Chris Garnett also predicted big rises in non-regulated fares over the next two years, saying: "We are charging people more and more, and they are going to have fewer and fewer seats."

Mr Garnett's outburst on Friday came after he had learnt that the Office of Rail Regulation (ORR) had backed plans for rival Grand Central to run the Sunderland services, preventing GNER from running services to Leeds.

Mr Garnett said the Government had effectively "mis-sold" the East Coast Main Line franchise, for which GNER paid £1.3 billion last year, and that the ORR's decision would damage the railway. He added that he did not know how long the present system could last because of its "enormous exposure to Government ministers". The GNER boss said that Grand Central's takings would come out of GNER's profit. "If you said what is basic fairness, what is franchising meant to deliver, it ain't meant to deliver that. And that's not the basis on which we bid, and it's not the basis on which the Department told us to bid," he said.

Mr Garnett said that GNER was taking legal advice, and is thought to be looking for a rebate of at least £100 million on the £1.3 billion it paid.

Ministers are understood to have been "disappointed and surprised" by the ORR's ruling.

Industry analysts say that the ORR's ruling will make large rail operators think twice when bidding for premium franchises.

See also:

GNER chief attacks franchising process

Independent Online:?29 March 2006
By Barrie Clement, Transport Editor

The head of one of Britain's flagship rail routes has condemned the Government's whole franchising process and accused ministers of misleading him over his network's potential profitability.

At a private lunch meeting Christopher Garnett, the chief executive of Great North Eastern Railway, let rip on a range of issues, accusing Whitehall of exercising an "extraordinary" amount of control over the industry and warning of fares rising "quite heavily" in the next few years.

Addressing industry leaders, Mr Garnett tore into the decision of the Office of Rail Regulation last week to deny GNER extra services on the East Coast main line route.

He said the ruling that an "open access" operator should gain slots instead would mean the Government would not get the ?1.3bn premium over 10 years agreed in the franchise deal. Under government "open access' policies a company can apply to run services on routes already covered by a franchise.

The regulator's decision had not only undermined GNER, it damaged the industry and cast doubt on the viability of other franchises such as that covering the South West main line, run by Stagecoach.

The Department for Transport had let the East Coast franchise on the basis that bidders should "ignore" any threat from open access operators despite the fact the Government's policies provided for such competition.

Speaking at a lunch organised by Modern Railways magazine on Friday, Mr Garnett said: "The DfT are letting franchises on the basis of saying 'ignore open access', yet their White Paper said there is open access."

He said the South West Trains timetable covering the routes out of Waterloo contained "padding" and that open access operators would argue for those slots. He said the decision to allow Grand Central Railway to operate between Sunderland and London on the East Coast line had taken "half the franchise" from GNER.

"That's not the basis on which we bid and it's not the basis on which the department told us to bid." He said since the abolition of the Strategic Rail Authority, an "extraordinary amount of government control" had developed.

If GNER fails to produce the revenue it promised as part of its bid for the franchise, ministers could decide to offer the licence to other operators. But it is doubtful if any other company could fulfill the promise of a ?1.3bn premium without huge rises in fares.

A spokesman for GNER said it would be a "very partial" representation of Mr Garnett's speech to suggest he was attacking the Government. He confirmed GNER was considering legal action over a system which allowed open access operators to bid for slots on the basis of lower charges.

See also:

Government control is harming railways, says train operator

The Guardian: March 29, 2006
Mark Milner

One of the rail industry's leading executives has warned the government it could face a backlash over its tightening control of rail franchising.

Christopher Garnett, the chief executive of train operator GNER, said rail companies were losing the flexibility to run more trains, change timetables and maximise revenue.

"I think there is an extraordinary amount of government control in what we are now doing ... the government lays down the specification in the franchises; the government buys what that specification is," he said.

"What I find slightly distasteful, though, is that having bought what it is they have bought, they then almost deny that that is what they have bought, and start to blame the franchisee."

In a transcript of a speech to rail managers seen by the Guardian, Mr Garnett warned rail fares would rise "quite heavily" over the next few years. "We make no secret that we make about 4% on those fares. That money is all going to the government. And therefore we are filling up our trains all the more. And charging people more and more. And they are going to have fewer and fewer seats."

The GNER chief executive questioned how long the present system could last. "I think what the present system has is enormous exposure to government ministers. They are buying and running the railway. They have got nowhere to hide."

Mr Garnett was speaking to a gathering of railway managers last Friday, the day after the Office of Rail Regulation said it would allow a new operator, Grand Central, to run services on the east coast mainline. The decision infuriated GNER, which claimed it would lose revenues. Mr Garnett said his firm had been encouraged to bid for the franchise on the basis that so-called "open access operators" would not be allowed extra "paths" to run services.