Fresh blood-letting likely as GNER tries to renegotiate franchise fee

Heads are set to roll at the troubled intercity train operator, Great North Eastern Railway (GNER). In a desperate attempt to make the ailing operation profitable, the American parent company Sea Containers is expected to dispense with the services of GNER's chief operating officer, Jonathan Metcalfe, along with a group of his top colleagues.

The fresh blood-letting follows the departure of Christopher Garnett, the train operator's chief executive, who has taken the blame for GNER's inability to meet the mouth-watering prospectus it offered the Government when it retained the flagship London-to-Edinburgh franchise last year.

Amid considerable scepticism in the industry, Mr Garnett promised the Government £1.3bn over 10 years in return for the licence to run the services between London and Edinburgh. The proposed premium was understood to be at least £300m more than its nearest rival. "I would rather overbid and win than underbid and lose," Mr Garnett said at the time.

It seems the former GNER chief executive both overbid and lost.

Last July's bombings in London frightened away customers in their thousands. In the first 14 months of the contract, GNER's passenger revenue rose by 3.3 per cent against a projected growth of 9.9 per cent. An increase in electricity prices sent costs rocketing and the final straw came when the Office of Rail Regulation allowed increased competition on the route from two rival operators. The train operator lost High Court action to have the regulator's decision overturned.

Bob MacKenzie, the Sea Containers' chief executive, has assumed the role of executive chairman at GNER in an attempt to get a grip on the business.

He is having to deal with massive problems elsewhere in the New York-listed and Bermuda-registered group. The parent company has been plagued by problems in its ferries business, leading to the sale of its Silja Line in the Baltic earlier this year.

Sources close to Sea Containers believe it may have difficulty in repaying £60m of its £340m debt on the scheduled date of 14 October. Ministers have been warned that the GNER situation will have to be solved before then.

In New York this week, Mr MacKenzie has been attempting to calm the frayed nerves of investors. They have been invited to agree a restructuring programme for the company and a plan to recast debt. Without a deal with bondholders, who met management in New York yesterday, the group could be forced into liquidation.

That would be an ignominious end for the company which was founded as a shipping business 40 years ago by Jim Sherwood. The bluff American, who left Sea Containers in March, built up a company which, in its heyday, was an eclectic mix of businesses including such trophy assets as the Hotel Cipriani in Venice, the Orient Express train service, a half share in Harry's Bar and the Hoverspeed fast ferry company.

It has since slimmed considerably with the Orient Express hotel and train business spun off into a separate company.

It is now struggling with a huge debt burden. The plight of GNER - generally seen as Sea Containers' cash cow - has dealt a savage blow to the group's financial structure. Uncertainty over the accounts has prompted Mr MacKenzie to delay filing last year's figures.

If Sea Containers runs aground, the British Government will be forced to intervene over GNER.

Mr MacKenzie has been involved in talks with the Department for Transport in an attempt to breathe life into the franchise. He is understood to have warned ministers that, unless they renegotiate the deal, he could be forced to hand back the keys. Such a course of action would have its penalties for the cash-strapped Sea Containers because it would lose a £15m bond.

Mike Mitchell, the director general of railways at the Department for Transport, is also in something of a dilemma.

If he refuses to come to an accommodation with Mr MacKenzie, the Department for Transport will have to operate services until a new auction can be arranged. The model was provided by the franchise in south-eastern England which was taken over by the now-defunct Strategic Rail Authority after Connex was relieved of its licence.

In order to do that, the Government would have to shell out for a management team to take over at GNER pro tem and then finance an expensive and inevitably protracted bidding process.

Worse, from ministers' point of view, is that fresh bidders are highly unlikely to match the £1.3bn offered by GNER. Prospective franchisees would probably not even match a lower renegotiated figure from the incumbent.

The First Group and Virgin, both of which originally bid for the east coast licence, may not be disposed to go a lot higher than £700m even if they were tempted to re-enter the fray, according to some analysts.

The alternative for Dr Mitchell would be to allow GNER some leeway. He is fully aware, however, that such a compromise could lead to other franchise holders arriving at the DfT's doorstep with their begging bowls.

Such a course of action would also encourage bidders for future franchises to promise the Government huge sums of money on the basis that they could renegotiate if they hit a rough patch.

The whole situation might lead to a fresh approach to the franchising process with the DfT not simply opting for the highest bidder, but for an operator which presented the most credible forecast.

Even that strategy has its downside. Opposition politicians, together with the National Audit Office - a parliamentary watchdog - would want to know why a company giving taxpayers a lower return might be allowed to prevail.

The tough-minded Dr Mitchell is not expected to give GNER much leeway. In fact, his department yesterday repeated its hardline mantra: "We don't renegotiate franchise agreements."

Unless senior officials are indulging in a semantic game aimed at concealing their true intentions - always a possibility - that could be the end of the line for GNER.

Meanwhile, under Sea Containers' tutelage the operator is trying to become all shipshape and Bristol fashion in order to impress investors and streamline the business.

On top of the departure of senior GNER managers, the company plans to axe hundreds of jobs lower down the pay structure, having taken away a stratum of middle management.

There is an effective freeze on recruitment and the RMT rail union is bracing itself for redundancies throughout the business.

The company has announced that it wants to reduce the 300 ticket office staff to 150, and the union believes there will be similar announcements concerning station staff, on-train personnel and maintenance workers. Some industry sources believe up to 400 could go in total. That would be bad news for the unions, but also for the passengers who use the service. The quality offered by the service would be bound to be affected by such measures.

The process is unlikely to go smoothly. Bob Crow, the general secretary of the RMT, warned yesterday that he would fight job cuts "with all the means at our disposal". He said the whole operation should be taken back in-house to be run by the state.

That could happen very soon - albeit on a temporary basis.