August 14, 2019 / 8:49 AM / 2 months ago

FirstGroup to replace Virgin on UK's West Coast rail franchise

(Reuters) - FirstGroup (FGP.L) will take over the British rail franchise that links London, Manchester and Glasgow in December, and is being lined up to run trains on the High Speed 2 line planned for some similar routes, the government said on Wednesday.

Virgin Trains West Coast Mainline service from London to Manchester pulls out of the station in Macclesfield, Britain, August 14, 2019. REUTERS/Phil Noble

The award of the West Coast Mainline contract to a joint venture 70% owned by First and 30% by Italy’s TrenItalia marks the end of Richard Branson’s Virgin Group involvement with Britain’s railways after more than 20 years.

Virgin’s West Coast partner Stagecoach (SGC.L) was disqualified from bidding for the new contract after it did not comply with rules over pension funding. It has challenged the bar.

FirstGroup Chief Executive Officer Matthew Gregory said the joint venture was committed to delivering a range of improvements on the West Coast mainline, which he said had been one of the most consistently successful franchises over the last 20 years.

“The West Coast Partnership’s first phase allows us to earn returns on the significant investments in services and facilities for passengers but protected by a much improved revenue risk sharing mechanism,” he said.

“This will transition to a management contract in the second phase, ensuring we can really focus on using the respective skills and experience within our joint venture to deliver the desired benefits of the HS2 project for passengers and the country.”

First Trenitalia will pay 1.6 billion pounds real net present value in premiums to the government over the first phase - from Dec. 8, 2019 to March 2026.

“Today’s award confirms that, from December 2022, passengers will benefit from 263 extra train services every week,” the Department for Transport said.

In the first phase, First Trenitalia will operate existing InterCity West Coast services while providing design, development and mobilisation services as “shadow operator” to the HS2 programme.

First Trenitalia will then operate HS2 and the reshaped InterCity West Coast rail services together as an integrated operation in the second phase, from March 2026 until March 2031.

The government will shortly launch a review into HS2, and the contract has been designed in order to comply with the review’s outcomes, such as changing the scope of the multibillion-pound project or cancellation.

Passenger revenues, which were 1.2 billion pounds in 2018-19, are expected to increase at a mid-single digit annual rate over the first phase, lower than the historic growth rate of the franchise over the last 10 years, the company said.

FirstGroup, which already operates the Great Western (GWR), South Western and TransPennine Express franchises, said it would not seek additional franchises other than its negotiations to extend GWR.

Shares in FirstGroup were trading down 1.2% at 114 pence at 1145 GMT.

Analyst Gerald Khoo at Liberum said he had expected “a muted positive reaction at best, with investor scepticism likely following past loss-making rail contracts, and only partially mitigated by an end to bids for further franchises aside from seeking to extend GWR”.

Reporting by Tanishaa Nadkar in Bengaluru and Paul Sandle in London; Editing by Gopakumar Warrier and Mark Potter

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