Last updated: August 29, 2012 11:20 pm

Branson image exposed in franchise fight

Virgin Train©Reuters

Sir Richard Branson would appear to have little to lose in his legal fight over the government’s decision to strip him of the West Coast main line rail franchise.

The £14m Virgin Rail spent on its bid is already down the drain, while a court order to reopen the tender – however unlikely – would give the group another chance to compete for £20bn in passenger revenues over the next 15 years.

But as a judge considers whether to grant a judicial review amid intense public debate over the dispute, Virgin’s record on a line it has run since privatisation in 1997 is likely to come under increased scrutiny. And that could undermine Sir Richard’s self-styled image as the customer-friendly outsider fighting out-of-touch institutions.

Analysis of his company’s financial returns from the West Coast line show why Sir Richard is so keen to overturn the government’s decision to hand the franchise to rival FirstGroup. Virgin Rail, a 51-49 per cent joint venture between Virgin Group and Stagecoach, has reaped 6.6 per cent average annual operating margins on West Coast over the past 15 years, among the highest across the country’s 19 rail franchises. “Few franchises have bettered Virgin’s margin in recent years and given the sheer size of West Coast, its absolute profitability may well have been the highest in the industry,” says Douglas McNeill, an analyst at Charles Stanley.

Graph on train operators' punctuality

Average margins mask a bumpy ride, however. When Virgin won the franchise in 1997, it did so with the sort of aggressive revenue and traffic projections that it is now criticising FirstGroup for using in its successful bid.

Virgin’s optimistic initial plan was based on expectations of a massive upgrade to the line that would boost passenger numbers through faster trains and greater capacity. Virgin, moreover, passed on much of the risk associated with its commitments to third parties.

It subcontracted the new trains to the manufacturer Alstom and the infrastructure upgrade to Railtrack, the new, private owner of Britain’s rail network. While Alstom delivered, Railtrack – burdened by rising costs following the Hatfield crash and facing what rail expert George Muir calls “a completely undeliverable contract” – could not. Its collapse in 2001 and renationalisation in the form of Network Rail gave Virgin bargaining power.

“The government had a gun to Virgin’s head, but Virgin had a gun to Railtrack’s,” says one City analyst. “Once Railtrack became part of the government, Virgin had a gun to the government’s head.”

Virgin used that power to negotiate a relatively high fee to run the line risk-free from 2002 to 2006 and to make sure a renegotiated franchise contract in 2006 gave the company wiggle room in case the long-awaited upgrade – finally completed in late 2008, though not to the original specifications – failed to deliver the traffic growth the Department for Transport thought possible.

But the upgrade was successful and by 2009 Virgin had doubled 1997 passenger numbers to 28m and achieved operating margins of more than 10 per cent. “There is a sense that the DfT thinks Virgin pulled a fast one,” said one expert.

Mr Muir, former head of the Association of Train Operating Companies, admits Virgin profited from aggressive bargaining. But he praises the strong management and innovation it brought to West Coast. “Virgin deserve whatever deals from the government they have got.”

Any government resentment of Virgin seems not to extend to the public, whose support has largely swung behind Sir Richard in his fight to keep the franchise.

Advocates for Virgin point to a recent survey by Passenger Focus, an independent rail watchdog, which gave the operator higher approval ratings than FirstGroup on long-distance routes. But data from the UK rail regulator have Virgin lagging behind its rival on punctuality and passenger satisfaction and leading on customer complaints per 100,000 journeys. Grievances range from bad rush hour crowding and spotty WiFi service to exorbitant walk-up fares.

FirstGroup says it will address all such issues. Virgin calls these empty promises.

TRACKING THE WEST COAST LINE

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