Rail firm counts cost of loss-making East Coast line

Transport operator Stagecoach is in talks with the Government over the terms of its deal to run the East Coast mainline after the loss-making rail franchise helped drag annual profits down by 83%.

The group said it was paying 30% more to the Treasury for the line than that charged to the state-backed operator that previously ran the operation - at a time when revenue growth is slowing.

It also said planned improvements to infrastructure and rolling stock had not materialised as expected at the time Virgin Trains East Coast - 90% owned by Stagecoach - had won the franchise, and that the Government ought to bear the impact of this.

The outlook for the group's rail business was also damaged by the impact of terror attacks in London and Manchester as well as political uncertainty which it said had weakened revenues in recent weeks.

Problems on the East Coast contributed to a collapse in Stagecoach's pre-tax profits for the year to 29 April to £17.9m, compared to £104.4m the year before.

Shares (Berlin: DI6.BE - news) plunged by 11% on the results, which were also affected by a worse than expected performance from its bus operations.

Stagecoach's profit slump was driven by an £84.1m charge to provide for expected losses under the current East Coast contract over the next two years, before the mainline is forecast to turn profitable in 2019.

There was also a separate £44.8m accounting charge related to the operation.

Stagecoach chief executive Martin Griffiths said: "We are engaged in discussions with the Department for Transport regarding our respective contractual rights and obligations under the current Virgin Trains East Coast franchise and reflecting the reprioritisation of Network Rail's infrastructure programme."

The group argued that "the financial risks related to changes in scope and timing of new rolling stock and infrastructure rest with the Department for Transport".

Julie Palmer, partner at Begbies Traynor (LSE: BEG.L - news) , said: "Profit margins continue to shrink as the transport giant struggles to maintain dwindling passenger numbers in the face of growing economic headwinds and rising inflation.

"All hopes now rest with the rail division's high-profile tenders for the new East Midlands, South Eastern and West Coast rail franchises, including the first few years of operation of HS2 services."

Mick Cash, general secretary of the Rail, Maritime and Transport union said the announcement on the East Coast mainline added weight to its warning that re-privatising the line after a successful spell in public hands was "a gamble doomed to failure"