The former chief executive of GNER, the struggling British train operation, has warned that the market for rail franchises will "self-destruct" because bids are getting too high.

Christopher Garnett, who surprised the rail industry by stepping down last month, said the government would be forced to decide the future of the east coast mainline. GNER agreed to pay the government £1.3bn over 10 years but it is struggling to meet the payments, with revenue growth only a third of what it had expected.

"If you ask me where GNER is going to be in a year's time, I really don't know. The only people who will actually decide that will be the government," he said.

Mr Garnett said the franchise market was unsustainable because the winning bids have low margins, reflecting the pressure to win highly competitive franchise contests. Last week Stagecoach renewed the south-west franchise, which includes the UK's busiest commuter routes, with a £1.2bn bid. It came 10 months after FirstGroup won the Great Western network for £1bn.

"Franchise bidding has got too tight. The margins are too slender, but the trouble is every train company says, 'You've got to win it' - and bids accordingly. We had to win GNER," said Mr Garnett.

"It's going to take some pretty spectacular failures, I think, before people move the margins. The market will self-destruct as bidders bid to win on ever-tighter margins. When it goes wrong, it's going to come right back to the Department for Transport."

GNER's parent company, Sea Containers, is also in financial difficulties having breached its banking covenants. GNER has blamed its own financial shortfall on the effect of the July 7 bombings on travel to London, increased electricity costs and slow GDP growth. It also faces a new competitor in Grand Central, which will run London-bound services on the east coast line.

A spokesperson for GNER said the company was not seeking to renegotiate the franchise, but was in talks with the government over its revenue shortfall: "It is no secret that we are below our revenue growth forecasts and that we are discussing the shortfall with the government. Christopher Garnett was expressing personal views and they do not reflect the view of GNER."

See also:

GNER is no longer sustainable, says man who ran it

The Times: September 26, 2006
By Ben Webster, Transport Correspondent

THE Government will be forced to step in and dictate the future of Britain’s flagship rail franchise, according to its former chief executive, who resigned suddenly last month.

Christopher Garnett, who ran GNER after its inception a decade ago, said that financial problems on the London-to- Edinburgh franchise were so severe that it was no longer sustainable under the terms agreed last year.

GNER, owned by Sea Containers, the shipping and rail group that is in breach of its banking covenants, began a new ten-year contract in April last year. It agreed to pay the Government £1.3 billion over the course of the franchise, which is believed to have been at least £300 million more than the next-highest bidder was prepared to pay.

Sea Containers admitted last month that revenue growth in the first year of the new GNER franchise, at 3.3 per cent, had been only a third of what it had expected. It blamed the July 7 bombings for deterring travellers to London, a big increase in electricity costs for running trains, lower-than-predicted growth in GDP and competition from its rival operator Grand Central.

Mr Garnett told Rail magazine: “If you ask me where GNER is going to be in a year’s time, I really don’t know. The only people who will actually decide that will be the Government.” Other train companies were also making bids with very low margins that could prove unsustainable, he said. Bidding teams were under pressure to win franchises.

“Franchise bidding has got too tight. The margins are too slender, but the trouble is every train company says ‘You’ve got to win it’ — and bid accordingly. We had to win GNER.

“It’s going to take some pretty spectacular failures, I think, before people move the margins. The market will selfdestruct, as bidders bid to win on ever-tighter margins. When it goes wrong, it’s going to come right back to the Department for Transport.”

GNER distanced itself from Mr Garnett’s comments. It said: “That’s Christopher’s view, not the company’s view.” However, it said that GNER needed to discuss its lower-than-expected revenue growth with the department.

See also:

Ex-GNER boss warns rail market will self-destruct

Edinburgh Evening News: 26 Sep 2006

TRAIN companies vying to win contracts are working to margins that are virtually unsustainable, GNER's former chief executive has warned.

Christopher Garnett, who quit as head of the London-Edinburgh main line operator suddenly after a decade at the helm, also suggested the agreement GNER made with the Government last year for its latest ten-year franchise made the operator no longer financially viable.

He claimed that if action was not taken, the train franchise market would "self-destruct" as train companies were being forced to make bids that gave them very low margins to work with.

GNER, which is owned by shipping and rail group Sea Containers, paid £1.3 billion for the London-Edinburgh contract last year - thought to be around £300 million more than the next highest bidder was prepared to pay.

Mr Garnett said in an interview with Rail magazine: "Franchise bidding has got too tight. The margins are too slender, but the trouble is every train company says 'You've got to win it' - and bid accordingly. We had to win GNER.

"It's going to take some pretty spectacular failures, I think, before people move the margins. The market will self-destruct, as bidders bid to win on ever-tighter margins. When it goes wrong, it's going to come right back to the Department for Transport."

Sea Containers admitted last month that revenue growth in the first year of the new GNER franchise was three times lower than expected, at 3.3 per cent.

Comments

1. Chris / 12:34pm 26 Sep 2006

Seems they have gone from one extreme to another. The first franchises paid out huge amounts in subsidy while now the government expects lots of revenue coming in. Guess who will get to pick up the tab for all this when it all goes wrong - yes the good old taxpayer with the lawyers, accountants and con-sultants (sic) making a fortune no matter what happens

2. PD, Glasgow / 4:50pm 26 Sep 2006

Over greedy when in charge - over critical when not!!

3. Andrew, Cumbernauld / 4:52pm 26 Sep 2006

We already have a "Network Rail" 'owning' and maintaining the track - how about a "Britain's Railways" actually running the services???