With six weeks to go before West Coast bids are submitted, some interesting issues are emerging.

Hundreds of the UK railway’s best brains are currently labouring on the bids for the new West Coast intercity franchise. When the bids are submitted to the Department for Transport on May 1, more than £20m will have been spent on specialist advice by the four companies that are competing for the 14-year contract – Abellio, FirstGroup, Keolis and Virgin Rail Group.

With passenger revenue of more than £750m and the highest passenger km of any UK franchise, West Coast is a huge operation, but this is the first time that it has been put out to tender since privatisation in the mid-1990s. Virgin Rail Group, which is 49%-owned by Stagecoach, is the team to beat, having held the franchise since January 5, 1997.

The competition will be fierce, however, with rival bids coming from the UK’s biggest passenger transport group, FirstGroup, and subsidiaries of the state railway companies of France (Keolis) and The Netherlands (Abellio). To retain the contract, VRG may have to surrender some of its current £55m-plus annual operating profits.

The competition represents a tough test for everyone concerned, including the Department for Transport, which will not want to see a repeat of the two failed franchises on the East Coast Main Line – GNER (2006) and National Express (2009). In both instances the failure resulted from over-ambitious bids by the operators for a business that was vulnerable to fluctuations in the economy.

The new West Coast deal, which is scheduled to begin in December 2012, is likely include a risk-sharing mechanism based on GDP rather than revenue, which would insulate a future incumbent against an economic downturn. The DfT is likely to be cautious about accepting the bid that offers the highest premium payments, and will be looking for evidence that revenue targets are realistic.

Virgin appears to be growing rapidly, despite the current recession – with an 8.4% growth in passenger kilometres in the year to March 31, 2011 (only First TransPennine Express and the enhanced London Overground grew faster). However, the level of risk involved in bidding for a large contract, which will last for nearly 14 years, remains a key concern for bidders. “Whoever wins it is going to be writing an enormous cheque to the Department for Transport,” one bidder told Passenger Transport. “The sheer size of the franchise is giving people concern.”

Another concern is that the competition is taking place amid ongoing discussions of rail industry reform, in the wake of last year’s McNulty review of rail value for money. The new West Coast franchise will not be a template for the new franchising model. It does not include many stations, and there is little scope for alliancing opportunities with Network Rail. The franchise is highly vulnerable to Network Rail performance, and its principal London terminus is going to be a building site during the last years of the franchise as part of the High Speed 2 project.

Bidders will have to capture the tone that matches that of the government before it has concluded the consultation process that began this month with the publication of its railway command paper – Reforming our Railways: Putting the Customer First. The DfT may favour flexible bidders who are able to demonstrate that they are will help to implement reforms over the next decade.

Fares policy is also due to be reviewed by the government and this potentially has huge implications for the company that wins the right to run intercity trains on the West Coast Main Line until March 2026. Bidders are expecting the DfT to offer them some increased flexibility to change fares and timetables, but the extent of this is yet to be made clear.

THE WEST COAST BIDDERS:

Abellio

Who are they? – A subsidiary of the Dutch state railway company, Nederlandse Spoorwegen
UK rail pedigree – Operates Northern Rail and Merseyrail franchises with Serco, and recently took over Greater Anglia franchise
Key people – The group’s bid is being led by a rising star, Jamie Burles, who was formerly commercial director at Northern Rail

Abellio made a big breakthrough last year when it won the contract to operate the Greater Anglia franchise. Can the Dutch really make it two wins in a row and add the massive West Coast operation to their UK portfolio?

There is likely to be caution at the parent group’s Utrecht HQ over the figures after it emerged that the group had won the 29-month Greater Anglia contract by bidding £60m more than its nearest rival. Bidding 16% more than your nearest rival is probably survivable for the short Greater Anglia franchise, but it would almost certainly be terminal on the much larger and much longer (14 years) West Coast contract.

Abellio’s expansion means that it has already grown larger than its parent company, Nederlandse Spoorwegen. Winning the West Coast contract would tilt the balance even further, and grow overall NS turnover by more than a quarter. How much risk is a company underwritten by Dutch taxpayers willing to take on?

Our verdict: The outsiders. Anglia deal is enough for now

FirstGroup

Who are they? – The UK’s largest passenger transport group
UK rail pedigree – Operates four franchises: Greater Western, Thameslink, ScotRail and TransPennine Express
Key people – Caroline Donaldson, formerly of London Underground, is leading the bid. The designate MD is Richard Parry, formerly deputy MD at LU

Tim O’Toole has appointed two colleagues from his days as chief executive of London Underground to spearhead the groups first rail franchise bid since taking charge of FirstGroup. Former Tube executives Caroline Donaldson and Richard Parry will seek to make West Coast the group’s fifth UK rail franchise. FirstGroup’s UK rail business already generates annual revenue of £2.2bn – West Coast would take this over £3bn.

All four of FirstGroup’s existing franchises are due to expire within the next three years, beginning with Greater Western and Thameslink in 2013. Greater Western is being handed back early, which may not have endeared the Aberdeen-based group to the Department for Transport. O’Toole and Vernon Barker, managing director UK rail, will be under pressure to maintain the group’s large footprint in the UK rail sector, but in a way that ensures a reasonable return for their shareholders.

Our verdict: Rejuvenated First is a serious contender

Keolis

Who are they? – A subsidiary of SNCF, the French state railway
UK rail pedigree – Minority partner in four UK franchises: Southern, Southeastern and London Midland with Govia, and TransPennine Express with FirstGroup
Key people – David Franks, joined Keolis as managing director for new franchises last year. He is designate MD for West Coast

Capturing the West Coast franchise would be a breakthrough deal for Keolis, which has so far operated only as a minority partner in the UK rail industry, with Go Ahead and FirstGroup. Keolis has no experience of operating an intercity franchise in the UK, but parent group SNCF has a wealth of experience as operator of the French TGV network. Keolis has meanwhile made a shrewd move by persuading David Franks, the former head of National Express Group’s UK rail business, to lead its bid and become its designate MD for West Coast. Few in the UK rail industry can match his breadth of experience.

President Sarkosy has instructed SNCF to go forth and conquer, and West Coast would represent a huge prize for the French state railway company. West Coast would only add 3% to SNCF’s annual turnover, but it still represents a risk, especially in view of SNCF’s debt, that they might not be willing to take.

Our verdict: The biggest threat to a Virgin victory

Virgin Rail Group

Who are they? – A joint venture between Virgin (51%) and UK transport group Stagecoach (49%)
UK rail pedigree – The incumbent operator: has operated the West Coast intercity franchise since rail privatisation in the mid-1990s
Key people – Tony Collins has been Virgin Trains boss since 2004. Paul Furze-Waddock is new business development director

Virgin’s status as the incumbent operator must give it a considerable advantage when bidding for such a large and risky franchise. However, the group’s relationship with the Department for Transport has been a notoriously difficult one. Could it be payback time? The joint venture lost the CrossCountry franchise to Arriva when it was retendered in 2007, so losing West Coast would mean the end of its 15-year presence on Britain’s railway network. There are a few people in Great Minster House who might raise a glass to that, although some expect that a Judicial Review would follow.

However, two aggressive entrepreneurs like Sir Richard Branson and Sir Brian Souter won’t be giving up without a fight. The West Coast operation has changed beyond recognition under Virgin’s tenure. Passenger satisfaction (89%), punctuality (85%) and growth are all higher than on government-run East Coast. Can they make the case?

Our verdict: Marginal favourites – a must-win

This article, inclusing our analysis of each of the bidders strengths and weaknesses, appears in the latest issue of Passenger Transport. Click here to subscribe.