Transport officials plan to replace the east-coast deal, struck with National Express just over two years ago, with a management contract, under which the company would operate the line for a fixed fee. It may then be relet to a new operator at a later date.

The east-coast line, which links London to Edinburgh via York and Leeds, carries 17m passengers a year and employs 3,100 staff.

National Express beat fierce competition to take it over, promising to pay nearly £2 billion in premiums back to the government over eight years. But recession has left the company struggling to make money from the route.

The government, led by rail minister Lord Adonis, has rejected requests for a renegotiation of the franchise.

Rail-industry sources said a meeting on Thursday between Ray O’Toole, National Express’s UK chief executive, and Mike Mitchell, the top rail official at the Department for Transport (DfT), resulted in an outline agreement for the franchise to be suspended and replaced with a contract under which National Express would receive a flat management fee.

Removal of the uncertainty should clear the way for a £400m fundraising by National Express . It has just over £1 billion in loans, with £484m to be refinanced by February.

A £400m rights issue is seen as the most likely option, but it is understood that some shareholders have demanded management change before agreeing to support an injection of new equity.

Insiders say Richard Bowker, National Express’s chief executive, may come under pressure from those unhappy at how the east-coast deal has played out. Bowker faces investors at the company’s annual meeting on Wednesday.

National Express would not give details of its discussions with the DfT. “All train-operating companies have regular meetings with the DfT and as a company we never talk about in public what we discuss in private,” it said.

The DfT said: “As we have made clear on numerous occasions we do not renegotiate franchises.”

See also:

National Express feels the heat over East Coast line

Daily Telegraph: 03 May 2009
By Alistair Osborne

Richard Bowker, the National Express chief executive, will this week face investor calls to come clean over the future of its East Coast Main Line train franchise and the group's creaking balance sheet.

The bus and rail operator holds its annual meeting on Wednesday amid shareholder concern over Mr Bowker's punchy East Coast bid. National Express undertook to pay the taxpayer £1.9bn between now and 2015 for running the service, with payments rising from £86.9m to £140m in the year to March 2010. Such premium
payments were predicated on bullish forecasts for passenger growth, now hit by the recession.

The situation has been compounded by the requirement to refinance a €540m (£480m) loan by September 2010, which may require a similar sized rights issue.

However, investors will not back a cash-call until they are clear over National Express's strategy for curing its East Coast headache. Some investors may also call for Mr Bowker's scalp as the price for participating in any rights issue.

Weekend reports suggested that National Express was negotiating a deal with the Government to turn the East Coast franchise into a management contract – whereby the company merely covers its costs.

However, the Department for Transport appeared to suggest that any such deal could only be short-term, with the franchise being relet, because of its ongoing policy not to renegotiate franchises.

A DfT spokesman said: "As we have made clear on numerous occasions we do not renegotiate franchises."

National Express would only say: "We do not comment on rumours and speculation."

One senior rail industry source said: "With a refinancing coming down the track, National Express has only two choices: sell assets or do a rights issue. However, it would be difficult to do a rights issue with an open-ended liability like the East Coast, while retaining the same chief executive."

See also:

National Express in talks over scrapping east coast franchise

Guardian Online: Sunday 3 May 2009
Dan Milmo

National Express is in talks with the Department for Transport to scrap its east coast rail franchise after admitting that the £1.4bn contract is unsustainable.

It is understood that the rail and bus group is preparing to switch the franchise to a management contract, which will see it operate the London-to-Edinburgh route for a fixed fee. If a deal is agreed, National Express will become the first casualty of a downturn in the rail market that is threatening several franchises.

The group won the east coast franchise in August 2007, days after the French bank BNP Paribas signalled the beginning of the credit crunch. National Express committed itself to paying £1.4bn in excess profits to the government by 2015 with an annual payment schedule that rises from £85m last year to £395m by the end of the contract. However, the recession rendered the contract untenable and an outline agreement between the group and the DfT to scrap the franchise was reached last week. National Express is expected to follow the deal with a £400m rights issue to help reduce debts of more than £1bn.

The DfT and National Express declined to comment today but rail industry sources said they expected the contract to be retendered, with the management contract representing a short-term fix for the government. The National Express chief executive, Richard Bowker, said that the east coast franchise would secure a much smaller windfall for the taxpayer if it was put back on the market.

Meanwhile, the competition for another major franchise has narrowed to three companies exposed to the industry downturn after the government sidelined a train operator that has so far survived the recession unscathed.

It is understood that NedRailways UK, a subsidiary of the Dutch national rail service, has failed to convince with its bid for the Southern franchise that operates the London-to-Brighton route. The selection process for Southern appears to have been pared down to National Express, Stagecoach and Go-Ahead Group.