Virgin Rail loses franchise
SIR RICHARD Branson has threatened to pull his Virgin Group out of running any UK rail services in the future after losing the lucrative West Coast franchise to FirstGroup, the UK’s biggest bus and train operator by revenues.
The UK government awarded FirstGroup the franchise for just under 14 years after it bid £9.6 billion for the contract, putting it well ahead of Virgin Rail’s bid of £8.6 billion.
The decision to award the contract to FirstGroup means Virgin will lose its only hold on the UK rail market at the end of this year. Virgin Rail, a joint venture between Virgin Group and Stagecoach, has operated the London to Glasgow route since 1997.
Sir Richard criticised the government’s decision to award the franchise to its rival, labelling the decision “insanity”, and said the way the government assessed the bids had to change.
He compared it with the East Coast franchise award, which saw Virgin Rail lose to National Express in 2007 only for the government to take over the operation two years later.
“We also did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise, as happened to who overbid on the East Coast mainline. Sadly, the government has chosen to take that risk with FirstGroup.”
Virgin Rail now has 10 days to decide whether to mount a legal challenge. Sir Richard said: “I think under the current system you will be seeing the end of Virgin trains in the UK.”
Tim O’Toole, chief executive of FirstGroup, rejected Sir Richard’s accusations as sour grapes.
He added that FirstGroup’s bid would stand the test of time and insisted it was “a growth story” that “would provide better service for customers and a better return for the government”.
FirstGroup said it expected to earn an operating margin of 5 per cent, and estimated that the new franchise would generate a compound annual revenue growth rate of 10.4 per cent, higher than many analysts’ forecasts.
“The double-digit revenue growth forecast looks aggressive and significantly higher than Virgin Rail’s 8.5 per cent. We believe there are substantial risks in respect of revenues falling short of expectations,” said Gert Zonneveld, analyst at Peel Hunt.
FirstGroup shares fell more than 6 per cent in London yesterday to 243.2p.
Keolis of France and Abellio of the Netherlands also bid for the franchise. – (Copyright: 2012 The Financial Times Limited)