Rail operators embark on a hazardous journey

It was a journey into the unknown. British Rail, loss-making, unloved and underfunded, was never going to have an easy ride to the market. Despite gloomy predictions, the Government has parcelled off pounds 2.7bn worth of passenger services to private firms in just over 12 months. Buoyed by a growing economy, most firms have seen a 5 per cent rise in passenger numbers.

Many doubt this increase is sustainable. Critics point out that in the mid-Eighties, more than 370,000 people used mainline BR services to commute to London. By the early 1990s, that had dropped by 25 per cent to 270,000.

Those figures have not deterred the private sector. Private firms are brimming with new ideas to attract travellers and are convinced that by increasing passenger numbers and cutting staff they can make money. Early signs are promising. Midland Main Line, which runs services from London to Leeds and is owned by National Express, introduced a family fare of pounds 19 and saw passenger revenue rise by nearly 9 per cent.

Companies have ambitious plans to invest in rolling stock. Chiltern, the company which runs trains from London to Birmingham, has ordered four trains and London Tilbury Southend, a commuter service known as the misery line to passengers, has placed a pounds 200m order for 44 trains to come into service by next year.

New carriages are key to increasing cash. Owners have realised these will increase capacity by 10 per cent and reduce running costs by 15 per cent. Thames Trains, under British Rail, managed a 30 per cent increase in ticket sales in three years after it introduced its diesel units.

Not all the innovations are welcomed. Lord Palumbo, former chairman of the Arts Council, asked peers last week: "Why should the liveries of privatised rail companies be such as a rash of kitsch?"

Certainly Midland Main Line's "tea and tangerine" colours have not dissuaded passengers. But travellers are probably more impressed with the pounds 13m refurbishment programme of its 125 high-speed trains.

The trickle of marketing wheezes designed to woo back passengers will turn into a flood. Virgin, which plans to order more than pounds 1bn worth of tilting trains, has the most grandiose plans. But it also has the most ambitious growth targets. Richard Branson's West Coast service aims to quadruple revenue to pounds 1bn in 15 years.

Competition for each train company was fierce. Under the Government's franchising system, companies bid to run routes. The licence is awarded to the company that asks for the lowest subsidy or offers the biggest payments over the length of the franchise while meeting minimum standards.

The task ahead for private operators is daunting. In order to fill the gap between dwindling subsidies and the cost of running a franchise operators must increase passenger numbers and cut costs. An analysis by The Independent shows the challenge ahead for private companies.

The study uses industry figures for fixed costs such as charges by Railtrack, the owner of track, signalling and stations, and fees charged by Roscos (rolling stock companies) for leasing carriages. It also includes controllable costs such as maintenance charges and wage bills. By combining these, it is possible to estimate the rate at which each train company must grow its passenger revenue to make a profit.

The model predicts that seven of the 25 franchises will need more subsidy in the next few years. This is unlikely under any government committed to pruning expenditure. "There were some racy bids for some of the companies. I think many people are quite worried by how much they need to grow," said one analyst.

According to SBC Warburg, Great Western has to raise revenues by only 0.2 per cent a year to make money, Great Eastern, which runs commuter services to London from Essex, a comfortable 3 per cent and Regional Railways a stiffer 4 per cent.

South West Trains, owned by bus giant Stagecoach, will see an operating profit of more than pounds 100m at the end of 2002 if passenger revenue grows at 4 per cent a year.

Some firms will find it hard to cut staff at the rates predicted by the model. When South West Trains cut 10 per cent of its driving staff, the company was forced to wipe 39 services from its daily timetable.

Leaked documents from three franchises in the north of England show owners are preparing to shed 25 per cent of the workforce - more than 2,300 staff.

The Big Six - National Express, Connex, Virgin, Prism, Great Western and Stagecoach - all have profit centres whose cash flow will guarantee money for other parts of their rail empires.

Privately, civil servants and industry executives say they expect a rash of takeovers next year, when struggling franchises will be added to the rail divisions of larger, more successful businesses. This, of course, is what happened the last time the railways were in private hands.