Stagecoach has said it is in discussions with the Department for Transport (DfT) over the terms of its East Coast franchise after anticipating losses of more than £80 million over the next two years.
Publishing its preliminary year-end results today (June 28), Stagecoach said it was having to make an £84.1m exceptional charge to account for losses it expects to incur under the contract.
The company also confirmed a £44.8m non-cash exceptional impairment of franchise intangible assets. This has been described by Stagecoach as an “acceleration of amortisation” – a decrease in the value of the franchise which occurs over time.
Services on the East Coast are currently operated by Virgin Trains East Coast – a joint venture between Stagecoach (90 per cent) and Virgin (10 per cent).
Stagecoach said that although revenue was not growing as strongly as anticipated – citing concerns around terrorism and political uncertainty as factors – it did expect the business to be profitable by 2019.
Stagecoach said discussions with the DfT were needed because assumptions made in its bid for the East Coast franchise around certain infrastructure upgrades and the timing of new rolling stock didn’t match current plans.
Rail union RMT claims the announcement supports its campaign for public-sector ownership of the railway.
Since taking over the franchise, the Virgin Trains East Coast has made premium payments amounting to around £525 million to the Treasury, Stagecoach said, and average payments are up by around 30 per cent compared to those made by the government-owned Directly Operated Railways.
At the start of this year, the operator also completed a £40 million refurbishment of its InterCity 125 and 225 fleets as part of a wider investment programme on the East Coast corridor.
Announcing the results, Stagecoach chief executive Martin Griffiths said: “We are engaged in discussions with the Department for Transport regarding our respective contractual rights and obligations under the current Virgin Trains East Coast franchise and reflecting the reprioritisation of Network Rail’s infrastructure programme.
“However, separately we have made financial provisions to reflect the short-term outlook for that business over the next two years, including in view of the weak growth environment affecting the UK rail sector as a whole.
“We are disappointed to report losses at Virgin Trains East Coast. However, I am confident that we can return the business to profitability and build on the significant benefits we have delivered to date for customers and taxpayers.
“Overall, we believe in the long-term prospects for the business and public transport remain positive.”
Stagecoach’s rail business saw revenues rise from £2.13 billion to £2.16 billion, while operating profits fell from £66.7 million to £31 million.
The company is shortlisted for the future East Midlands and South Eastern rail franchises and is part of a joint venture with Virgin and SNCF competing for the West Coast Partnership franchise.
The group as a whole recorded a statutory profit of £17.9 million, down considerably from £104.4 million in 2016. Revenue increased from £3.87 billion last year to £3.94 billion.
Adjusted earnings per share for the year were in line with expectations, according to Stagecoach, and there had been an increase in its dividend per share.