From the telegraph 02/04/2009

 Rail companies could be forced to default on franchise

Two of Britain's major rail operators, National Express and Stagecoach, could be forced to give up their rail franchises, a city analyst has warned.

The companies may have to consider drastic action because of the downturn in the economy, according to Andrew Fitchie, an expert on the rail industry with Collins Stewart stockbrokers.

This could leave the Government having to take over National Express's operations on the East Coast Main Line from London to Scotland, East Anglian services into London's Liverpool Street and c2c, which brings in commuters from Essex and the outer reaches of east London.

It could also be forced into operating Stagecoach's services in the East Midlands and South West Trains, which runs into Waterloo.

Mr Fitchie's warning, contained in a note to clients, comes as the Department for Transport advertises for consultants to provide help should the Government have to take over running a rail franchise.

According to Mr Fitchie, a combination of the recession and the complex funding arrangements agreed with the Government, has made the two companies more vulnerable than their competitors.

"Defaulting is a last resort, it would probably preclude an operator from ever participating in rail franchising going forward," Mr Fitchie has written in a note to clients.

"Needless to say none of the operators are talking of default."

But according to Mr Fitchie both National Express and Stagecoach are vulnerable because they will not benefit immediately from the subsidy safety net put in place by the Department for Transport.

It means that both companies will have to bear the cost of falling revenues as a result of the recession.

As a result the two companies faced some very "unpalatable results", which would leave them having to raise money from "sceptical" investors.

"Default may well be the only option," Mr Fitchie added.

For both companies pulling out of rail – known within the industry as "throwing in the keys" – would have a "considerable upside."

However this was dismissed by the firms.

A National Express spokesman responded: "As we said at our full year results the transport industry is not immune from wider economic conditions.

"The Group has a robust plan in place and we are taking appropriate self-help measures.

"Our absolute priority is to manage cash and maintain a strong balance sheet whilst maintaining our service commitment to customers."

A Stagecoach spokesman was equally robust. "We have contracts with the Department for Transport and we will be honouring our commitments across all of our franchises."

The Department for Transport also sought to play down the significance of the analyst's note.

"As Andrew Adonis, the transport minister in the House of Lords said last week, no Train Operating Company has indicated that they are currently unable to fulfil the terms of their franchise agreement."