Virgin Rail loses contract to FirstGroup

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After 15 years of operating the West Coast Rail Line from London to Scotland, Virgin Rail lost its government contract to FirstGroup (LSE:FGP).  Reports claim FirstGroup offered the Department for Transport £5.5 billion for the 13-year contract, outbidding Virgin Rail by £750 million.  Since the announcement, FirstGroup’s share price has dropped due to speculation that their bid was too high and may send the rail company down the same path as some of its predecessors.

In the past, Virgin Rail was overlooked twice for contracts to operate the East Coast Main Line.  Both times, the winning bids were excessively high and the government was forced to regain control of the railway operations as the private companies could not live up to the bids’ terms.  The East Coast Main Line is still under government ownership; something Virgin Rail owner Richard Branson believes results in “outdated and underinvested” services.

However, FirstGroup CEO Tim O’Toole is excited about improving and expanding the railway system by reducing travel time, enhancing the travel experience, and offering more travel options.  They also have plans to introduce new direct services to Blackpool, Telford, Shrewsbury, and Bolton.

While First Group is promising better and faster service, many industry experts are concerned about the viability of the contract and expect that major cuts in staff and quality of service are inevitable, if they are even able to maintain control of operations through the life of the contract.

Rail unions are already voicing their displeasure with the new contract and are prepared to “mount a massive industrial, political, and public campaign to stop any attacks on [its] members’ jobs and the services they provide” announced Rail Maritime and Transport Union General Secretary Bob Crow.

As the West Coast Rail Line was Virgin Train’s last remaining rail franchise, it is possible that this may be the end for the railway firm.  However, some expect Branson to request a judicial review of the contract decision, but any alternative outcome is unlikely.  Stagecoach Group (LSE:SGC), which owns 49% of Virgin Rail, has announced its openness to future joint ventures with Virgin, although no plans are currently in the works.

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