Industry News

LONDON (ShareCast) - Bus and rail group National Express (LSE: NEX.L - news) has given up the running of the East Coast Main Line service after failing to renegotiate the cost of the franchise, sparking furious criticism from the Transport department.

The group also confirmed the departure of chief executive Richard Bowker, who has decided to step down to take up a position as chief executive designate of the Union Railway in the United Arab Emirates.

In a statement, the government said it would establish a publicly owned company to take over the loss-making rail franchise, which runs between London and Edinburgh, when National Express East Coast ceases to operate. It will agree an orderly handover with the company, it said.

The government also thinks it may have grounds to terminate National Express's franchises to run rail services on the East Anglia main line and associated commuter routes.

"We are exploring all options in the light of the Group's statement this morning. In the meantime, we expect National Express to meet its obligations on these franchises in full," it said.

"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging," the Department of Transport statement said, adding "A company which had defaulted in the way National Express now intends would not have pre-qualified for any previous franchises let by the Department".

It is the government's intention to tender for a new East Coast franchise operator from the end of 2010, the statement added.

National Express said committed funding for the East Coast franchise will keep it operating until "later in 2009", although it warned this would depend on trading conditions.

It's thought the decision to exit East Coast could cost National Express over £70m. It agreed to pay £1.4bn for the right to run the franchise until 2015, far too much, according to some analysts

Its franchise bid was based on annual passenger revenue growth of between 9% and 10%, far more than the paltry 0.3% reported for the first three months of 2009.

Underlying revenue for East Coast grew by just 1% in the first half as cash-strapped passengers traded down from full and first class fares. The franchise is seen posting an interim loss of over £20m.

When the deal was agreed in August 2007, the company expected the franchise to generate total annual revenue of £600m in its first full year.

National Express revealed the fate of the rail contract in a trading update this morning when it warned that all its businesses have experienced difficult market conditions.

UK bus and coach growth slowed during the second quarter, while the rail business has continued to experience declining revenue growth rates.

Today's move comes just days after National Express, currently valued at £433m, rejected an unsolicited bid approach from £1.7bn bus and rail rival FirstGroup (LSE: FGP.L - news) .

Jonathan Jackson, head of equities at Killik Capital, had called the bid "opportunistic", coming at a time when the group is struggling to cope with high debt.

It agreed a deal to renegotiate its £1.2bn debt earlier this month, but a £400m rights issue is on the cards.

On a slightly brighter note, total revenue in Spain is expected to have increased by 2% in local currency terms in the first half. Revenue in the North America school bus business has remained robust.