4 days ago
Private rail firms face probe over ‘super' profits
A major row has erupted after ministers ordered a review into privately owned train companies extracting 'super normal profits' that risk costing taxpayers more than £200 million a year.
An 'extremely late' intervention by transport secretary Heidi Alexander to clamp down on 'open access' train operators has this weekend sparked recriminations from FirstGroup, one of the country's biggest transport companies.
It also threatens to derail Sir Richard Branson's bid to return the Virgin name to Britain's railways.
Open access services have proved popular with consumers, with the likes of FirstGroup-owned Lumo offering fares from London to Edinburgh for as little as £19.99.
Labour is pressing ahead with plans to bring the railways into full public ownership as the contracts to run services on behalf of the state expire.
Alexander has insisted that open-access operators, which are not tied to timetables set by the government and compete with state-contracted firms, will be allowed to continue on the railways. Other popular operators include Grand Central and Hull Trains.
But the government's top transport official is now urging a tougher stance on open-access firms.
Richard Goodman, director-general for Rail Reform & Strategy, last week wrote to the Office of Rail and Road (ORR), the transport regulator, to raise the bar for granting licences to new open access operators. New analysis by the Department for Transport (DfT) had found that the annual 'abstraction' cost to the Exchequer would be up to £229 million if all the open-access operator licence applications were granted.
'This represents significant additional cost to taxpayers and would materially affect the funds available to the secretary of state. We therefore believe it is critical that the ORR immediately takes steps to fully understand and consider the cumulative scale and impacts of abstraction when it assesses open access applications,' Goodman continued.
'The secretary of state considers that this analysis should be undertaken in respect of all live applications as well as existing services in order for the ORR to fully discharge its duty to consider impacts to the secretary of state's funds.'
Whitehall sources singled out FirstGroup, the FTSE 250 company behind London and Edinburgh service Lumo, and Hull Trains, which achieved a 32 per cent operating profit of £34.1 million in 2024-25. 'These super normal profits come about because [open-access operators] do not pay the full cost of accessing the track, nor do they have to meet public service obligations that require them to put on the services people need,' they said.
FirstGroup this weekend hit back with a strongly worded letter of its own. Bosses raised concerns about the 'extremely late-stage' intervention by government officials.
Steve Montgomery, FirstGroup managing director, said that Goodman's 'openly hostile' letter included claims that were 'demonstrably untrue' such as suggestions that open-access operators were an 'unwelcome drain on the DfT budget'.
Sources close to the firm added that FirstGroup's open-access operations had been lossmaking during the pandemic and would soon be paying more in track access charges than contracted operators such as east coast main line firm LNER.
South Western Railway was the first to be nationalised under Labour in May. It will be followed by c2c next month and Greater Anglia in October. They will join LNER, Northern, Southeastern and TransPennine Express, which were brought back into public ownership by the Conservatives after operational or financial failings. Others will be nationalised between now and 2028 and will ultimately be rebranded as Great British Railways.
There has been an influx of open-access applications to the ORR since Labour swept to power last July.
Among them is Branson, the billionaire whose operator Virgin Trains ran services on the west coast mainline between 1997 and 2019. Virgin has applied to start an open-access service on the same line.
Alexander has previously voiced concerns about open-access operators luring customers that would otherwise travel on the incumbent state-contracted, or state-owned, operator. Fare income would go into the pockets of private companies that would otherwise be paid to the Exchequer. Politicians and civil servants refer to this as 'abstraction'.
In a major blow to Branson's ambitions, Goodman said that the south part of the west coast main line was already 'severely constrained'.
'Additional open-access services would both prevent development of revenue-generative contracted services and increase performance risks to existing services due to perturbation,' he concluded.
The government reiterated that there will be a place for open-access operators, even once all contracted services are brought under full public ownership. In May, the prime minister backed a new open-access service running from north Wales, the West Midlands and London called the Wrexham, Shropshire & Midlands Railway.
