Arriva said it had committed to cutting the 1.056 bln stg support for Cross Country, which equates currently to about 30 pct of revenues, to 'almost zero' before the end of the eight year, four month deal.

The company said it plans to hit its target by generating substantial revenue growth from an expected 40 pct increase in passengers. It expects annual revenue to exceed 600 mln stg in the franchise's first full year, including support payments.

However, it warned passengers to expect fare increases, with the cost of the most flexible walk-on tickets expected to rise on average by 3.4 pct plus inflation a year.

'For those people who need ultimate flexibility, there is a price to pay,' the company's Steve Clayton told journalists in a conference call.

The UK government has courted criticism from passenger watchdogs by forcing operators to meet tough premium payments and cuts in subsidy.

The policy has already resulted in the early termination of Great North Eastern Railway's 10-year franchise after the Sea Containers-owned company succumbed to difficulties in meeting its 1.3 bln stg premium.

Transport analyst Douglas McNeill at Blue Oar Securities said Arriva is likely to have factored a margin of error into its franchise plan to avoid a repeat of the problems that plagued GNER. Growing passenger numbers should enable it to meet its targets, provided its contingency planning is effective and it does not face any major unforeseen problems, he said.

McNeill said the deal showed the UK's Department for Transport (DfT) was adopting an increasingly revenue-driven approach to awarding franchises in the face of higher rail costs and pressure to ease overcrowding.

'The DfT is trying to maximise the revenue it gets from rail franchisees, which manifests itself in higher premium payments or sharply-reduced subsidies,' he said.

'Cross Country is a case in point and so was (the South Eastern franchise), which puts upward pressure on operators to raise cash from passengers and therefore to raise fares.'

Arriva's shares stood 56.5 pence, or 7.9 pct, up at 770 p by 3.24 pm.

Broker Collins Stewart said it expected the deal to boost Arriva's earnings per share in 2008 by more than 10 pct.

'For now, we see our Arriva fair value sum-of-the-parts rising from 718 p to 760-770 p,' Collins Stewart said in a note.

Arriva said it intends to refurbish 40 Intercity 125 carriages, to launch more discounted fares and to introduce new ticketing technology as part of its plans for Cross Country, which is currently run by a Virgin and Stagecoach Group PLC joint venture.

Investment in the franchise will be about 30 mln stg, excluding the cost of refurbishing the HSTs, which contrasts with a 1 bln stg investment in a fleet of 78 new Voyager trains when Virgin Trains took over the franchise following the privatisation of British Rail in 1996.

An Arriva spokesman stressed that it would continue to run the Voyagers, which are currently leased to Virgin. Arriva plans to rebrand the trains and to change their interiors to provide more luggage space.

The group said the extra trains and modifications to the Voyagers would help to increase seating capacity by 35 pct in the critical evening peak on main routes by June 2009.

There will also be extra services, cheaper fares easier to obtain closer to the point and time of travel, improved ticketing and booking systems and at-seat catering on all routes.

Rail watchdog Passenger Focus welcomed the announcement, saying the planned improvements 'should make a big difference to passengers'.

However, it warned that its National Passenger Survey had shown that nearly one third, or 29 pct, of passengers currently using the service do not feel they get value for money.

'We are pleased Arriva has published a ballpark figure for possible unregulated fare rises, but this means some prices may rise by more than 50 pct over the length of the franchise,' the watchdog said in a statement.

'This makes it all the more important that affordable, off-peak turn up and go fares are protected.'

A DfT spokesman defended fare rises by rail operators, saying they are required partly to reinvest in the network, but stressed that the DfT does not want 'to price people off the railways.'

The franchise will run from Nov 11, 2007 to March 31, 2016, with the last two years and five months conditional on achieving performance targets.

It will cover Cross Country's existing routes between north east Scotland, Cornwall and south Wales, as well as the Nottingham-Cardiff and Birmingham-Stansted Airport routes currently run by National Express Group franchise Central Trains.

'Arriva's new Cross Country operation will support growth in regional travel by rail, help to ease congestion and contribute to improving the UK's environment,' chief executive David Martin said in a statement.

See also:

Arriva races ahead on Cross Country rail franchise win

Citywire: 10 July 2007
Colin McClelland, Shares Editor

Arriva steamed to the top of the FTSE 250 in morning trading after the Department of Transport awarded it the new Cross Country rail franchise estimated to be worth £63 million.

The shares raced ahead 69.5p or 9.7% to 783p before easing back to 59.25 or 8.3% firmer at 772.75p.

The franchise running from Aberdeen to Penzance and from Stanstead to Cardiff covers about 1,500 miles and 100 stations.

Arriva (ARI), one of the largest bus and rail operators in Europe, hopes to earn revenue of £600 million in its first year of the contract from 11 November 2007 to 31 March 2016. Government subsidies are to total £1.056 billion during the contract's life.

Merrill Lynch retained its neutral recommendation but estimated the franchise could be worth £63 million in profit a year plus an additional 3.8% upside for Arriva.

The company plans to invest £30 million in the franchise, excluding plans to boost seats in peak travel times by 35% by June 2009. Instead of buying new trains, this will be achieved by re-introducing 40 refurbished former Intercity High Speed Train carriages.

The five diesel trains are 30 years old but the company vows they will be made state of the art with wireless internet connections for all passengers and at-seat catering.

The company also plans to invest in ticket machines at stations, in internet service so that tickets can be printed at home and in more staff.

In contrast, Virgin Trains invested about £1 billion when it took over the franchise after the privatisation of British Rail in 1996. Virgin operates the franchise in a joint venture with Stagecoach (SGC).

The cost of most flexible walk-on fares would be increased by about 3.4% plus inflation, the company said.

It planned to upgrade information and station staff help at Birmingham which would be the franchise hub, the company said. There has been criticism that too many passengers would have to change trains there instead of a long-haul across the country configuration.

Arriva chief executive David Martin said the company’s research had shown areas to improve passenger service and business efficiencies.

‘With innovations in technology, and expertise which benefits from our existing success in rail operations in the UK and across mainland Europe, we are confident of meeting both rising demand and passengers' rising expectations for quality of service,’ Martin said in a statement.

Arriva operates Trains Wales until 2018, and has been short-listed for other rail franchises in the East Midlands and the InterCity East Coast which is currently run by the Sea Containers arm GNER.

Group revenue rose 10% to £1.73 billion in the year to 31 December against £1.57 billion in 2005. Operating profit rose 8% to £127.6 million against £117.8 million. Pre-tax profit increased to £109.8 million from £103.1 million, slightly ahead of expectations.

See also:

Arriva Plc Gets Cross Country Rail Franchise With GBP 1.056 Bln Subsidy From UK Department For Transport

RTT News: 7/10/2007

UK-based bus and rail operator Arriva Plc revealed that it has received a contract from UK Department for Transport, or DfT, to run the new Cross Country rail franchise, the most extensive rail franchise in the UK. In a separate communiqué, DfT said it will pay a subsidy of GBP 1.056 billion to Arriva to run the franchise for eight years and four months, from November 11, 2007 to March 31, 2016. According to DfT, the new franchise combines most of the existing Cross Country franchise currently operated by Virgin Cross Country and some services currently operated by Central Trains.

Arriva said it will run the franchise under a new CrossCountry brand and livery. The center of operations will be in Birmingham. The company said the franchise covers around 1,500 route miles and calls at over 100 stations. The network extends across Britain from Penzance to Aberdeen, from Cardiff to Stansted Airport and from Manchester to Bournemouth.

Arriva said the last two years and five months of the franchisee-running period are conditional upon achieving agreed performance targets. The company anticipates annual revenue to exceed GBP 600 million in its first full year, including franchise support payments. According to the company, the franchise support payments reflect the current inability of the franchise to cover its operating costs through fares alone. However, Arriva said it is committed to reducing government support on the franchise to almost zero before the end of the franchise by supporting growth in passenger numbers and improving the quality of services.

According to Arriva, its successful bid for the franchise featured certain benefits for travelers, such as 35% increase in seating capacity by June 2009 in critical evening peak on principal routes, and at-seat catering on all routes for all passengers, not just First Class. The benefits also include radical improvements in ticketing and reservation booking, including home printing of tickets and tickets by mobile phone, with discounted tickets available much closer to the start of travel, investment in improved rolling stock, with all other trains refurbished to the standard of the popular Voyagers, the reintroduction of HSTs to provide 550-seat trains on busy routes, and Wi-Fi available to all Voyager and HST passengers, free in First Class.

Commenting on the deal, David Martin, Arriva's chief executive, said, “The Cross Country network has many existing strengths but our stakeholder research has helped us to pinpoint important areas where we can improve the passenger experience and make the business more efficient. Our proposals and substantial targeted investment will make rail travel more attractive and support growth in passenger numbers by increasing seating capacity.

Meanwhile, Rail Minister Tom Harris said, “We have secured an excellent deal with Arriva. Not only are they delivering an even bigger increase in capacity than we asked for, they are doing it a year earlier than expected. I am especially pleased that the new franchisee will connect some of our biggest cities even more effectively.”

The DfT said the Government will continue to limit annual rises of regulated fares in line with national policy. As with all franchises, unregulated fares will be the responsibility of the operator. Arriva pointed out that it will raise unregulated fares by an average of 3.4% above inflation each year.

“Arriva's new Cross Country operation will support growth in regional travel by rail, help to ease congestion and contribute to improving the UK's environment. With franchise support payments almost eliminated by the end of the term, we are confident of providing an excellent result for the taxpayer as well as improved services for passengers and a reasonable expectation of fair returns for the risks borne by our shareholders,” Martin said.

Arriva, with more than 34 thousand employees, is a private sector provider of passenger transport in mainland Europe. The company provides transport services including buses, trains, commuter coaches and water buses in nine European countries, and operations in Poland are due to start later this year.

ARI.L is currently trading on LSE at 771.00 pence, up 57.50 pence or 8.06%, on a volume of 1.1 million shares.

See also:

Arriva wins its biggest ever rail contract

Times Online: July 10, 2007
Steve Hawkes

National Express misses out again as Arriva picks up giant Cross Country franchise from the Department of Transport

Arriva, the transport group, has won its biggest UK rail contract with the £5.4 billion award of the new Cross Country franchise that operates services stretching from Aberdeen to Penzance.

Shares in the group raced nearly 8 per cent as David Martin, chief executive, vowed to cut delays, introduce state-of-the-art internet booking services and increase the number of seats on key peak-evening routes.

Part of the targeted 35 per cent capacity increase will come from the re-introduction of refurbished 30-year old Inter City 125 diesels on the Cross-Country network.

Arriva admitted that some fares could go up by more than double the rate of inflation every year during the lifetime of the nine-year contract but insisted it was a “great day” for passengers.

Mr Martin said: “We are delighted to have been chosen to operate this major franchise, which advances Arriva’s UK presence significantly.”

Arriva’s success is a major blow to Sir Richard Branson’s Virgin Trains, which currently runs Cross Country services and bid for the new franchise.

National Express also bid for the contract, and has now missed out two new franchises in a matter of weeks, following the Department for Transport’s decision to award East Midlands to Stagecoach last month.

Virgin said it was “extremely disappointed” to have lost out, and would seeking a meeting with the DfT to find out why it was unsuccessful.

National Express shares fell 2 per cent to £11.03.

Andrew Fitchie, analyst at Collins Stewart, said there was an increasing risk National Express may end up not winning any of the four franchises up for grabs this summer.

A decision on the new Inter-City East Coast line operator is due this summer.

Mr Fitchie said: “Implicit in the market’s forecasts for National Express is an assumption that they’ll win at least one franchise. With the probability of this happening now reducing, this exposes a risk.”

Arriva already operates most of the train services in Wales but is better known for its extensive bus network across the UK and Europe.

The new Cross Country deal begins in November and the group expects annual revenue of £600 million, helped by a £1 billion government subsidy.

The group believes passenger numbers across the network will rise 40 per cent over the lifetime of the contract, to 28 million.

The Cross Country franchise means that Arriva will be operating some of the longest services in the UK, including Aberdeen to Penzance and Stansted Airport to Cardiff and Stansted to Birmingham.

The franchise covers 100 stations and 1,500 route miles.

The group plans to spend £1 million on more ticket machines and information screens, as well as introducing services to allow passengers to print off tickets at home and receive them over the mobile phone.

See also:

Arriva has won its biggest UK rail contract with the £5.4 billion award of the new Cross Country franchise

Times Online: July 10, 2007
Steve Hawkes

Arriva claims its success in winning the Cross Country franchise marks a “great day” for passengers. It’s not a bad one for shareholders either.

Based on a 5 per cent margin, victory is judged to be worth 45p to the group’s share price, but that benefit has already been surpassed by the gains made by the stock today. Arriva shares rose 55p, or nearly 8 per cent, in morning trading and within sight of January’s five-year high.

The big loser from this year’s franchise shake-up so far is National Express, and it could suffer a series of downgrades if it also misses out in the race for the new Inter-City East Coast contract currently held by GNER - for which Arriva is also in contention.

Around 9 per cent of the NE’s forecast 2008 profits are at risk, matching the uplift many now predict in Arriva’s earnings next year.

The key for Arriva is to ensure it succeeds in delivering the vast improvement in services it is promising - and far beyond routine pledges such as “help and advice for passengers who need to change trains”.

While plans to increase some fares every year by more than double the rate of inflation will be well received in the City, Cross Country passengers will want tangible evidence their money is being re-invested wisely