U.S. News

Arriva Wins U.K.'s Cross Country Rail Franchise


Britain's Arriva has won the competition to run the country's biggest rail franchise, Cross Country, replacing Virgin Rail, the current operator owned by Richard Branson and Stagecoach.

Arriva shares rose 7.9 percent to 769.846 pence at close.

"The Cross Country network is the most extensive rail franchise in the U.K.," Arriva said in a statement on Tuesday. "Stretching from Aberdeen to Penzance and from Stansted to Cardiff, it covers around 1,500 route miles and calls at over 100 stations."

The franchise was the third of four to be awarded in Britain this year, putting pressure on Arriva's rival, National Express, which has yet to secure a deal. National Express shares fell 1.3 percent to 1108 pence.

Arriva promised to increase capacity by 35 percent during evening rush hour on its main routes by June 2009, provide WiFi Internet access on trains and improve ticketing, allowing passengers to print tickets at home and receive and display them on mobile phones.

"You'll make a booking on the mobile phone and have a ticket sent down to you, which will be ... a two-dimensional image," MD Steve Clayton told reporters.

Prices of the most flexible tickets will rise by an average of 3.4 percent, but Arriva said it would make more discounted fares available.

The franchise will generate over 600 million pounds ($1.2 billion) of revenue a year, including around 1 billion pounds of government subsidies spread across its eight-year lifetime from November.

Risk for National Express

Rail Minister Tom Harris said: "Not only are they delivering an even bigger increase in capacity than we asked for, they are doing it a year earlier than expected."

Analyst Andrew Fitchie at Collins Stewart said Cross Country had been making little financial contribution to Virgin Rail and that losing the franchise would take only about 1 percent off Stagecoach's profits.

Stagecoach shares fell 0.25 percent to 203 pence.

But the risk to profit forecasts is increasing for National Express, which only has one more franchise out of the four this year to bid for -- InterCity East Coast.

"With the probability of this happening now reducing, this exposes a risk," said Fitchie. "There is about 12 million pounds of profits at risk here, which equates to around 9 percent of 2008 pretax profit."

Last month Go-Ahead Group won the West Midlands franchise, and Stagecoach won the East Midlands franchise. Arriva is expanding rapidly throughout Europe. Last month it announced a deal to enter the Polish rail market and bolstered its position in Italian buses, taking the number of countries in which it operates to 10.

Analyst Gert Zonneveld at Panmure said the deal was worth around 50 pence per Arriva share and upgraded Panmure's recommendation to 'hold' from 'sell'.

"This reflects not only today's franchise win, but also the recent acquisition of Veolia Denmark and the expectation of further acquisitions and contract wins in continental Europe," said Zonneveld.

Arriva's subsidy comprises over one third of revenues in the first year, falling away to almost zero as services are expanded to generate higher sales.

"By the end of the franchise, the railway will be pretty much paying for itself," said Clayton.