An announcement on who will run South West Trains, which operates services in and out of London’s Waterloo station, is expected this week.

Rail industry sources said that while Stagecoach, the incumbent on the franchise, was favourite, there was still a possibility that the deal could go to one of its rivals. Stagecoach is bidding against First Group, Arriva, and a joint-venture between MTR, the Hong Kong transport company, and National Express.

“I think Stagecoach is favourite because it is the incumbent and will have a much stronger inside knowledge of the business than the other bidders,” said one rail industry executive.

South West runs more than 11,000 trains a week and carries 400,000 people a day, many of them City workers. It was one of the first passenger franchises to be created in the break-up of British Rail, being awarded to Stagecoach in 1996.

The bidding battle for South West has been closely followed by the rail industry. The franchise has in the past been regarded as one of the most lucrative, and contributed £58.9m of Stagecoach’s £159m operating profits last year.

But bids for franchises have become much more competitive in recent years. Transport companies are also mindful of the recent cautionary tale of GNER, which made an ambitious bid to retain its franchise only to run into financial trouble when its revenue projections proved faulty.

Stagecoach’s shares rose 6.3% last week to close at 126Åp. Analysts said this was in part caused by hopes of a win in the South West contest, but also by the expectation of a major return of cash to shareholders. The company has in the past year offloaded several overseas assets, and recently sold its London bus operations to Australian bank Macquarie. Merrill Lynch thinks the firm could return as much as £235m.

Meanwhile, Virgin Rail, a joint venture between Stagecoach and Virgin, is in the final stages of negotiations with the government over a rejigging of its West Coast franchise.