Virgin Rail hold talks with DfT after West Coast Main Line profits fall 80%
HALF year profits have fallen almost 80% at West Coast Main Line operator Virgin Rail as a result of losing the route’s franchise.
The company, in conjunction with minority shareholder Stagecoach is in talks with the Department for Transport on revised terms for the route which could see the firm take on greater revenue and cost risk through to April 2017 for a commensurate financial return.
Until December 2012, VRG operated the West Coast rail franchise under a commercial agreement where it was at risk for variations in revenue and cost, and earned a commensurate return.
To ensure the continued operation of the franchise following the DfT’s failure to properly conclude its re-letting of the franchise during 2012, a temporary commercial arrangement was entered into in December 2012. Since then, VRG has earned a pre-tax profit equivalent to 1% of revenue from the West Coast rail franchise with the DfT taking the risk that revenue and/or costs differ from those expected.
The agreement has resulted in a near 80% decline in profits from the operation, from £6.9m for the six months to October 31 last year to £1.4m this year for the same period.
However, in a boost to the operation, the DfT has now refunded the costs VRG incurred in bidding for the long-term West Coast rail franchise, which was due to begin this time last year. VRG has also recovered the legal costs that it incurred in challenging the Department’s initial decision on the award of the franchise.
“Constructive discussions are continuing with the DfT. Although these discussions have not progressed as quickly as we had hoped, we expect agreements to be concluded in the second half of 2014. We will also be progressing discussions around the planned extension to the East Midlands rail franchise in due course,” said the transport group Stagecoach in its interims report.
Stagecoach holds a 49% shareholding in VRG.
Stagecoach chief executive Martin Griffiths said: “We are positive about the outlook for the rail sector in the UK where the franchising programme is again moving. There is a pipeline of new opportunities in addition to the planned extensions to the duration of the rail franchises operated by our existing high quality train companies.
“Our experience of alliancing with Network Rail over the past 18 months has given us an invaluable insight and understanding that can be used to ensure new franchise bids can deliver better value for money for Government. We are also working closely with Government to deliver vital new rail capacity for our customers.”
The group as a whole saw revenue for the six-month period up 5% at £1,473.9m (2012: £1,403.3m). Total operating profit (before intangible asset expenses and exceptional items) was up 1.1% at £126.5m (2012 as restated: £125.1m). Earnings per share before intangible asset expenses and exceptional items were 2.8% higher at 14.6p (2012 as restated: 14.2p).
