Why was the ECML unprofitable for so many years until LNER?

[RailWonderer]

As per the title, the ECML went through GNER before National Express and Virgin lost their franchises or had them terminated early due to financial losses and a continuing need from the DfT to bail them out. Why was it so hard to turn a profit until these last post-pandemic years?

Was it due to increased car use years ago that subtracted from rail revenue, was it ageing rolling stock, longer journey times, more unreliability?

 

[HST43257]

As per the title, the ECML went through GNER before National Express and Virgin lost their franchises or had them terminated early due to financial losses and a continuing need from the DfT to bail them out. Why was it so hard to turn a profit until these last post-pandemic years?

Was it due to increased car use years ago that subracted from rail revenue, was it ageing rolling stock, longer journey times, more unreliability?

My own scepticism says the government chose the highest bidder who simply overpromised each time. I seem to remember East Coast didn’t do half bad but the DfT didn’t want rail as a direct responsibility (ironic)?

 

[Energy]

GNER's parent company had poor financials, National Express bid big franchise premiums which were difficult to deliver, and was finally killed by the 2009 financial crisis.

VTEC was promised new trains by the government under IEP, which were late. Its losses weren't that bad, £20m loss is nothing compared to the £300m+ it was paying in franchise premiums.

 

[Clarence Yard]

Over optimistic bidding was the reason - the expected revenue was the problem in both the NXEC and VTEC cases.

Other bidders who bid a more realistic revenue line in their bids were ignored.

 

[WSMP]

Exactly as mentioned above, DfT irresponsibly took over optimistic bids. Operationally ECML was always profitable, but the artificial price those companies bid to pay the government was too high.

 

[Sir Felix Pole]

GNER were so desperate to retain the franchise on renewal in 2005, which they did, that they significantly overbid and quickly failed - irrespective of the parent company's problems.

Unlike the WCML, the ECML was always more dependent on variable leisure rather than stable business traffic - which post-COVID is now something of an advantage.

 

[SuspectUsual]

Exactly as mentioned above, DfT irresponsibly encouraged and then took over optimistic bids

Corrected it for you

 

[Adrian1980uk]

There is a element of it was Britains premier railway (remember when Virgin took over the wcml it was most definitely the poor relation) and carried premium in franchise bidding. Also that's the only line where open access operators can soak up some of the passengers and provide competition.

 

[Wilts Wanderer]

Of course, the definition of ‘profitability’ in the post-1995 railway is completely divorced from reality - BR ultimately had a profitable Intercity sector that made more money than it required funding to run. Today’s companies receive an agreed funding package and either pay a premium to government (difference being the profit margin) or have an agreed management margin, say 2%, and all revenue goes to government. Either way it’s hard to compare as there is no common ground with BR.

 

[thedbdiboy]

The East Coast Main Line has for many years been one of the the most generative parts of the GB rail passenger business. The problem with the franchising process is that several times in succession, over optimistic assumptions by both DfT and bidders led to contracts that were undeliverable. It wasn't simply a matter of saying that the business would earn 'x' when it earned 'x-y'; a number of external events also contributed. In the case of GNER, the owing group Sea Containers became unable to guarantee the bond required to be financially compliant with operating the franchise, and it became forfeit. NXEC won it on a fiercely competitive bid in December 2007 and was almost immediately hit by the 2008 financial crash. In bidding terms that's the equivalent of all the engines failing during a plane takeoff - there's virtually no chance of a recovery and (once again) the contract was forfeit.
After a period of operation as East Coast under the Operator of Last Resort arrangements, the franchise was then let to Virgin/Stagecoach. This again had some fairly heroic assumptions based on increasing train services, but failure by Network Rail to deliver the required upgrades in a timely fashion meant that difficult targets became impossible and the franchise was again terminated. At the time this was presented as Virgin being 'let off the hook' but forfeiting a franchise is a costly business. The myth also tends to get perpetuated that the 'public' sector TOC (East Coast, and then LNER) is somehow more successful at making money but in reality they pay less to the Government than the private sector franchises promised because the revenue they generate is based on actual receipts and not a promised premium that a private sector franchise has to pay regardless of what they earn. What is clear is that shorn of accountants and lawyers trying and failing to predict long term future revenues, it is possible for the management of LNER to be able to concentrate on making the best return they can for Government without the distraction of undeliverable targets.

 

[norbitonflyer]

Over-bidding. Promising to pay a premium to HMG for the privilege of running what was seen as a money spinner (call it a tax, tribute, bribe, inducement, whatever, but basically it meant fare revenue was going to HMG rather than being spent on the railway).

When East Coast took over from NXEC they lost no time in cutting back the services NXEC had been committed to under the franchise (NXEC had not been given that option) - for example it was another eight years, and two more changes of operator, before the direct daytime (1) services to Lincoln were restored (barely six months after my family connection to Lincoln ended) They said the cuts were necessary to save money - in correspondence EC told me axing the Lincoln service saved £6m pa. But they made a surplus of £235m pa.

(1) I do not consider a train that arrives in the city after 9pm and leaves again before dawn is a genuine attempt to attract the tourist and "visiting family" markets that would be most attracted to a through service - (And horrendously inefficient, as the train ran empty from Lincoln to Neville Hill after arrival, and back again in the morning). At the same time, EC were bidding for a path for a third hourly service to York.

 

[Matt P]

How were we defining 'profitable' here?

Revenue net of operating costs (access charges, leasing costs, staff, fuel/electricity, staff ages); or

The above, plus the additional cost of premiums built into franchise agreements.

The premiums the various failed franchisees offered suggest that all anticipated the East Coast IC franchise being very profitable indeed. The basic problems with the franchising system is that it appeared to encourage bidders to try to wave as much cash as possible at the government. The second being that having waved cash at the government, the franchise contract was somewhat of a straight jacket if market conditions didn't turn out quite as hoped.

If IC East Coast had been operated like a normal private business, franchise premium payments wouldn't have been a issue. The business would have had the commercial freedom to respond to changes in demand by increasing or reducing services accordingly or taken a risk on new services if it thought they may turn out to be profitable. Indeed in my opinion this is exactly how something approximating to BR's Intercity sector should operate.

 

[norbitonflyer]

How were we defining 'profitable' here?

Revenue net of operating costs (access charges, leasing costs, staff, fuel/electricity, staff ages); or

The above, plus the additional cost of premiums built into franchise agreements.

That was the problem - net of the premium, they made a profit. But the premium ate it all up, and more.
That is why DOR made a profit of course - no premiums were required.

 

[Hadders]

The East Coast Main Line has for many years been one of the the most generative parts of the GB rail passenger business. The problem with the franchising process is that several times in succession, over optimistic assumptions by both DfT and bidders led to contracts that were undeliverable. It wasn't simply a matter of saying that the business would earn 'x' when it earned 'x-y'; a number of external events also contributed. In the case of GNER, the owing group Sea Containers became unable to guarantee the bond required to be financially compliant with operating the franchise, and it became forfeit. NXEC won it on a fiercely competitive bid in December 2007 and was almost immediately hit by the 2008 financial crash. In bidding terms that's the equivalent of all the engines failing during a plane takeoff - there's virtually no chance of a recovery and (once again) the contract was forfeit.
After a period of operation as East Coast under the Operator of Last Resort arrangements, the franchise was then let to Virgin/Stagecoach. This again had some fairly heroic assumptions based on increasing train services, but failure by Network Rail to deliver the required upgrades in a timely fashion meant that difficult targets became impossible and the franchise was again terminated. At the time this was presented as Virgin being 'let off the hook' but forfeiting a franchise is a costly business. The myth also tends to get perpetuated that the 'public' sector TOC (East Coast, and then LNER) is somehow more successful at making money but in reality they pay less to the Government than the private sector franchises promised because the revenue they generate is based on actual receipts and not a promised premium that a private sector franchise has to pay regardless of what they earn. What is clear is that shorn of accountants and lawyers trying and failing to predict long term future revenues, it is possible for the management of LNER to be able to concentrate on making the best return they can for Government without the distraction of undeliverable targets.

In addition weren't GNER hit by the 7/7 terrorist bombings and subsequent downturn in tourism business and Grand Central gaining rights to run its service along the ECML, and in particular being allowed to call at York.

 

[Darandio]

In addition weren't GNER hit by the 7/7 terrorist bombings and subsequent downturn in tourism business and Grand Central gaining rights to run its service along the ECML, and in particular being allowed to call at York.

Although they weren't the only affected, there was the Hatfield aftermath as well.

 

[Bald Rick]

As per the title, the ECML went through GNER before National Express and Virgin lost their franchises or had them terminated early due to financial losses and a continuing need from the DfT to bail them out. Why was it so hard to turn a profit until these last post-pandemic years?

Was it due to increased car use years ago that subtracted from rail revenue, was it ageing rolling stock, longer journey times, more unreliability?

To put it in simple terms, the ECML has always been profitable post privatisation (and before). It is my guess that the current LNER operation is the least profitable of the lot, adjusted for inflation.

Before Virgin EC was taken over by Government with LNER as an ‘operator of last resort‘, the franchisees paid the government an agreed sum each year for the right to run the franchise, known as a franchise premium. This was considerable amounts of money - nearly £1m a day for VTEC in 2017/18 - and if the franchise bidder did their sums wrong, or was affected by significant external events (Financial crisis, for example) then they had to pay Government more than the profit on the franchise.

Currently, compared to previous franchisees, LNER have a much higher cost of operation (including a large fleet of trains that are expensive to lease), have significantly fewer high yield passengers (ie on business) and therefore reduced revenue per passenger, and also have more competition (Lumo). I would be very surprised if the operational profit now (leaving franchise premium out of it) is higher than it was in 2017/18 on an inflation adjusted basis (£445m pa).

 

[Energy]

Currently, compared to previous franchisees, LNER have a much higher cost of operation (including a large fleet of trains that are expensive to lease), have significantly fewer high yield passengers (ie on business) and therefore reduced revenue per passenger, and also have more competition (Lumo). I would be very surprised if the operational profit now (leaving franchise premium out of it) is higher than it was in 2017/18 on an inflation adjusted basis (£445m pa).

Final year of VTEC

Turnover: £842m
Operating profit: -£20m (a loss)
DfT premium: £334m

First accounts of LNER (24 June 2018 through to 31 March 2019)

Turnover: £842m
Operating profit: -£20m (a loss)
DfT premium: £334m

Adjusted for 12 months as opposed to 9.

Turnover: £926m
Operating profit: £70m
DfT premium: £170m

The figures are the accounts released pre covid, it took until around Nov 2022 to get close to pre-covid revenue. [source]

 

[LNW-GW Joint]

And GNER/NXEC/VTEC/LNER "profits", along with those from the few other TOCs paying a premium, paid a fair chunk of the subsidies elsewhere on the network (if we forget Network Rail funding).
So lower premiums from LNER make it that much harder to fund the rest of the network.

 

[Bald Rick]

And GNER/NXEC/VTEC/LNER "profits", along with those from the few other TOCs paying a premium, paid a fair chunk of the subsidies elsewhere on the network (if we forget Network Rail funding).
So lower premiums from LNER make it that much harder to fund the rest of the network.

Back in 2018/19, the franchise payments to DfT (£2.856bn) more than offset those paid by DfT (£2.388bn).

Source : ORR financial data for the year https://www.orr.gov.uk/sites/default/files/om/uk-rail-industry-financial-information-2018-19.pdf

 

[RailWonderer]

To put it in simple terms, the ECML has always been profitable post privatisation (and before). It is my guess that the current LNER operation is the least profitable of the lot, adjusted for inflation.

Before Virgin EC was taken over by Government with LNER as an ‘operator of last resort‘, the franchisees paid the government an agreed sum each year for the right to run the franchise, known as a franchise premium. This was considerable amounts of money - nearly £1m a day for VTEC in 2017/18 - and if the franchise bidder did their sums wrong, or was affected by significant external events (Financial crisis, for example) then they had to pay Government more than the profit on the franchise.

Currently, compared to previous franchisees, LNER have a much higher cost of operation (including a large fleet of trains that are expensive to lease), have significantly fewer high yield passengers (ie on business) and therefore reduced revenue per passenger, and also have more competition (Lumo). I would be very surprised if the operational profit now (leaving franchise premium out of it) is higher than it was in 2017/18 on an inflation adjusted basis (£445m pa).

Thanks. +1

And GNER/NXEC/VTEC/LNER "profits", along with those from the few other TOCs paying a premium, paid a fair chunk of the subsidies elsewhere on the network (if we forget Network Rail funding).
So lower premiums from LNER make it that much harder to fund the rest of the network.

Does this mean the various Northern operators never paid a premium because the government knew it was always a lossmaking operation, as was Scotrail and all the regional operators?

In other words running a railway like a business doesn't work because the railways have a social responsiblity to provide loss making services that businesses don't have.

 

[Bald Rick]

Does this mean the various Northern operators never paid a premium because the government knew it was always a lossmaking operation, as was Scotrail and all the regional operators?

Effectively yes. When bidders bid for franchises they pitch the best price that they think will enable them to make their own profit (typically at very low levels compared to most business) taking into account the revenue from passengers and costs of operation. Northern is, and always will be, substantially loss making on an operational basis, and therefore needed ‘subsidy’ rather than ‘premium’.

In 2018/19, Northern’s income was £369m, and costs were £735m. ‘Subsidy’ of £346m made up most of the gap, but Northern’s owners at the time (Arriva) also lost £20m.

Source from the dame ORR doc I linked above.

 

[mike57]

And the ECML history is a good example why in my view the whole franchise model was flawed. Railway investment and operation is long term. Decent rolling stock may have a 40 year life with refurbishment. Infrastructure improvements are long term. Once short-termism (not sure if its a word!) took hold failure was guaranteed. For railways to be successful a long term view needs to be taken, and political micromanaging needs to end. Set service level requirements, agree subsidy if required, and then let the business get on with it, with some sort stick/carrot to encourage the best use of resources, infrastructure, rolling stock and staff.

 

[JamesT]

Does this mean the various Northern operators never paid a premium because the government knew it was always a lossmaking operation, as was Scotrail and all the regional operators?

In other words running a railway like a business doesn't work because the railways have a social responsiblity to provide loss making services that businesses don't have.

Of course it works. It's just the state needs to provide funding for those services that wouldn't run in a purely commercial environment. But the profit motive incentives the private company to try and grow the business to gain extra profits.

And the ECML history is a good example why in my view the whole franchise model was flawed. Railway investment and operation is long term. Decent rolling stock may have a 40 year life with refurbishment. Infrastructure improvements are long term. Once short-termism (not sure if its a word!) took hold failure was guaranteed. For railways to be successful a long term view needs to be taken, and political micromanaging needs to end. Set service level requirements, agree subsidy if required, and then let the business get on with it, with some sort stick/carrot to encourage the best use of resources, infrastructure, rolling stock and staff.

Surely that's exactly why the franchising model is needed? Award a long franchise and let them get on with it?

 

[Merle Haggard]

The figures are opaque to say the least; but isn't it the case (and with all franchises) that a proportion (?50%) of track access charges are paid by the DfT/Treasury direct to Network Rail, so don't count against the 'profit'? And does not Network Rail make a 'loss', showing that track access charges do not exhaust costs?
I have no agenda or 'axe to grind', just would like know the details.
In B.R days, infrastructure costs were charged on 'Prime User/avoidable costs' basis, so the IC company picked up all costs for the route except those created by the other sectors and which IC did not benefit from (eg signal boxes open when there were no IC trains).

 

[LNW-GW Joint]

And the ECML history is a good example why in my view the whole franchise model was flawed. Railway investment and operation is long term. Decent rolling stock may have a 40 year life with refurbishment. Infrastructure improvements are long term. Once short-termism (not sure if its a word!) took hold failure was guaranteed. For railways to be successful a long term view needs to be taken, and political micromanaging needs to end. Set service level requirements, agree subsidy if required, and then let the business get on with it, with some sort stick/carrot to encourage the best use of resources, infrastructure, rolling stock and staff.

Franchising ensured that all the routes got investment every 7-10 years (infrastructure, rolling stock, stations etc).
The BR model favoured intercity first and then NSE with investment, leaving "Regional Railways" out in the cold.
Northern/TfW/Scotrail would not have got new trains under that model, they would be operating cast-offs.

The DfT aim was to improve the finances of all the franchises, reducing the overall subsidy over time.
That sort-of worked until 2019, but is not viable now.

The Treasury (who else) vetoed long franchises which would have offered more risk/return for the owner, and more investment.
Only Chiltern got a long Mk2 franchise (now expired).
The policy when Covid struck was to have more smaller franchises to attract new bidders.
Nobody knows what will be proposed by the next government (of whichever hue).

 

[Clarence Yard]

The figures are opaque to say the least; but isn't it the case (and with all franchises) that a proportion (?50%) of track access charges are paid by the DfT/Treasury direct to Network Rail, so don't count against the 'profit'? And does not Network Rail make a 'loss', showing that track access charges do not exhaust costs?
I have no agenda or 'axe to grind', just would like know the details.
In B.R days, infrastructure costs were charged on 'Prime User/avoidable costs' basis, so the IC company picked up all costs for the route except those created by the other sectors and which IC did not benefit from (eg signal boxes open when there were no IC trains).

You also have the fixed track access paid through the TOC to consider. That was and is effectively a “laundered” DfT subsidy to NR and did go up and down by several million each year of a Control Period, affecting the actual premium paid or subsidy received, as the TOC was indemnified for any change in FTAC.

 

[Adrian1980uk]

Thanks. +1

Does this mean the various Northern operators never paid a premium because the government knew it was always a lossmaking operation, as was Scotrail and all the regional operators?

In other words running a railway like a business doesn't work because the railways have a social responsiblity to provide loss making services that businesses don't have.

But that is where the subsidy comes in, for each franchise the agreement was individual, i.e ECML profitable so paid premium but ScotRail was paid subsidy because it had more routes losing money than profitable ones. The incentive to turn some of those routes into profitable routes was there as it increased the profit of whomever is running the franchise at the time (profit was subsidy+operating loss or profit).

Now of course there is a different mindset where the DFT takes the risk, the incentive to increase revenue on each route isn't really there as the management company gets paid to run it and doesn't really matter profit or loss.

 

[Tetchytyke]

Franchising ensured that all the routes got investment every 7-10 years (infrastructure, rolling stock, stations etc).

No it didn't. Northern back in 2004 was let to Serco/Abellio as a no-growth franchise with no provision for any new rolling stock. Indeed that franchise was let assuming that the Pacers released from the Oldham Loop would be scrapped, and Serco/Abellio only agreed to take them back out of storage upon payment of a fee by GMPTE.

The only new (to the operator) rolling stock- as it happens, cast off 156s and 158s- were paid for by Merseyside PTE and the development agency Yorkshire Forward.

What was Regional Railways North East didn't receive any new rolling stock between the pre-privatisation 333s- part funded by WYPTE- which were eventually delivered in 2000 and the 195/331s in 2019.

(On the subject of the 333s, the funding for the 4th cars ran out in 2007 and Serco were going to remove the cars unless someone else paid for them. In the event SYPTE funded them so that the 4-car 321s would remain on the Doncaster line).

 

[Merle Haggard]

Franchising ensured that all the routes got investment every 7-10 years (infrastructure, rolling stock, stations etc).
The BR model favoured intercity first and then NSE with investment, leaving "Regional Railways" out in the cold.
Northern/TfW/Scotrail would not have got new trains under that model, they would be operating cast-offs.

The DfT aim was to improve the finances of all the franchises, reducing the overall subsidy over time.
That sort-of worked until 2019, but is not viable now.

The Treasury (who else) vetoed long franchises which would have offered more risk/return for the owner, and more investment.
Only Chiltern got a long Mk2 franchise (now expired).
The policy when Covid struck was to have more smaller franchises to attract new bidders.
Nobody knows what will be proposed by the next government (of whichever hue).

mmm...

Sprinters???

 

[Tetchytyke]

Now of course there is a different mindset where the DFT takes the risk, the incentive to increase revenue on each route isn't really there as the management company gets paid to run it and doesn't really matter profit or loss.

That's the same for any of the franchises where services are operated at a loss, with the operator's profit margin coming from subsidy.

Serco, when they had the Northern franchise, even parked up the 142s displaced from the Oldham Loop despite chronic overcrowding problems in Greater Manchester. They only brought them out of storage after GMPTE paid them to.

mmm...

Sprinters???

Pretty much the entire Regional Railways fleet was replaced between 1982 and 1992 using brand new trains. And, certainly in RRNE territory, that was then it for another 20+ years. No new diesels between the 158s of 1990-1992 and the 195s of 2019.

But yep, we should be thankful for privatisation(!)