Shares of Perth-based transport giant Stagecoach Group plc fell about 5% on Wednesday after it said it has been disqualified from the current three UK rail franchise competitions by the Department for Transport (DfT) due to concerns over pensions.
Stagecoach said it was shortlisted for the East Midlands franchise, where it was bidding independently; for the South Eastern franchise where it was bidding with Alstom; and for the West Coast Partnership franchise where it was part of a joint bid with Virgin Group and SNCF.
“A senior DfT official has verbally informed Stagecoach that it has been excluded from all three competitions for submitting non-compliant bids principally in respect of pensions risk,” said Stagecoach.
“Bidders for these franchises were asked to bear full long-term funding risk on relevant sections of the Railways Pension Scheme.
“This is at a time when The Pensions Regulator is seeking additional funding because of serious doubts over the Government’s ongoing support for the industry-wide scheme.”
Stagecoach Group CEO Martin Griffiths said: “We are extremely concerned at both the DfT’s decision and its timing.
“The Department has had full knowledge of these bids for a lengthy period and we are seeking an urgent meeting to discuss our significant concerns.
“We have drawn on more than two decades of rail experience and worked in partnership with local stakeholders to develop high quality proposals to improve each of these rail networks.
“We bid consistent with industry guidance issued by the Rail Delivery Group and shared with the DfT.
“Without ongoing Government support for the long-term funding of railway pensions, The Pensions Regulator has indicated that an additional £5 billion to £6 billion would be needed to plug the gap in train company pensions.
“In contrast, the rail industry proposed solution would have delivered an additional £500 million to £600 million into the scheme.
“This would have provided better stability and security for members and much better value for taxpayers. We are shocked that the Government has rejected this for a higher risk approach. We would urge that a full independent value for money review is undertaken into this issue without delay.
“Along with many other train companies, we believe strongly that the private sector should not be expected to accept material risks it cannot control and manage.
“In fact, this was a key finding of the Brown review into rail franchising more than six years ago.
“We are therefore extremely surprised that the Government still expects private operators to take risks they are not best placed to manage, despite the recent difficulties experienced by a number of operators of outsourced public sector contracts.
“Forcing rail companies to take these risks could lead to the failure of more rail franchises and cannot be in the best long-term interests of either customers, employees, taxpayers or the investors the railway needs for it to prosper.
“This is more evidence that the current franchising model is not fit for purpose, a view which has already been expressed by Keith Williams, who is leading the independent review of the rail system.
“It also further damages the already fragile investor confidence in the UK rail market and it undermines the involvement of two of the last British transport groups who are part of running Britain’s railway.
“Over more than 20 years, we have delivered industry-leading performance, record passenger growth, excellent industrial relations, and the highest levels of customer satisfaction in the sector.
“We will continue to focus on delivering high quality services for our customers at our existing rail businesses.”
Virgin boss Richard Branson responded to the news by saying his train business could disappear from the UK by November after partner Stagecoach was barred from the three rail franchise bids.
Branson wrote in a blog: “I am devastated for the teams who have worked tirelessly to make Virgin Trains one of the best train companies in the UK, if not the world.
“Virgin Trains has led in the industry for more than 20 years and we wanted this to continue for many more years.
“Running the railway comes with many challenges and the West Coast Main Line was struggling when we took it over, but we were determined to turn it around.
“With new trains, new track and our incredible team, we have become renowned for the award-winning way we look after our customers.
“Virgin Trains is consistently at the top of the long distance franchised operators for customer satisfaction – receiving a 90% customer satisfaction rating in the National Rail Passenger Survey.
“We have almost tripled passenger journeys – from around 14m in 1997 to nearly 40m today – and introduced ground-breaking initiatives like automatic delay repay, Beam, and Alexa.
“Drawing on the expertise we’ve gained over the past two decades in the UK, Virgin Trains have also recently launched in the US and we are working to transform rail travel there too.
“We’re baffled why the DfT did not tell us that we would be disqualified or even discuss the issue – they have known about this qualification in our bid on pensions for months.
“Our first priority is always to look after our teams.
“The pensions regulator has warned that more cash will be needed in the future, but no one knows how big that bill might eventually be and no responsible company could take that risk with pensions.
“We can’t accept a risk we can’t manage – this would have been reckless.
“This is an industry-wide issue and forcing rail companies to take these risks could lead to the failure of more rail franchises.
“We have significant concerns over the latest developments and their implications for the future of the UK rail market.
“We are still looking closely at the decision and we are now considering our options.”