Some train companies are obliged to make fixed payments of tens of millions of pounds to the government next year regardless of revenues while others have negotiated some protection against losses but will not see the benefits before 2011.

"There is now widespread acceptance that the current UK recession will mean rail operators are faced with potentially loss-making portfolios in our view," says Jamie Rowbotham, bus and rail analyst at Morgan Stanley.

"To prevent operators from walking away, we believe the Department for Transport (DfT) is likely to take action."

Falling passenger numbers and revenues because of recession and growing unemployment is something the companies have not experienced since rail privatisation in the mid-1990s.

And the sudden economic turnaround is certainly not something they took into account when bidding huge prices for their franchises two years ago.

National Express's East Coast Main Line and Stagecoach's South West Trains -- both of which serve the London commuter market -- are two franchises seen by analysts and rail industry sources as particularly vulnerable to a downturn.

Both National Express and Stagecoach agreed when negotiating the franchises to pay the government a premium to anticipated revenue during the latter part of the operating term.

National Express must pay the government 87 million pounds in 2009 and 140 million pounds next year, while Stagecoach owes 40 million in 2010, according to research by Collins Stewart.

Meanwhile Arriva's Cross Country routes -- which run between Aberdeen in north-east Scotland to Penzance in south-west England -- must share revenues made above certain targets with the government, but must wait until 2011 to share any losses under the so-called 'cap and collar' scheme.

"Revenue momentum is decaying rapidly, and we're over a year away from revenue protection," says Collins Stewart analyst Andrew Fitchie, adding that the companies are bound into contracts with no obvious get-out clause.

The franchises were negotiated based on revenue targets that are undisclosed to the public, but they are certain to reflect recent boom times that even last year saw passenger volumes grow at just under 5 percent, according to the Association of Train Operating Companies (ATOC).

Jamie Rowbotham is predicting a 3 percent fall in rail and bus passenger volumes in 2009, based broadly on an expected rise in unemployment.

If passenger revenue falls to those levels while the premium paid to the government stays the same, both National Express and Stagecoach in particular could be sitting on heavy losses and may turn to the taxpayer for help.

National Express is already expected by analysts to see pretax profit before exceptional items fall from an estimated 195 million pounds in 2008 to 124 million in 2010, according to Reuters estimates.

Meanwhile the company has seen its net debt soar from 438 million pounds in 2006 to a forecast 1.1 billion in 2008, according to Morgan Stanley.

National Express is due to report 2008 results on February 26, and declined to comment as it is in a close period. JP Morgan analyst Damien Brewer said in a note this week that the firm may need at some point to launch a rights issue to cope with its rail situation.

AGREEMENT TO BE STRUCK

Any government support to rail operators would enrage trade unions and passengers already upset by a perceived combination of high profits and poor service from the major train companies, and the DfT's current stance is not to budge.

"The franchises are not re-negotiable," a spokesman for the DfT told Reuters.

But analysts and rail insiders believe the government may be forced to take action if it looks likely that an operator will default on a franchise, potentially bringing key commuter routes to a grinding halt.

"It is in no one's interest to let franchises go out of business, so the reality is an agreement will be struck to make sure the railways continue to operate," says a spokesman for

ATOC.

He would not comment on what the industry was likely to demand, arguing that the impact of the recession on rail travel is still unknown.

However, rail industry insiders say asking government to bear a share of the losses as under the cap and collar scheme already in some franchise agreements could be high up the list of priorities.

"That is possibly what they will do. The government would not take a franchise back in house (in the event of a default) -- it can't manage it, it has no experience," one source says.

Analysts believe the cap and collar clause could form the basis for a compromise.

"The government will be loathe to countenance a material change of the franchise terms. However, the cap and collar system provides the basis for delivering a little bit more government support. This would be more politically acceptable (than a bail-out)," says Blue Oar transport analyst Douglas McNeill.

Spokesmen for Stagecoach and Arriva both said they would continue to operate under the terms of the contracts.