FirstGroup has reached agreement with the Department for Transport on the fee payable for termination of the TransPennine Express franchise (Photo: Tony Miles).

UK: FirstGroup plc announced on May 11 that it had reached agreement with the Department for Transport on the fee payable for termination of the TransPennine Express franchise.

The move is part of the process agreed with DfT as the Covid-19 pandemic saw operators moving into Emergency Recovery Measures Agreements in order provide continuity for passengers and the industry. This required train operators and DfT to agree whether any payment would be required to terminate their existing franchise agreements, based on a model of the business’s pre-coronavirus trajectory.

In the case of TPE, FirstGroup and DfT have now agreed that the termination requires a further FirstGroup contribution of around £6m, in addition to the £42·5m already paid into the operating company. DfT has now extended the ERMA term to September 19 2021, having concluded that the operator would not have defaulted on the franchise had the pandemic not occurred.

FirstGroup said it was ‘working collaboratively’ with DfT with a view to entering into a National Rail Contract in advance of the September deadline. It noted that on April 23 it had made an assumption as to the termination fee, based on the best knowledge then available, and said the final agreement was around £50m better than that assumption.

FirstGroup reports that as of March 31 2020, £80m remained of its contingent capital exposure to the TPE contract which had been provided for in the accounts as an impairment of Right of Use Assets under IFRS 16. Following the termination agreement, this impairment provision will be released and will be credited to the income statement as an adjusting item in the group’s accounts for the year to March 31 2021.

Additional challenges

TPE faces a number of additional challenges as it emerges from the impact of the pandemic, including those posed by the faults discovered in the TOC’s 19-strong fleet of Hitachi Class 802 units and the likelihood of a repair programme being needed for the CAF Class 397 sets.

The delivery of new stock meant 15 of the operator’s 51-strong fleet of three-car Siemens Class 185 DMUs were due to go off lease. However, this intention will need to be reassessed in the light of the impact of the pandemic, the need for extra capacity, ongoing delays to the acceptance of the Nova 3 Mk5a fleet and the current problems with the Hitachi Class 802 Nova 1 trains.

In addition, TPE currently only has contingent rights to paths between Newcastle and Edinburgh as an extension of its service from Liverpool Lime Street until December 2021. Changes to service patterns in the Manchester area will also be required once a decision is taken over the plan to manage performance through the Castlefield Corridor. Industry sources confirm that this may include turning back some services from the northeast at Manchester Victoria, reducing the use of the Ordsall Chord to an hourly train each way, and the diversion of the Cleethorpes —Manchester Airport service to Liverpool instead of the airport, routed over the CLC line via Warrington Central.

Final termination agreement

The TPE settlement is the final termination agreement for FirstGroup’s rail franchises, and reduces the overall financial risk within the First Rail portfolio. Earlier agreements saw FirstGroup accepting a contribution of £33·2m for South Western Railway but nothing for the West Coast Partnership.

FirstGroup is now working towards agreeing directly-awarded National Rail Contracts with DfT to continue operating the three businesses. These would come into effect by the end of their respective ERMAs, when the pre-existing franchise agreements will be terminated.

The ERMA for SWR is in place to the end of May 2021 and that for the West Coast Partnership until the end of March 2022. Both have provision to be extended by a further half-year at DfT’s discretion.

FirstGroup said the latest indications from DfT were that the new National Rail Contracts would have a core period to the end of May 2023 for TPE and SWR (each with extension periods of up to two further years at DfT’s discretion), and up to March 31 2032 for the West Coast Partnership (with the core and extension periods to be determined).

The existing Emergency Measures Agreement for Great Western Railway has already been extended to June 2021, and the underlying GWR direct award runs to April 1 2023 with an extension option of up to one year. There is no termination sum for GWR, given that this contract was entered into after the transition to the EMAs.