National Express Goes For Growth

International Railway Journal, Nov, 2000 by David Briginshaw

National Express Group, already the largest operator at passenger rail franchises in Britain with five train operating companies, has just acquired Prism Rail, which will give it additional franchises. Mr Richard Brown, National Express Group's commercial director, explains the reasons for the acquisition and why he believes that privatisation has on the whole been a good thing.

NATIONAL Express Group (NX) completed the purchase of Prism Rail on September 19. This effectively gives NX two additional profitable franchises, as Brown explained. "The deal will enhance our earnings from day one, so there is an immediate benefit to NX. We had a much higher ratio of subsidy to revenue than some of the other franchise owners in Britain, which meant that we had only a 13% share of national revenue. The Prism deal will increase this to nearly 20%. It will also rebalance our portfolio of franchises, as we were under-weighted in the lucrative London and southeast England market."

Prism Rail currently has four franchises. However, two of them-Wales & West and Valley Lines in Cardiff--will be handed back to the Strategic Rail Authority (SRA) on March 31 next year as they are being restructured as part of the current refranchising process. Brown admitted that NX would not have taken on Prism if these two franchises had remained part of the group as both of them were losing money.

NX only had one London commuter rail operator: Silverlink Train Services. The Prism acquisition will give it two more. One is c2c (formerly LTS Rail), which is a 15-year franchise for the London--Tilbury--Southend service. WAGN Railway is a 7year franchise covering routes between London and Cambridge. However, half the franchise will be handed back to the SRA at the end of March for inclusion in the new Thameslink 2000 franchise. This will leave NX with the services operating out of London Liverpool Street to northeast London suburbs and Cambridge, plus the rapidly growing service to Stansted Airport.

NX already had one London airport rail link as part of its original portfolio: its 15year franchise for Gatwick Express. NX recently concluded an alliance with BAA, which owns the successful Heathrow Express rail link and London's three main airports of Heathrow, Gatwick, and Stansted. The deal involves the joint marketing of the Heathrow Express and Gatwick Express services. This can now be extended to included Stansted Express. "Half the market for these services is incoming foreign travellers, which are ideal for public transport because they have to leave their cars at home," Brown observed. The difficulty of any rail-air link is how to market the service to such a global audience, so pooling resources makes commercial sense.

The Prism deal also gives NX a third long-term franchise, which will help to remove some of the uncertainty of the shadow Strategic Rail Authority's (sSRA) refranchising process. NX has just concluded a deal with the sSRA to extend its 10-year Midland Main Line inter-city franchise by another two years to 2008. NX won the original Midland Main Line franchise on the basis of doubling the train frequency between London and Derby and Nottingham, which in turn enabled it to accelerate London-Sheffield services. This has been a success as Brown explained: "Midland Main Line has performed ahead of our expectations financially--we had a 17% increase in revenue in the first half of this year--and it has consistently grown faster than expected."

NX is the first franchise owner to negotiate and conclude an extension to a franchise without having to compete for it. The sSRA has agreed to allow Midland Main Line to use the premium payments of [pound]33 million it would have paid to the sSRA between now and 2006 to invest in the business. This will allow a [pound]238 million package of investments to go ahead.

This includes [pound]135 million to replace Midland Main Line's recently-acquired fleet of Adtranz 160km/h Turbostar dmus with a 127-car fleet of 200km/h diesel trains which will start to enter service in 2004. These might be tilting trains similar to those being built by Bombardier Transportation for Virgin Trains. A [pound]17 million park-and-ride station will be built in the East Midlands, and a further [pound]22 million will be invested to improve existing stations. Railtrack will spend [pound]60 million to upgrade track. London-Sheffield services will be extended north to Leeds.

Brown confirmed that NX is looking at the possibility of extending some of its other franchises. "All franchises include an option to extend them for up to two years, provided both the franchisee and the sSRA can agree suitable terms," Brown explained.

NX is keen to retain its existing short-term franchises. This is somewhat surprising as Brown admitted that NX is not making much money on two of them: Central Trains and ScotRail. The two franchises are remarkably similar with a mixture of heavily loss making commuter rail (centred on Birmingham and Glasgow) and rural services, plus more lucrative interurban routes such as Liverpool--Birmingham-Stansted Airport and the Glasgow--Edinburgh--Aberdeen triangle. These are the two franchises that have lowered NX's share of national rail passenger revenue.