Stagecoach demands cash in rail franchise dispute

STAGECOACH yesterday warned that it would suffer a substantial fall in profits next year unless the UK government paid it compensation for expected losses at its recession-hit rail division.

The surprise warning, in a stock market trading update, was seen in the City as an attempt by the Perth-based transport giant to put pressure on ministers to bail out its South West Trains franchise.

In the statement, Stagecoach said its UK trains arm – of which South West is a major part – was expected to incur a loss for the year to April 2011, denting group operating profits.

The company argued that, under the terms of the franchise agreement, sealed in February 2007, the Department for Transport (DfT) should step in to help.

Stagecoach's argument, which is disputed by the government, is that it is due cash compensation under a "cap and collar" clause in the franchise agreement.

Under the clause – designed to ensure that rail firms do not make excessive profits and also continue running if they make a loss – a percentage of Stagecoach's profits or losses on the division will be taken on by the government.

Stagecoach, headed by chief executive Brian Souter, revealed yesterday that at the heart of its wrangle with the DfT is a dispute over when government support for the franchise should begin.

The transport group believes the franchise contract entitles it to revenue support calculated from April 2010, but the DfT claims the start date should be February 2011.

There is also a dispute over whether or not car parking revenues should be included.

In the year to April 2008, the division accounted for almost £60 million of Stagecoach's £205m operating profit.

The company said: "The sums in question depend on future revenue, which in turn partly depends on future macroeconomic conditions. However, to the extent that these matters are not satisfactorily resolved, the UK rail division is likely to incur a significant operating loss in the year ending 30 April 2011."

Jonathan Jackson, head of equities at broker Killik & Co, said: "It is clear that contracts such as South West Trains will potentially be loss-making because the number of commuters is dropping as unemployment rises. They can only put their prices up so far and after that, their only choice is to go to the government for help."

If the dispute is not resolved arbitrators dealing with the matter will make a legally binding ruling. That process would take up to 18 months. The DfT declined to comment yesterday.

Stagecoach has already reduced staffing levels amid falling passenger numbers.

The company added it expected both its UK rail division and the Virgin Rail joint venture to remain profitable in the next financial year without government help.

Also in yesterday's statement, the company said revenues for its UK rail arm excluding East Midlands Trains was up 7.3 per cent in the 48 weeks to 29 March. East Midlands Trains was up 10.5 per cent in the period, while Virgin Rail grew just 0.5 per cent, reflecting disruption from works carried out by Network Rail.

The firm is committed to paying the government £1.2 billion by 2016 for the right to operate the South West Trains service.