The Commons transport committee said operators were making profits in good times but forcing the government to step in when revenues fall.

And they charged "unacceptable" fare rises of up to 11% above inflation.

The Association of Train Operating Companies said four-fifths of passengers bought discounted tickets.

The MPs urged the government to run East Coast trains itself.

They said nationalisation could be a way of comparing the performance of the public and private sectors.

The report found operators had exploited a loophole to charge "unacceptable" fare rises.

Passengers had to go to "extraordinary lengths" to get cheap fares and that fares had risen out of all proportion to the rest of the economy, it said.

Tighter rules will now tie all prices to inflation plus 1% - resulting in cheaper fares by next January.

"The franchise mess is beyond reform and the only real solution is a return to public ownership of railways" - Bob Crow, RMT general secretary

The committee's Labour chairwoman Louise Ellman said: "The fare rises we saw this year were excessive.

"Companies cream off profits in good times, but leave passengers to pick up the bill when hard times hit."

The report found the current structure had allowed rail operators to hike-up prices at the worst possible moment.

But Mrs Ellman said the price formula that allowed companies to take advantage in 2009 would remain in 2010 - when changed economic conditions should have the opposite effect.

Transport Secretary Lord Adonis has now closed a loophole which allowed train companies to increase prices of certain journeys if average fares remained within rules.

'High profile failure'

Mrs Ellman said: "We are pleased Lord Adonis has decided to tighten the rules and to hold firm in face of pressure from operators.

"The system which allowed unreasonable fare rises this year will be kept in place next year when it will be disadvantageous to train operators."

The MPs pointed to the "high profile failure" of operators GNER and National Express as evidence of underlying problems.

Shadow transport secretary Theresa Villiers said: "Rail users will not welcome the conclusion of this report which is scathing about the way Labour has run the rail franchising system.

"The government has failed to tackle the problems on our railways, creating a franchise system which resorts to pricing passengers off the railway to deal with overcrowding."

"The system is run in a fragmented fashion by companies whose principal aim is profit" - Penny W, Exeter

Bob Crow, general secretary of the RMT union, said: "This report exposes the chaos of the franchise system.

"The franchise mess is beyond reform and the only real solution is a return to public ownership of railways."

Peter White, professor of public transport systems at the University of Westminster, told the BBC that franchising was a delicate balancing act.

"If franchises were awarded for a longer period of time, that could have substantial benefits," he said.

"For example, they could invest in improved ticketing systems such as smartcards.

"But the problem is that if you've made a long-term franchise commitment and the company runs into difficulty, you must have some means of curtailing that franchise over a shorter period."

Lord Adonis said reforms to improve the rail franchising system were being considered - including longer franchises.

The "risks and rewards" of the rail industry are shared between operators and the government, he said.

He said: "When the rail franchising system was examined by the National Audit Office last year they found that it was delivering good value for money, and steadily improving services.

"The government will consider the committee's report and respond fully in due course."

See also:

Rail franchising criticised as a muddle

Financial Times: July 27 2009
By Robert Wright, Transport Correspondent

The current system of rail franchising is a muddle that has not served passengers' best interests, a parliamentary committee says in a report issued today.

Publication of the Rail Franchises and Fares report by the Commons transport select committee follows the announcement by National Express on July 1 that it would be forced to default on its obligations under its east coast rail franchise . The Department for Transport (DfT) has said that, when that happens later this year, it will temporarily take over operation of the franchise .

According to the report, National Express's problems on the east coast - along with the withdrawal of GNER, the previous franchisee on the route, from its contract in December 2006 - are "indicative of the underlying problems in the current franchising model".

The MPs' report is the latest contribution to a growing debate over the future of the rail franchising system, under which private companies are awarded the exclusive right to run passenger trains on certain routes in return for agreeing either to pay the DfT a set sum or to accept a set subsidy each year.

The DfT has announced its own inquiry into the system's future, and will consider awarding franchises longer than the current seven to 10 years. Michael Roberts, chief executive of the Association of Train Operating Companies, has also called for reform.

The report claims other franchises could be facing similar financial difficulties, citing Stagecoach Group's dispute with the Department for Transport over its South West Trains franchise .

Stagecoach has insisted its problem, which could cost it £100m if unresolved, results from mistakes by the DfT rather than fundamental financial problems.

See also:

MPs call for radical overhaul of rail franchises

Guardian: 27 July 2009
Dan Milmo, transport correspondent

• Transport secretary Lord Adonis pledges to reform system
• Stagecoach linked to bid for National Express

The failure of National Express to retain the east coast mainline franchise has triggered a takeover battle

The government pledged to reform the rail franchise system yesterday as Stagecoach became the latest public transport group to be linked with National Express, owner of Britain's biggest rail contract.

Lord Adonis, the transport secretary, said he would consider longer franchises after severe criticism from MPs in a report published today that describes the rail network as a "muddle".

National Express is expected to hand back the east coast main line franchise later this year after admitting that it cannot afford a contract that requires payments of £1.4bn to the government by 2015. The admission, and the departure of Richard Bowker, the train operator's chief executive, have left the company in disarray and sparked a potential takeover battle.

Stagecoach was linked with a bid for National Express yesterday, less than a week after FirstGroup renounced its interest. Sources close to the situation now expect Stagecoach to come under pressure from the Takeover Panel, which oversees mergers and acquisitions in the City, to clarify its intentions. Stagecoach has reportedly appointed Deutsche Bank to explore an all-share takeover offer.

The Perth-based bus, coach and train operator has been tipped to move for National Express since last week, when National Express received an approach from its largest shareholder, the Cosmen family, and the private equity firm CVC Capital Partners.

Last night it was reported that National Express is set to reject the Cosmen-CVC bid early this week on the basis that it puts too low a value on the company.

FirstGroup, another public transport operator, has dropped its interest in National Express after attempts to broker an all-share takeover were rejected. Analysts believe that a cash offer of around 400p per share, valuing National Express at more than £600m, could persuade a reluctant board to sell the business.

GNER was forced to hand back the east coast main line franchise in 2006 and the committee said the two "high-profile failures" were indicative of the underlying problems in the franchising model.

Adonis yesterday defended the franchising model, but admitted the case of National Express raised wider concerns.

National Express argues that it has limited responsibility for the east coast line because the franchise is owned by a special purpose vehicle and not the parent group. MPs and trade unions have warned that such a stance allows train operators to make profits from contracts when times are good and then walk away from them in an economic downturn.

"I am considering reforms to improve the rail franchising system, including longer franchises and a reform of the special purpose vehicle model for managing individual rail businesses," Adonis said.

In its report on the rail network published today, the House of Commons transport committee said: "There is no point in involving the private sector if it simply takes the profits in the good times, leaving the taxpayer to pick up the tab in bad times."

Adonis said he would launch a consultation on the reforms before reletting the east coast franchise next year, after a brief spell in public ownership. The committee urged the government to take a more radical step and keep the London-to-Edinburgh route under state control.

"The service could then be used as a comparator for other types of franchises, both in terms of financial viability and passenger service quality," said the committee.

The MPs said it was "unacceptable" that National Express might "cling on" to its other rail franchises (East Anglia and the London to Tilbury and Southend route c2c). They were also concerned about the lack of information available over the financial stability of other operators.

The east coast failure has triggered a takeover battle that could change the shape of the public transport sector.