The award, announced on Tuesday morning by the Department for Transport, is also a blow to Virgin Trains, the company controlled by Sir Richard Branson’s Virgin Group, which has run the Cross Country franchise since rail privatisation.

Unless it wins the Inter City East Coast franchise, the winner of which is due to be announced shortly, National Express will have only two rail franchises – the One franchise in East Anglia and the C2C commuter service in Essex – after November. The company was the UK’s largest train operator until April last year, when it was overtaken by FirstGroup, which also qualified as a bidder for Cross Country.

The decision is a major boost, meanwhile, for Arriva, which currently has only one UK rail franchise, Arriva Trains Wales. The Dft said Arriva would take over the franchise for eight years and four months from November 11 this year and would receive a subsidy of £1.06bn.

Shares in Arriva were up 8 per cent, or 571⁄2p, at 771p in mid-morning trade, while National Express shares fell 14p, or 1.3 per cent, to £11.07.

The new cross-country franchise is part of a major remapping of the UK’s rail franchise map intended to fit rail franchises more closely to the internal structure of Network Rail, which owns and operates the UK’s track and signals. The franchise will consist of most of the existing Virgin CrossCountry operation, except for some Birmingham-Scotland and Manchester-Scotland services, which will transfer to other operators. It will also include four services currently part of National Express’s Central Trains franchise, which is being abolished – Cardiff-Nottingham; Birmingham to Nottingham; Birmingham to Stansted Airport and Birmingham to Leicester.

Arriva would provide 35 per cent more capacity on the route by 2009, the DfT said. Most of the new capacity would be delivered during a timetable reorganisation in December 2008.

National Express’s leading position in the UK rail market has been lost largely because many of the franchises the company ran – including Wessex Trains, Gatwick Express, Midland Mainline, Central Trains, Silverlink and West Anglia Great Northern – have been abolished in reorganisations. It also lost out to FirstGroup in bidding for the last award of the Scotrail franchise in Scotland.

Ironically, the reduction in the number of rail franchises started when Richard Bowker, now National Express chief executive, was chairman of the now-abolished Strategic Rail Authority.

National Express now badly needs to win the East Coast franchise, also expected to start from this autumn, and is thought to have put an especially concentrated effort into securing the franchise.

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National Express will pay a penalty for prudence

Financial Times: July 10 2007
By Andrew Hill

Two types of barbed comment were aimed at Richard Bowker when he was named chief executive of National Express in May 2006. One was that his experience heading the old Strategic Rail Authority would somehow put the company on a fast track to victory in the forthcoming award of rail franchises. The other was that he was a boss with a two-track mind – his pre-SRA experience included running Virgin Rail and working at London Underground – who would only be interested in the group’s rail business.

The first accusation always looked far-fetched, given that Mr Bowker made few friends in government while at the SRA, but any remaining conspiracy theorists can now rest easy: there is no hint so far that the ex-regulator is winning favour for National Express.

On Tuesday, the transport group lost out to Arriva in the bid for the Cross Country franchise. Collins Stewart estimates that if it also fails to win the Inter City East Coast line, £12m will be knocked off the £37m of forecast pre-tax profits for 2008 attributable to rail – 9 per cent of National Express’s overall profit.

That would be awkward for Mr Bowker – who, as SRA chief actually initiated a policy of cutting rail franchises (including some of National Express’s) – but it would mean he could concentrate on seeing off the other railwayman jibe. Indeed, he has little choice now but to emphasise the fine prospects and higher margins of the group’s coach and bus operations in the UK, US and Spain.

It is still possible that the prices being paid for the abundant cash flow generated by UK rail franchises are out of kilter with economic reality. The cap-and-collar system – another Bowker innovation at the SRA – limits the damage if a rail operator has miscalculated (and the benefits if the government has). But though it mitigates the risk of calamity, it does not eliminate it and the government looks less willing these days to step in and rescue the extravagant. If rival operators turn out to have overbid, then the City may in time welcome the rebalancing of National Express. Mr Bowker’s problem is that evidence that he has been prudent could be slow coming. Meanwhile, rail is picking up steam.