The parent company of both South West Trains (SWR) and Avanti West Coast (in partnership with Trenitalia), First Group, has reached agreement with the Department for Transport (DfT) on next steps for the two train operating companies.
Both SWR and the West Coast Partnership (which includes both Avanti West Coast and the new shadow operator of HS2) are currently operating under Emergency Recovery Measures Agreements (ERMA) which were put in place by the DfT to provide continuity for rail passengers and the industry during the coronavirus pandemic. The ERMA for Avanti is in place to the end of March 2022 and the SWR ERMA is in place to the end of March 2021. Both can be extended by a further half year at the DfT’s discretion.
As part of this process, the ERMAs required the train operators and the DfT to agree whether any payment would be required to terminate the pre-existing franchise agreements, and, if so, how much, based on a pre-coronavirus trajectory financial model.
The payment calculation would take into account how much parent company support (PS’) or other sums would have been payable had the pandemic not occurred. The amounts are based on the financial status of each franchise prior to the pandemic and the DfT’s assessment, acting reasonably, of their potential trajectory for the remainder of the franchise term under those pre-existing agreements in the absence of the pandemic. The assessments would also take into account the franchise agreement change mechanisms and certain other input from the operating companies.
The DfT and FirstGroup have agreed that no termination sum is required for Avanti, which commenced operations in December 2019 and was performing well prior to the pandemic. Agreement has also been reached for a termination sum for SWR, which requires a further FirstGroup contribution of £33.2 million. This represents First Group’s share of parent company support and additional funding commitments under the franchise agreement, less amounts already paid into the operating company, and which will be paid at the end of the ERMA term.
The pre-existing franchise agreements will therefore terminate at the end of the ERMA term for SWR and Avanti. Agreement of the termination sums significantly reduces the overall financial risk within the First Rail franchise portfolio.
Following agreement of the termination sums, First Group is now negotiating new directly awarded management contracts with the DfT, which will come into effect at the end of the ERMAs, under which each incumbent train operator will deliver passenger rail services. The DfT has indicated that these new National Rail Contracts would last to 1 April 2023 for SWR, and to 1 April 2026 for Avanti, each with extension periods of up to two further years, at the DfT’s discretion.
Commenting on the announcement, FirstGroup chief executive Matthew Gregory said: “We welcome this agreement, which marks a further evolution of the contractual framework for our SWR and Avanti train operating companies, both in the context of providing resilient services throughout the coronavirus pandemic and also a more sustainable long-term approach.
“These new directly awarded management contracts will focus on passengers and operational performance, with a more appropriate balance of risk and reward. We look forward to working constructively with the DfT to make this a reality, and to use our expertise and understanding of the needs of our customers to deliver improvements that we know passengers want.”
First Group has two other rail franchises. TransPennine Express (TPE) is also operating under an ERMA, and the process to agree the franchise termination sum has been extended to the end of January 2021 by the DfT.
As also previously announced, the existing Emergency Measures Agreement for Great Western Railway (GWR) has already been extended to June 2021.