Stagecoach, the rail operator, will lose its East Midlands franchise and has been barred from two further competitions after submitting “non-compliant” bids amid a dispute over a pensions funding black hole, the Department for Transport has said.
The revelation came as Chris Grayling announced DfT had awarded the next East Midlands Railway franchise, which includes busy routes from London to Norwich and Sheffield, to Abellio East Midlands.
DfT then revealed Stagecoach was off the shortlist for two further tenders, South Eastern and the key West Coast Partnership.
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The announcement could put an end to the operation of Virgin Trains, which is 49%-owned by Stagecoach. Virgin had bid to continue operating the West Coast line, which it has run since 1997, from 2020.
Abellio, a Dutch government-owned company that operates five other UK rail franchises, will take over from Stagecoach on 18 August, Grayling said in a statement to the House of Commons. The franchise will run for eight years.
A DfT spokesperson said Stagecoach had submitted “non-compliant” bids not only for the East Midlands franchise but also for South Eastern and the West Coast Partnership, which is expected to be the launch contract for high-speed railway HS2.
The spokesperson said the company had proposed “significant changes to the commercial terms” for all three of the franchises, “leading to bids which proposed a significantly different deal to the ones on offer”.
"It is regrettable that they submitted non-compliant bids for all current competitions which breached established rules and, in doing so, they are responsible for their own disqualification,” they added.
Stagecoach said it had been told by DfT that its bids had been discarded because they did not meet the tender rules, “principally in respect of pensions risk”.
It said bidders had been asked to bear the full, long-term funding risk for parts of the Railways Pensions Scheme, which is facing a multi-billion pound deficit.
Stagecoach chief executive Martin Griffiths said: "We are extremely concerned at both the DfT's decision and its timing. The department has had full knowledge of these bids for a lengthy period and we are seeking an urgent meeting to discuss our significant concerns."
Griffiths said private companies should not be expected to bear the funding risks. "The Pensions Regulator has indicated that an additional £5bn to £6bn would be needed to plug the gap in train company pensions."
The East Midlands franchise will start on 18 August and run for eight years.
Grayling said under Abellio’s management, the franchise would see “significant improvements” to service and infrastructure, including an enhanced compensation scheme for late-running trains, more flexible ticket options and more seats at peak times on some routes.
In the same statement, Grayling announced his department was in talks to extend a franchising agreement with Govia for a second time.
DfT was negotiating for a “short-term extension” to the agreement to manage the Southeastern rail service up to 10 November, to “ensure continuity of services for passengers”. The contract was previously scheduled to end this month, but had been stretched to June.
There is also an option to extend the agreement further to April 2020, Grayling added.
Last year the department said it had considered stripping Govia of a separate contract to run the cross-London Thameslink service over last year’s train timetabling chaos.
Grayling told the Transport Select Committee last year that cutting the contract short could be legally difficult. “It is certainly an option that is still open to us to consider, but it is not straightforward. The contractual complexity does not automatically give you the right to withdraw a franchise because of poor performance over a short period of time,” he said.
In the same hearing, Grayling described his department’s franchising model as “shaky” and said its problems were “no secret”.