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Nic Sharp, a commercial manager in financial services, always enjoyed champagne and steak on the train home from London to Norwich. So when National Express said it planned to axe its restaurant carriage – a fixture on the line since the 1960s – he was understandably upset.

“It was the best place to network, and it was good food,” he says.

Cutting out the champagne may seem wise in these recession-ridden times but it is also a sign that the rail industry – often sold as a defensive sector – is as vulnerable to the downturn as any other.

A fiercely waged passenger campaign to save the restaurant service suggests that any attempts to shore up profit margins are likely to risk alienating the company’s best customers.

This could leave the rail industry in difficulty. The growing roll-call of job losses is taking its toll. Passenger growth has slowed from 7 per cent last year to about 3 per cent, according to the Association of Train Operating Companies.

Most train operators are tied to stringent government franchises that assumed passenger numbers would continue to rise, so they are likely to struggle.

“Life is about to become much more difficult for the rail operators over the next six months,” says Damian Brewer, an analyst at JPMorgan. “The recession may simply make large swathes of the rail industry unprofitable.”

Finding a model for how rail operators handle recession is difficult. The five key players – Go-Ahead, National Express, Arriva, FirstGroup and Stagecoach – have enjoyed boom times since the industry was privatised in the mid-1990s. But there is a precedent for how passengers respond – patronage fell 11 per cent between 1989 and 1995.

“It is reasonable to expect a fall similar to past recessions, where the slowdown lasted for several years,” says Douglas McNeill, analyst at BlueOar Securities. “But it is something the industry isn’t used to because the past 15 years have been exceptionally buoyant. It’s a completely new challenge for the franchise system.”

Rail operators are already wielding the knife. National Express has slashed 750 jobs, Stagecoach’s South West Trains has cut 480 and Go-Ahead 300. They have also cut back on services such as meals, increased ticket barriers, and raised car parking charges. But most industry experts agree there is little room for further savings in a labour-intensive business with fixed capital costs.

“Companies have been testing the scope for cost reductions in recent months but they can probably only play this card once,” says Mr McNeill. “They need a minimum level of staff to operate and there wasn’t a lot of excess in the first place.”

Attempts to save costs even at the margins have run into trouble. When South West outlined plans to scale back ticket office opening hours last month, Lord Adonis, transport minister, intervened to keep some of them open.

Attempts by National Express to close its restaurant carriage were met by a Facebook campaign and questions were raised in parliament, while the unions have threatened action over the prospect of job cuts.

This leaves train operators with few means to protect profits. Annual fare rises are pegged at the previous year’s retail prices index in July, so while regulated ticket prices rose at inflation-busting rates this year – some by as much as 10 per cent – analysts predict they will fall in early 2010.

A further problem for the operators is that the franchise agreements are tough. Some of them, negotiated during the economic boom, assumed double-digit passenger revenue growth and steep falls in the government subsidy regardless of economic conditions. They also determine the number of trains and carriages, which leaves operators with little room for service cuts.

Faced with an unpleasant cocktail of falling passenger numbers and flat or falling fares in the next 18 months, some rail operators are likely to press the government for either a softening of franchise conditions or a change to the way ticket prices are calculated.

But the prospect of either of these proposals being agreed remains unclear. The Department for Transport is adamant that it will not renegotiate contracts, and it reacted to the troubles of the previous east coast operator, GNER, and its parent company, Sea Containers, by stripping the company of its £1.3bn ($1.9bn) deal in 2006 and putting the contract out to auction.

Any move to shore up ticket prices risks a popular backlash as well as the likelihood that passengers will shun rail for cheaper means of travel.

The government could find its arm twisted in another way, according to one person in the industry. “Most of these companies were profitable bus companies before they went into rail,” the person says. “And if they don’t get what they want, they may just decide to go back to being bus companies.”

Copyright The Financial Times Limited 2017. All rights reserved.
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