2012-08-15 New operator for West Coast rail passengers (DfT Department for Transport)

2012-08-15 Press Statement: from Sir Richard Branson, Founder Virgin Group (Virgin Rail Group)

2012-08-15 FirstGroup welcomes award of Intercity West Coast rail franchise (FirstGroup plc)

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date 2 September 2012
source Virgin Rail Group
type Letter

The following letter from Sir Richard Branson appeared in the Financial Times on 1 September

Dear Sir

Your assertion that Virgin is seeking to re-write the competition rules for the West Coast train franchise (‘No Second Act for Virgin Trains – August 29, 2012) is wrong. On the contrary, we have applied to the High Court to ensure that the competition rules are properly applied.

You state “Virgin’s protests would carry more conviction if they had found fault with the process before the bidding round and not after.” The truth is we did and have been in dialogue with the Department for Transport for more than two years on the issues around the Invitation to Tender. Furthermore, we had expressed our views to the Conservatives in several meetings whilst they were in opposition. In particular, we focused on the assessment and deliverability of risks involved in such long and volatile franchises, as well as seeking assurances on our long held view that bids were typically won by aggressive revenue commitments from bidders relying on good spreadsheet skills rather than good rail business sense. You may recall that I highlighted this point in a press conference held at Euston station in December of last year. In response, the Department stated that it would risk adjust bidders’ franchise premium payments and robustly mitigate its exposure to franchise default risk accordingly. We have seen no evidence the Department has done what it said it would do.

Indeed, when faced with a promise to pay £5.6bn in premiums in the last four years, the Department has secured only £200 million in risk capital from FirstGroup. This is despite their own acceptance that First Group’s revenue forecasts are significantly less deliverable than ours. On long term delivery, Virgin was scored at 72%, while FirstGroup was at 54%. First Group’s bid is based on some key assumptions. To take just one of these assumptions it assumes that the country will see uninterrupted economic growth of 2.5% a year. Since 1830, the British economy has grown at an average rate of 1.94% a year. If you believe the Bank of England’s forecasts for the next three years, FirstGroup will need the UK economy to grow at 2.79% a year for the remaining 10 years of the franchise. If the numerous bets that FirstGroup has made in its bid do not work out, the passenger and the taxpayer will be worse off.

On FirstGroup’s own calculations, Virgin increased passenger numbers by 84% over the last 10 years, whilst average fares rose by a mere 1 pence in real terms. For the new franchise, we believe FirstGroup needs to increase passenger numbers by more than 35 million by 2026 – whilst pushing up fares by more than 20% in real terms. To reach the train occupancy levels that underpin its bid during the last years of its franchise, every seat on every train on every day of the week needs to be filled, otherwise the franchise goes bust.

To summarise this in one word, FirstGroup’s bid is “undeliverable”. A flawed process that delivered two collapses on the East Coast is now being repeated on Britain’s most important railway line. To believe Britain can do better is to believe in progress and rationality.

Sir Richard Branson
Founder, Virgin Group

Railhub Archive ::: 2012-09-02 VIR-001