DfT. It said key highlights of the new franchise would include:

Timetable and trains

–    A pledge to transform the on-board environment with a major refurbishment of Pendolino and Voyager interiors, with new seats throughout and improved luggage space.
–    The introduction of 11 new 125mph six-car electric trains for Birmingham – Scotland services which will create 12,000 additional seats per day. This is on top of the 28,000 new seats that will be provided by the additional 106 Pendolino carriages that are coming into service in time for the start of the new franchise. This means there will be 40,000 extra seats by 2016, compared with 2011.
–    Improved journey times of 15 minutes for trains between London and Glasgow.
–    The introduction of new direct services from London to Blackpool, Telford, Shrewsbury and Bolton providing a new direct link to the capital for more than 500,000 people.
–    A doubling in the frequency of London to Preston services and adding capacity to Chester and North Wales.
–    Improved connectivity with more stops at Nuneaton and Milton Keynes
–    Reliability and punctuality improvements to increase Public Performance Measure to over 90% (from current level of 85.9%) through targeted investment and a new alliance with Network Rail.
   
Fares and ticketing

–    Reduced Standard Anytime fares by 15% on average.
–    The installation of automatic ticket gates at 21 stations, including the major terminals of London Euston, Manchester Piccadilly, Liverpool Lime Street and Glasgow Central.
–    Investment in greater yield management capability to help grow demand with increased marketing and the introduction of a new customer loyalty programme.
   
Enhanced customer offering and innovation

–    The introduction of a smart ticketing system across the network.
–    Free upgraded high speed Wi-Fi and enhanced mobile phone coverage following train refurbishment.
–    Enhanced catering service offered with increased at seat catering for    customers.
–    Improved information systems including new customer mobile apps.
–    Station investment, including improved accessibility, security and passenger information.
–    A commitment to high quality services including a greater emphasis on customer-facing staff on trains and at stations.
   
However, the pledges have failed to impress current operator Virgin Rail and its joint venture partner Stagecoach. The group is now pondering whether to take legal action to challenge the contract award.

It said: “We believe that Virgin Rail Group submitted a strong bid for the new franchise, which offered the prospects of continued, high quality services for passengers and a substantial yet deliverable benefit to taxpayers.
 
“Stagecoach and its joint venture partner, Virgin, were both committed to Virgin Rail Group winning the new franchise but only on terms that resulted in an acceptable risk-reward profile and which would add value to the partners’ 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.”

It said a number of the features of the new franchise were likely to increase the risk to the train operating company relative to other franchises awarded over recent years.
 
These features included:
–    The longer duration of the franchise and the additional challenges presented in predicting revenues and costs.
–    The replacement of the revenue share/support arrangements with a GDP sharing mechanism, which it said increased the risk borne by the train operating company in respect of revenue falling short of the expectations.
–    Increased macroeconomic uncertainty; the risk of which it said had been emphasised by recent UK macroeconomic data being worse than that anticipated at the time the bids for the new franchise were submitted in May.
–    The requirement to procure a guarantee from a financial institution of the shareholder loan facility required for the franchise.
–    The requirement for a parent company guarantee of certain additional responsibilities being transferred to the train operator in respect of stations.
 
Virgin Rail said its bid had anticipated these risks and had positioned itself accordingly. In addition, it said Stagecoach had been mindful of the risk that a default on one franchise could result in a default in all franchises in which it has an interest, which in turn could result in significant contingent liabilities crystallising.   

The Virgin Rail bid was said to reflect:
–    Nominal premium payments to the DfT of £8.6bn over the core franchise period from December 9, 2012 to March 31, 2026, rising to £11bn when the potential extension period to December 2027 is included.
–    A net present value of premium payments of £4.8bn for the core franchise period and £5.8bn including the potential extension period.
–    Base passenger revenue for the year ending April 30, 2013 of approximately £870m
–    A forecast, nominal, compound annual growth rate in passenger revenue of 8.5% (5.4% in real terms) over the period from April 1, 2012 to March 31, 2026, including the revenue enhancing effect of a number of carefully developed growth initiatives.
–    Annual cost savings of £45m (before taking account of inflation and additional costs to support the revenue growth initiatives contained in the bid), including building on Virgin Rail Group’s key relationship with Alstom, with whom VRG had agreed contractual terms, and further enhancing the supply chain.
–    Initial capital at risk of £105m, reflecting an initial performance bond of £45m (which would increase over the franchise term in line with inflation), an initial season ticket bond of £5m (which would increase over the franchise term as season ticket revenues grew), an initial guaranteed shareholder loan commitment of £40m and a parent company guarantee of stations obligations of £15m.
 
It said while Stagecoach recognised that the revenue growth assumed in Virgin Rail’s bid was ambitious, Virgin had the advantage of being the incumbent operator with knowledge of the franchise and access to management, proven revenue-enhancing initiatives, access to established, Virgin Rail Group-owned revenue and yield management systems and it would have been able to begin initiatives well before the start of the new franchise and without the need to change structure.

Stagecoach is shortlisted for the Greater Western and Thameslink rail franchises and it said it would continue to progress these.

Commenting on the contract award, Sir Brian Souter, Stagecoach Group chief executive, said: “Virgin Rail Group has revolutionised train travel on the West Coast Main Line. I am bitterly disappointed that Virgin Rail has been unsuccessful in its bid for the new West Coast rail franchise.
 
“After 15 years, it is difficult to imagine a West Coast rail service without the Virgin brand.  I would like to thank all those that have been involved in delivering the Virgin vision over that time and all those that contributed to the strong bid for the new franchise.  The outcome is a blow to all of those people.  Stagecoach will now continue to assess other franchise opportunities and, where appropriate, will work in conjunction with its Virgin partner.”
 

Close