# UK Gov't to take over East Coast operations



## PerRock (May 16, 2018)

the UK government announced that they will be (re)taking over the ECML franchise from Virgin Trains at the end of June. The new service will be called the

London and North Eastern Railway, after the historic railway of the same name.

BBC Article:

http://www.bbc.com/news/business-44142258



> Rail services on the East Coast Main Line are being brought back under government control, following the failure of the current franchise.
> 
> Operators Stagecoach and Virgin Trains will hand over control from 24 June.
> 
> The Department for Transport will run the service until...


peter


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## jis (May 16, 2018)

Ironically, The original LNER (roughly what is ECML today plus all its branches and Scottish east side) was one of the big four private railways companies formed after the First World War by consolidation in the 1921 Railway Act! It was the second largest after LMS (roughly what is the WCML plus all its branches and Scottish west side)

Anyway, here is the new website of LNER....

http://www.lnerailway.co.uk/


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## caravanman (May 16, 2018)

I find it astonishing that companies like Virgin can cream off the profits quite happily, but then just abandon their contracts without penalty when it suits them. Strange "contracts" indeed...

Ed.


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## jis (May 16, 2018)

caravanman said:


> I find it astonishing that companies like Virgin can cream off the profits quite happily, but then just abandon their contracts without penalty when it suits them. Strange "contracts" indeed...
> 
> Ed.


It is actually way more complicated than that. I suggest you research the matter a little from Modern Railway or even Rail, and you will see how so. 
Yes the contracts are strange, but that is partly to make them politically palatable. So the government and Rail Regulators are at least as much at fault as the franchisees.

It is a mess.


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## MikefromCrete (May 16, 2018)

I thought the East Coast Main Line was one of prime franchises, offering some of the most profitable services. Seems strange that the private operators are giving it up.


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## cirdan (May 17, 2018)

jis said:


> Ironically, The original LNER (roughly what is ECML today plus all its branches and Scottish east side) was one of the big four private railways companies formed after the First World War by consolidation in the 1921 Railway Act! It was the second largest after LMS (roughly what is the WCML plus all its branches and Scottish west side)
> 
> Anyway, here is the new website of LNER....
> 
> http://www.lnerailway.co.uk/


The big four companies were in poor financial health, both due to incipient competition from the roads and more importantly to general poor state of repair caused by WW2. The government at the time saw nationalization as the way out of this problem.

LNER management however had a different proposal and petitioned the government to consider a franchise system under which the government would buy the tracks and the big four companies would be able to compete for franchises to run services. Basically they wanted the system that exists in the UK today.

The government would hear nothing of it. This was the same government that introduced free healthcare, nationalized a whole bunch of industries and introduced other Scandinavian style soft socialist policies and so weren't open to mixed private / pulic models for running public services. But it is interesting to think that if things had turned out differently, history might have taken a wholly different course, with consequences that we can only guess, maybe positive, maybe negative.


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## cirdan (May 17, 2018)

jis said:


> Ironically, The original LNER (roughly what is ECML today plus all its branches and Scottish east side) was one of the big four private railways companies formed after the First World War by consolidation in the 1921 Railway Act! It was the second largest after LMS (roughly what is the WCML plus all its branches and Scottish west side)
> 
> Anyway, here is the new website of LNER....
> 
> http://www.lnerailway.co.uk/


The LNER had some lines in Scotland, for example Edinburgh to Aberdeen, but the LMS was much bigger in Scotland.

On the other jand, the LNER had, for example, basically most of the lines in places like East Anglia and a considerable commuter traffic into London. They even ran lines that are now part of London's underground.

Besides the well known terminus at Kings Cross, the LNER also had other London terminii, including Marylebone.

There were also many secondary lines and branches that no longer exist.


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## jis (May 17, 2018)

This is apparently an interim arrangement pending something else, which has not been specified at present.

http://www.railwaygazette.com/news/single-view/view/government-terminates-virgin-trains-east-coast-franchise.html


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## jis (May 18, 2018)

Just in case you though it was easy to operate any of the franchises ....



Kings Cross is the London station at the south end of the ECML.


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## Ziv (May 28, 2018)

I am not sure I understand the minutiae, but the major aspect of the deal that seems to be crippling is that the consortium was paying 3.3Bn pounds sterling over 10 years for the privilege of operating the system. That is approximately $500,000,000US a year. I was under the impression that there weren't any profitable passenger railways in the world so Amtrak needing an annual subsidy was normal? Is it the fact that this particular line has a high usage rate and relatively low overhead expenses, so it is more profitable than most?

But $500Mn a year seems like a huge weight to carry. If they were bidding against groups willing to spend $490Mn a year, it might have seemed logical at the time, but penny wise and pound foolish on a monumental scale.


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## cirdan (May 28, 2018)

Ziv said:


> I am not sure I understand the minutiae, but the major aspect of the deal that seems to be crippling is that the consortium was paying 3.3Bn pounds sterling over 10 years for the privilege of operating the system. That is approximately $500,000,000US a year. I was under the impression that there weren't any profitable passenger railways in the world so Amtrak needing an annual subsidy was normal? Is it the fact that this particular line has a high usage rate and relatively low overhead expenses, so it is more profitable than most?
> 
> But $500Mn a year seems like a huge weight to carry. If they were bidding against groups willing to spend $490Mn a year, it might have seemed logical at the time, but penny wise and pound foolish on a monumental scale.


Exaggerated expectations are part of the problem.

Every operator goes in thinking they can grow passenger numbers and revenue further by clever marketing etc.

At some point you run out of organic growth. Instead you start cooking up all sorts of offers and things that attract one-off riders that help maintain the illusion of a growing base ridership..In reality they may be benefitting from super cheap special offers beinbg used to fill off peak and off season seats, and thus contribute little to either genuine customer base or overall revenue growth, but are nice for the statistics nevertheless. You're still growing ridership and that looks good in your annual report. And seeing these riders are occupying off peak and off season seats that would otherwise be empty, they are not costing the company very.much either. So net impact on cash flow is still positive. But nobody is getting rich, and revenue growth is lagging behind passenger growth.

The next operator bases their exaggerated expected earning on those figures, maybe even genuinely believing them to be genuine base growth with potential to grow further, and that they can maybe squeeze more money out of, but sooner or later reality returns.


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## jis (May 28, 2018)

The other major problem has been the government run the National Rail outfit which manages the infrastructure. It has been almost completely consistent in failing deliver all the infrastructure improvements that the franchise contract assumed would be available to run the number of trains necessary to meet the revenue goals.

A similar fiasco is unfolding on the great Western specially in its failure to deliver on planned electrification, leading to increased cost of acquiring many more bi-mode 8xx's and delaying introduction of planned additional services. Though fortunately, because the franchise there was structured differently and a lot can still be done with the suburban and stopping services, the overall impact will be less, other than to the taxpayers, who will have to cover the cost of the government owned national Rail's failures.


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## bretton88 (May 28, 2018)

jis said:


> The other major problem has been the government run Railtrack outfit which manages the infrastructure. It has been almost completely consistent in failing deliver all the infrastructure improvements that the franchise contract assumed would be available to run the number of trains necessary to meet the revenue goals.


This is exactly what happened. Virgin planned on operating significantly more services than what is available now. The problem occurred when Railtrack failed to deliver on the promised upgrades that would have allowed those extra services to operate. The situation was further exacerbated by the fact that Virgin had already sunk money into fleet upgrades and renovations before it became clear Railtrack would bring unable to come through with the upgrades.


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## Ziv (May 28, 2018)

More than $500Mn a year in profit lost? From a lack of upgrades?

Is this realistic, or is this a post facto rationalization of a really stupid business plan? I don't know what to think, it just seems strange that they actually were willing to pay $500Mn a year for the right to take a chance on profitability.

How could it have been that profitable?? In what world could they have expected that huge a growth in ridership?



bretton88 said:


> jis said:
> 
> 
> > The other major problem has been the government run Railtrack outfit which manages the infrastructure. It has been almost completely consistent in failing deliver all the infrastructure improvements that the franchise contract assumed would be available to run the number of trains necessary to meet the revenue goals.
> ...


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## Anderson (May 29, 2018)

(1) I think there's a "Winner's Curse" problem at hand here. The classic example of this is bidding on oil rights on some land: The person who thinks the land has the most oil to extract will likely win the contract (since they'll usually enter a higher bid than the others), but they obviously also have the biggest risk of being wrong.

(2) With that in mind, it would seem that there's a case that at least part of the payment should be based on the franchise operator's ability to operate their planned services (e.g. if Network Rail [1] fails to follow through, some of the payments are waived). This would probably require Network Rail to be party to the contracts in some manner on the government side (if only to potentially tell both the operator and the government "Nope, that plan is impossible in that given timeframe").

(3) Bear in mind that the line was, IIRC, producing several hundred million dollars per year in profit before payments. I think it was like $200m/yr. The problem is that, per the contract, that left about a $300m/yr hole.

[1] Not Railtrack. Railtrack was the private-sector fiasco in the 1990s.


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## cirdan (May 29, 2018)

A bit of history here.

The first franchise holder post privatization was a company called GNER. I think they belonged directly or indirectly to Sea Containers, the same people who at that time ran the Orient Express.

GNER went in with a lot of good ideas and was clearly priming to grow business. They did some good marketing. They upgraded the trains. They added services. And it worked. Passenger numbers grew and grew and GNER was held up as example of the way trains should be run.

The problem was that the contract saw a transition from governmnet subsidy in the first years to break even and then to a negative subsidy. In other words GNER had to pay the government every year. And the sum grew year by year.

So the first couple of years they did extremely well, and a lot of the surplus did not go into the pockets of shareholders by the way, but was invested back into the service. They added extra cars to make the trains longer. They added extra trains.

But as the surplus got thinner and thinner, they lost the muscle to do that.Corners had to be cut. At the same time the people who owned the franchise grew impatient. They saw the business case becoming less attarctive. Finally they bailed and gave it back to the government.

Then Virgin was brought in. And the same hapapned again only much quicker.


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## jis (May 29, 2018)

After having read in detail what happened in outstanding well researched articles in the likes of “Modern Railway” it becomes clear that the incompetence at both the DfT and at National Rail has at least as much to do with this episode as the over enthusiasm of Virgin, which itself was partially a product of the prodding of the DfT. I am not sure that renationalization will necessarily produce any better results financially or service-wise. But we will see, won’t we? Afterall it will be the same DfT, Rail Regulators and mostly even the operating managers that will be running things.


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## Ziv (May 29, 2018)

Thanks for that info, Anderson. It makes the rest of the story a bit easier to understand for a newby like me. Given the earlier profits I guess it makes sense that if a company is competing to get the contract they will be talking about how they will expand the service and in turn, how the government would want a piece of that action/profit. It just seems like the fee to operate was way too high to allow Virgin to do what it would take to both market the service, maintain what they had and expand it where possible. From what Cirdan notes, it seems like the precedent was there for increasing service and profits like GNER had done, but the "pay to play" fee was so high that it became a deal killer.

I have only ridden rail cars in the UK 10 or 12 times, but I have to admit that some of the trips have been incredibly memorable. Back in 1994, I rode on a local train that had 6 seated compartments on one side and the passage way on the other (?), but the crazy thing was that each compartment had its own door to the platform. When the train stopped you just stood up and opened your compartments door and stepped onto the platform. It was so cool! It was like stepping back to the 1950's. Or maybe the passage way was in the middle and there were 4 seat compartments on both sides of the passage way? I can't remember the interior of the train as well as I can picture the doors to the platform. The part that stuck in my mind was that I was opening the compartment door as the trains was coasting to a stop. It just seemed so cool.

And I was on a trip to Penzance one time where the waves off the English Channel actually sprayed the train cars, with water coursing down the window.



Anderson said:


> (1) I think there's a "Winner's Curse" problem at hand here. The classic example of this is bidding on oil rights on some land: The person who thinks the land has the most oil to extract will likely win the contract (since they'll usually enter a higher bid than the others), but they obviously also have the biggest risk of being wrong.
> 
> (2) With that in mind, it would seem that there's a case that at least part of the payment should be based on the franchise operator's ability to operate their planned services (e.g. if Network Rail [1] fails to follow through, some of the payments are waived). This would probably require Network Rail to be party to the contracts in some manner on the government side (if only to potentially tell both the operator and the government "Nope, that plan is impossible in that given timeframe").
> 
> ...


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## PerRock (May 29, 2018)

cirdan said:


> Then Virgin was brought in. And the same hapapned again only much quicker.


National Express should get slipped in there between GNER & Virgin. I believe they had the same problems, as their franchise was taken over by the DfT.

peter


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## jis (May 29, 2018)

Yeah. DfT/Rail Regulators learned nothing from the National Express fiasco, and basically doubled down to try even harder doing the same thing that failed the first time, hoping for a different result the second time.

There is an interesting fact filled letter to the Editor in the May 2018 Issue of Modern Railway regarding the ECML. One interesting tidbit from it is that there have been four separate operators, some public, some private, of the ECML in the last 20 years, and over that period there have been only seven quarters in which the operator has met 90% PPM target, and none above that. This suggest that the problem is not with whether it is a public or private operator, but with inadequacy of the infrastructure and the target setting process. And since franchise fees etc. are tied with the unrealistic targets, apparently on an ongoing basis, it is no surprise that things keep failing over and over.

Another interesting tidbit is that since 1991 there has been no running time improvement on the ECML This has to do with first Railtrack's and then National Rail's inability to meet any of their targets on delivery of the infrastructure, and endlessly postponing delivery of critical items from one CP to the next. At least they finally managed to get the Stevenage flyover done, removing one serious bottleneck. I got to experience that last November on the nonstop Kings Cross - Cambridge service.


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## seat38a (Jun 9, 2018)

jis said:


> Just in case you though it was easy to operate any of the franchises ....


Thanks A LOT!




I binge watched all the episodes on YouTube.


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