MORE LIVERPOOL SERVICES AND NEW BI-MODES AND EMUs PLANNED
WEST COAST Rail, a joint venture of FirstGroup and Trenitalia, has been awarded the West Coast Partnership franchise, which will start on 8 December. Following a standstill period, the contract was signed on 28 August.
The contract will be in two phases, with the joint venture operating Inter-city West Coast services until March 2026, before a second phase running to March 2031 where First Trenitalia will operate HS2 services alongside reshaped conventional services on the West Coast main line. The first phase may be extended by the Department for Transport for up to five years, while the second phase has the option of an extension period of up to three years, the award having been made prior to the announcement of a delay to the opening of HS2 (pages 8-9). During the first phase West Coast Rail will also act as shadow operator for HS2, providing a range of design, development and mobilisation services.
The company will take over the West Coast franchise from Virgin Trains, a Virgin/Stagecoach joint venture. Stagecoach, Virgin and SNCF had submitted a joint bid for the West Coast Partnership, but this was excluded due to non-compliance concerning pensions. A venture led by MTR and Guangshen Railway was the other bidder in the competition; FirstGroup is the 70% majority partner in the bid with Trenitalia.
MORE LIVERPOOL SERVICES
The first phase will include enhancements to conventional services, notably a timetable change in December 2022 which will see introduction of over 260 extra services a week. Subject to Office of Rail and Road approval, services between Liverpool and London will be doubled from hourly to half-hourly; Virgin Trains has already submitted an open access application seeking to introduce a new service between the cities, with which this proposal will compete (p11, July issue).
Other enhancements planned include new direct services from London to Llandudno (in the summer from May 2021) and Gobowen (once a day from December 2022), a new inter-city service to Walsall (from December 2020, with an extra northbound service two years later), more trains calling at Motherwell and Rugby and introduction of hourly calls by the franchise at Liverpool South Parkway from December 2022.
The current fleet of 20 Class 221 Voyager diesel trains is to be refreshed by December 2020 and replaced by December 2022. Thirteen new bi-mode trains will be ordered for services between North Wales and London along with 10 new electric trains, with a promised reduction in CO2 emissions of 61%. The 56-strong Pendolino fleet is to be refurbished in a £117 million investment, including new seats and additional luggage space. First Trenitalia also promises improved Wi-Fi, at-seat power, wireless charging, on-board entertainment and upgraded catering with an at-seat service for all.
Improvements at stations include more car park spaces and greater accessibility, along with new First Class lounges at Preston, Stockport and Rugby and remodelled ticket offices at Glasgow Central, Preston and Rugby. Ticketing improvements promised include flexi season ticket products, Delay Repay 15 compensation, increased use of smart ticketing and removal of the administration fee enabling on-the-day changes to advance tickets and seat reservations.
Joint working with Network Rail is a key feature of the franchise, with an Alliance Agreement planned in advance of the December 2022 timetable. £32 million is to be spent on developing and delivering infrastructure capacity and capability improvements, with work to explore opportunities to improve connectivity at locations such as Nuneaton. Joint plans will be developed to reduce major and minor incidents, along with installation of on-train and trackside infrastructure monitoring equipment.
REVENUE PROTECTION MECHANISM
The West Coast Partnership represents ‘a significant move away from the previous flawed franchising system’ according to DfT, with a Forecast Revenue Mechanism (FRM) helping avoid a repeat of the issues that have affected the East Coast franchise, where multiple operators have failed to meet financial targets. An annual review process will ensure partnership working is ‘effective, collaborative and continually improving’. The Partnership is designed to fit with the direction of the Williams Review, for which Government says it intends to produce a White Paper in due course setting out the review’s recommendations.
During the first phase of the contract, First Trenitalia will share revenue risk with DfT through a GDP-based revenue protection mechanism and an additional FRM from April 2021. FirstGroup says the former mitigates the financial impact of UK macroeconomic conditions outside the operator’s control, while the FRM can be triggered if revenue variances exceed a set threshold from bid assumptions. First says had these mechanisms formed part of its South Western Railway and TransPennine Express franchise agreements, against both of which it has made onerous contract provisions, it believes these contracts would have remained profitable.
The first phase will see First Trenitalia deliver £1.6 billion real Net Present Value in premium payments to the Government. A compound annual growth rate (CAGR) for seat miles of around 1.2% per annum is projected over the first phase, with passenger revenue expected to increase at ‘a mid-single digit CAGR’, lower than the franchise’s historic growth over the past 10 years.
The first phase will end at least six months prior to launch of the first HS2 services, with Phase One now planned to open in stages between 2028 and 2031. The Partnership has been designed to ensure it can implement the outcomes of the Government’s review into HS2.
The second phase of the franchise will be a management contract through which First Trenitalia will operate classic West Coast services alongside HS2 services as an integrated operation. Revenue and cost risk will pass to DfT, with First Trenitalia earning a management fee which it says will be ‘equivalent to a low single digit margin per annum, with additional incentive payments for good performance’.
RISK AND REWARD
FirstGroup says it has scrutinised closely the potential financial performance of the Partnership, given the challenges experienced by some franchise operators. It says its joint venture with Trenitalia believes the ‘unique contract’ has ‘an appropriate balance of potential risks and rewards for shareholders’.
On the topic of pensions, which saw Stagecoach’s bid with Virgin and SNCF ruled out, First says no ongoing pension liabilities will remain at the end of the franchise, with these liabilities transferred to DfT during the second phase of the contract.
However, FirstGroup Chief Executive Matthew Gregory has said that beyond its current negotiations with DfT to extend the Great Western Railway franchise, First will not be seeking new franchising opportunities ‘for the foreseeable future’. Mr Gregory commented: ‘The differences between this contract and more traditional rail franchises were reflected in the terms set out by the DfT, which has resulted in a more appropriate balance of risks and rewards for us as operators.
The West Coast Partnership’s first phase allows us to earn returns on the significant investments in services and facilities for passengers but protected by a much improved revenue risk sharing mechanism. This will transition to a management contract in the second phase, ensuring we can really focus on using the respective skills and experience within our joint venture to deliver the desired benefits of the HS2 project for passengers and the country.’
The franchise is FirstGroup’s fourth in the UK, alongside GWR, SWR and TPE, plus open access operator Hull Trains. Trenitalia entered the UK rail market in February 2017 when it acquired the c2c franchise from National Express. First and Trenitalia were initially shortlisted for the East Midlands franchise but withdrew from bidding to focus on the West Coast Partnership, while Trenitalia was shortlisted as a sole entity for the South Eastern franchise but again withdrew from the competition.