UK Transport Secretary Chris Grayling said on Monday the Stagecoach-led Virgin Trains East Coast rail franchise is facing an “urgent” cash crisis and will be able to continue in its current form “for a matter of a very small number of months and no more.”

Grayling said his department “issued the franchisee with notification that the franchise had breached a key financial covenant.”

The Transport Secretary said this means he will have to “in the very near future” end the franchise contract and put in place “a successor arrangement” to operate East Coast.

Grayling said one option even being considered is that East Coast could be directly operated by the Department for Transport (DfT) as an operator of last resort.

But Grayling conceded: “At this stage, one of the options is to consider the possibility of Stagecoach continuing to operate services on the East Coast under a very strictly designed and short-term arrangement.

“The current management has a strong record of customer service and to rule out their involvement now would go against the principles I set out above.

“However, given the circumstances in which the government is having to step in to protect passengers on this line, I am only prepared to consider this option on the basis that the franchise would be operated on a short-term, not-for-profit basis.

“The only acceptable financial reward for Stagecoach would be received at the end of the contract and only in return for clearly specified passenger benefits being delivered.

“The company cannot be allowed to continue running this franchise and making a profit given what has happened.

“They got their sums wrong and they will pay the price for that – not the taxpayer.

“The alternative option is that the East Coast franchise would be directly operated by the Department for Transport through an Operator of Last Resort.

“My department will subject this option to the same rigorous assessment to establish whether it will deliver value for money for taxpayers and protect the interests of passengers.

“This option is currently on the table and will be selected if the assessment that I have set out determines that it offers a better deal for passengers and taxpayers than the alternative.”

Grayling said that since 2015, the Stagecoach-Virgin East Coast franchise has met all its financial commitments to the taxpayer, returning nearly £1 billion to the public purse.

“But this has come at a substantial cost of nearly £200 million to Stagecoach,” added the Transport Secretary.

“I have already informed the House that the franchise will in due course run out of money and will not last until 2020.

“But it has now been confirmed the situation is much more urgent.

“It is now clear that this franchise will only be able to continue in its current form for a matter of a very small number of months and no more.”

Nonetheless, Perth-based Stagecoach said in a stock exchange statement the DfT and its joint venture, Virgin Rail Group (VRG), agreed a new West Coast rail franchise to run from April 1, 2018, potentially until March 31, 2020.

The Perth-based company also said a Stagecoach subsidiary has been shortlisted to bid for the next East Midlands franchise, currently planned to begin in August 2019.

And Stagecoach said the DfT will continue to explore entering into new commercial terms with Virgin Trains East Coast (VTEC) on the continued operation of the East Coast franchise subject to certain criteria being met.

Stagecoach CEO Martin Griffiths, said: “Our partnership with Virgin on West Coast has delivered two decades of investment, innovation and a step-change in customers’ experience of rail travel. 

“The new West Coast contract will build on that and ensure a strong foundation for the start of the new West Coast Partnership franchise.

“We are also pleased to have been shortlisted for the new East Midlands franchise.  

“At East Midlands Trains, we are proud of the improvements we have delivered for customers and our people over the past 10 years, and we look forward to working with local stakeholders on our plans to maximise the benefit of the railway for the regional economy.

 “Virgin Trains East Coast is progressing a £140m investment programme for customers and delivering significant payments to the taxpayer. 

“Contrary to much misinformed recent comment, we have neither walked away from the East Coast franchise nor asked for, or received, any special treatment. 

“We have accepted our share of risk agreed with the Government at the time the franchise was let. 

“At all times, we have acted with professionalism and integrity by fulfilling Stagecoach’s obligations to fund the franchise, even in challenging times and with changed circumstances. 

“We are also continuing our discussions with the Department for Transport about new contractual arrangements to facilitate the transition to the planned new East Coast Partnership in 2020.

“Our proposal for a collaboration with Alstom to bid for the South Eastern rail franchise aims to combine Alstom’s knowledge of infrastructure and rolling stock, with our operational expertise and customer service focus. 

“The proposed arrangement supports our vision of delivering a more integrated and innovative rail service for the customers and local communities who depend on what is one of the busiest rail networks in the UK.”