South West has had the same operator for longer than any other UK rail franchise, and the decision by the Department for Transport is a significant fillip for FirstGroup, which will take over in August.
FirstGroup also operates the Great Western franchise to Wales and the west of England, Transpennine Express and Hull Trains. It will pay premiums with a net present value of £2.6bn over seven years for the right to run the South West service. Tim O’Toole, FirstGroup’s chief executive, said the premium payments were on a similar level to those paid by Stagecoach.
Shares in FirstGroup were up 2.7 per cent on Monday, while Stagecoach shares were down 0.6 per cent.
The new operator will be obliged to introduce 90 new trains by 2020 on suburban services around south-west London and running to Windsor and Reading. The trains will replace rolling stock dating back as far as the 1980s.
FirstGroup said it was in “advanced discussions” with a number of manufacturers about a potential order. The trains will add to an order of 30 new five-car trains from Germany’s Siemens that are currently coming into service on the route.
Stagecoach, which had been the only other bidder shortlisted to run the franchise, said it was “disappointed”.
“We are proud to have operated the network under the South West Trains brand for more than 20 years and we are disappointed that we have been unsuccessful in our bid for the new franchise,” said Martin Griffiths, Stagecoach chief executive.
Mr O’Toole said FirstGroup was “delighted” that the joint venture, of which it owns 70 per cent and MTR 30 per cent, had been selected to run the franchise. “Our successful bid will deliver the tangible improvements that customers and stakeholders have told us they want from this franchise,” he said.
MTR, whose Hong Kong rail operations are among the world’s most admired, was previously involved in UK rail operations as a shareholder in the company that ran Transport for London’s London Overground operations between 2006 and 2016.
Jeremy Long, MTR’s chief executive of European operations, said the company would work with FirstGroup to provide a “best-in-class travel experience” for passengers.
The DfT said the new operator and Network Rail, the infrastructure owner, would co-operate closely on the new franchise under plans set out by the secretary of state in December to change how rail franchises work.
The South West franchise is one of the UK’s largest, operating commuter services into and out of London Waterloo and serving a broad swath of south-west England as far west as Exeter.
Under the new franchise, FirstGroup will have to provide far smaller bonds to the DfT to guarantee its own adherence to the contract than other franchisees have paid in recent contract awards. The high level of these and other bonds had become a significant deterrent to would-be franchisees.
“It just seems as if the market has spoken to the department in terms of the available balance sheet to take on some of these extreme bonding requirements we’ve seen in other franchises,” said Mr O’Toole.
He said that FirstGroup’s victory was a vindication of its approach to rail franchising, which he said had been disciplined. The company has lost out in recent years on a number of competitions, including the East Coast franchise, in which other bidders have been accused of overpaying.