Stagecoach and Virgin’s corporate welfare boost with East Coast rail bailout

The early termination of the Virgin Trains East Coast franchise for East Coast rail means a massive corporate welfare boon for Stagecoach.
Virgin Trains East Coast 82200 at King's Cross Station in London in March 2015. (Aubrey Morandante/Wikimedia Commons)

The Guardian reported in late November 2017 that the government has agreed to end Virgin Train’s East Coast (Vtec) contract to run the East Coast rail franchise three years early. This means the contract will terminate in 2020 rather than 2023, and according to the Guardian’s late-December report, could mean a loss of as much as £2bn for the treasury.

The value of the contract that Vtec signed with the government is £3.3bn. However, to date, the company has paid just a fraction of this. According to Vtec’s annual filings with Companies House, it paid £272m to the Department for Transportation for the 2016-17 financial year, £204.5m the previous year and £233.3m in 2015. To date, Vtec has paid £709.8m of that £3.3bn. (Note that Vtec is incorporated and registered as East Coast Main Line Company Limited.)

Members of the Labour party are calling the revised deal a ‘bailout’ and ‘a total smokescreen’. Andy MacDonald, the shadow transport secretary, argued that the failed franchise, which has so far not made a profit, will now become a financial burden to taxpayers.

Others have argued that this situation proves that the franchise model is broken. Of the move, Christian Wolmar, a transport commentator asked, ‘What is the point of franchising if the risk is never with the private company, and the promised gains to the taxpayer are clearly just theoretical?’

Chris Grayling, transport secretary, defended the decision, saying,

As we bring this franchise to a close and as we move to the new arrangements, no one is getting any bailout at all. Stagecoach will meet in full their commitments made to the government as part of this contract.

Stagecoach and Virgin see immediate financial benefit

Vtec, formed in 2015, is a joint venture by Stagecoach and Virgin Group. Though it is branded as Virgin, Stagecoach, the operator, owns 90 per cent of the company while the Virgin Group owns just 10 per cent.

Analysts noted that Stagecoach’s stock value rose by 12 per cent following the announcement of the early termination of Vtec’s contract. As of the writing of this blog, the company’s market capitalisation is £953.47m and growing by the day.

What some are calling a bailout follows years of receipt of substantial corporate welfare on the part of both Stagecoach and Virgin. Our Corporate Welfare Database shows that, between 2011 and 2014, Stagecoach Group received more than £1.2bn in government subsidies. Subtracting from this the contribution that Stagecoach makes through contributions to Railtrack and in paying for the train Franchises, means that total net payments to Stagecoach amount to almost £200m.  Similar figures to Virgin amount to gross subsidies of £5bn and net subsidies of £170m.

Details of the revised deal have not been released, so it’s not possible to know just how much money Vtec (and Stagecoach and Virgin) will save by ending the contract three years earlier than planned. What is clear is that train companies cannot exist without huge subsidies to effectively prop-up fake markets. And if companies fail, they will be bailed out.

Source: East Coast rail ‘bailout’ could cost taxpayers hundreds of millions | UK news | The Guardian