Passenger groups say that the dispute between the train companies and the Government underlined the need for reform of the franchise system. They argue that squabbles over profits stop the network from expanding.

Virgin West Coast and First TransPennine Express, are negotiating with the Department for Transport (DfT) over the delivery of 150 carriages. Demand for both services is at record levels and crowding on them is expected to worsen.

Passenger numbers on Virgin have increased from 15 million in 2004 to 20 million last year. People are forced to stand on one in four of its services, partly because the company ordered too many first-class carriages and not enough standard-class ones.

Passenger numbers on TransPennine have grown by 50 per cent in four years, reaching 18.5 million last year. The worst overcrowding is on peak services into Manchester and Leeds on which hundreds of people are forced to stand for up to an hour.

TransPennine accepted a new fleet of 51 three-carriage trains only last year but the new trains are already struggling to cope with demand. The company is negotiating with the DfT over the addition of a fourth carriage to at least 20 of the trains.

Both companies are demanding a compensation deal for the new carriages, arguing that accepting them will cause disruption and add to maintenance and running costs. In both cases, the carriages would be bought by rolling stock companies and leased to the operators, with the costs partly underwritten by the Government.

Virgin said that it wanted a two-year extension to its franchise, which runs out in early 2012. A spokesman said: “Introducing these carriages would cause disruption to our business. Giving us an extension to 2014 would allow us two clear years of smooth running to make up for that.

“It is generally accepted that whenever something new is introduced on the railways that affects the business, compensation would be paid.”

He said that if a deal were reached the new carriages could be introduced from 2010. If not, passengers would have to wait until after Virgin’s franchise expired in 2012.

A DfT source said the department would not be forced into accepting a deal with a train company that did not offer value for money for passengers and taxpayers.

Passenger Focus, the government-funded watchdog, said that demands for compensation by private rail companies were delaying the expansion of the network. Anthony Smith, the chief executive, said: “The sight of train companies squabbling with the Government over new trains is deeply unattractive to passengers. They don’t care who provides or runs the new trains, they just want to see action now on adding capacity.”

He said that the existing franchise system had been based on the assumption that there would be no significant growth in rail travel.

“There is a weakness in the system because the Government or Network Rail has to pay compensation when it wants to improve the railways. You see the bizarre situation where a train company is compensated when a station is being upgraded even though the work will benefit everybody.”

The DfT is bracing itself for more disputes with other companies as it seeks to introduce a total of 1,300 new carriages by 2014.