Published by ASLEF Design & print by TU ink The train drivers union

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1 ASLEF 77 St John Street, London EC1M 4NN Tel Fax Published by ASLEF Design & print by TU ink V4 July 2015

2 ASLEF THE TRAIN DRIVERS UNION >>> Rail Franchise Handbook 2015

3 ASLEF THE TRAIN DRIVERS UNION

4 RAIL FRANCHISE HANDBOOK 2015 Introduction It s a real pleasure to introduce our Rail Franchise Handbook for I hope you find it as interesting as I always do, and a useful tool for political, economic and industrial purposes. We put this handbook together every year to give our representatives an overview of who really runs our railway, how they run our railway, and what they take out and away from our railway. And we believe that, once again, the facts and figures you will find in these pages clearly reveal the folly of our privatised, and fragmented, franchise system. A system underpinned and financed by passengers through ever-increasing rail fares and huge sums of money from the public purse while millions of pounds leak out of the industry into the pockets of shareholders. That isn t strictly true of all the train operating companies, of course. Because several TOCs are publicly-owned operators where shareholders do not cream off the profits. Unfortunately, it is not the British taxpayer who benefits but taxpayers in Germany, France and the Netherlands. Deutsche Bahn, Keolis and Abellio have a big presence on Britain s railways because foreign state operators see UK rail as a way of increasing their revenue to improve their networks at home without taking more funds from passengers in their home countries. In other words, we are subsidising the fares of our European neighbours. When East Coast was brought back into public ownership after National Express handed back the keys we saw the service improve dramatically, passenger satisfaction increase, and 1 billion was returned to the Treasury. It was good for the route, good for the railway, and good for Britain. The decision to re-privatise the East Coast was an ideological decision against the national interest. I hope that armed with the facts and figures you will find in this handbook, you will be able to help us continue the fight to build a better, fairer and more efficient railway for Britain. Mick Whelan General secretary >>> 3

5 ASLEF THE TRAIN DRIVERS UNION Notes when reading this handbook The figures stated below come from various sources. Figures followed by a * come from the individual Train Operating Companies Annual Accounts. The accounts are a statutory legal requirement. However they can be submitted up to 12 months after the company's financial year end. Therefore most of the reports available are for 2013 or Most of the detail in this document comes the annual reports of the TOCs parent groups. You will note that some TOCs have more information about them than others. Usually these are TOCs that are owned by publically listed companies. This is because they must present full annual reports for shareholders. Other publically owned companies such as Deutsche Bahn or Abellio do have annual reports but with less specific commercial information as they have no individual shareholders who they must share this information with. Other companies have less information for other reasons. For example, Virgin Group is a private holding company so has no obligation to publish much detail. Where TOCs are co-owned, we have used the annual report with the most detail in it. In some cases the 2014 Annual Reports are not available. In this case figures have been taken from the most recent Annual Report. 4 >>>

6 RAIL FRANCHISE HANDBOOK 2015 Explanation on asterisks ** These figures are taken from Department for Transport Rail subsidy per passenger mile. They include subsidy paid directly to train operators by Government plus an allocation of the Network Grant (that is, payments made directly to Network Rail) ***Arriva Trains Wales, First ScotRail, Merseyrail and LOROL are not covered by the DfT s Rail subsidy per passenger mile due to devolution. Therefore these figures are provided by Transport Scotland, Welsh Assembly or the ORR. They only include direct subsidy. Please note that these are per kilometre, not by mile as per the other figures. **** These figures come from the GB rail industry financial information The profits mentioned are not accounting profits in a statutory reporting sense due to statutory financial reporting adjustments for the treatment of deferred tax, pension schemes, derivative fair values, dividends etc. They simply represent total income minus total expenditure. Dividends paid will not necessarily be reflective of the profits earned in that year. Profitable operators may pay dividends during or following the end of their franchise periods. Contents Franchising timetable 6 Owner groups Deutsche Bahn 9 First Group 13 Govia 18 National Express 25 Serco 27 Abellio 29 Stagecoach 32 Virgin Trains 37 Directly Operated Railways 38 MTR Corporation 40 Notes 42 >>> 5

7 ASLEF THE TRAIN DRIVERS UNION >>>FRANCHISING TIMETABLE Following the West Coast franchising debacle, the Government halted the re-franchising of every line in the country whilst it undertook two investigations into what had gone wrong. Following this, the Government have once again begun the refranchising of our railway. Many of the previous holders have had their contracts extended to give the DfT time to do this and to stagger the process. Below is the DfT s revised timetable >>>

8 RAIL FRANCHISE HANDBOOK 2015 Current Franchise Expiry Date including E any contractural extention offers that have been called OJEU (Official Journal of the European O Union) Notice published by Pre- Qualification Process T ITT (Invitation to Tender) Issued by Shortlist Bidders A S E Contract Award Franchise Start Date Franchise End Date Passengerrail services opperated by Directly operated Railways Current Franchise Direct Award Contract signed Direct Award Anticipated New Franchise, Duration to be determined (exept for Essex Thameside, TSGN & East Coast) Key Deliverable process link >>> 7

9 ASLEF THE TRAIN DRIVERS UNION The below table is the current franchise holders and their parent groups. This may vary from financial details given if the franchise has recently changed hands as this reflects the previous year. Company Deutsche Bahn (DB Arriva) Deutsche Bahn (DB Regio UK Limited. Now a subsidiary Now a of DB Arriva) First Franchises owned Arriva Trains Wales, Arriva CrossCountry, LOROL (50%) Chiltern Railways First Great Western TransPennine Express (55%) Govia London Midland (Go-Ahead Group Southern (65%) and Keolis (35%)) Southeastern Great Northern Thameslink National Express c2c Serco-Abellio Northern (50% Serco 50% Abellio) Merseyrail Abellio Stagecoach Greater Anglia, Scotrail East Midlands Trains South West Trains Virgin Trains (49%) Virgin Trains East Coast (90%) Virgin Management Virgin Trains (51%) Virgin Trains East Coast (10%) Keolis First TransPennine Express (45%) MTR Corporation LOROL (50%) Serco Caledonian Sleeper 8 >>>

10 >>>OWNER GROUPS RAIL FRANCHISE HANDBOOK 2015 >>>DEUTSCHE BAHN Deutsche Bahn AG is the German national railway company, a private joint-stock company with the federal government being its majority shareholder with its headquarters in Berlin. The DB group (Deutsche Bahn AG) is divided into four main operations groups: Arriva, DB Bahn, DB Netze, and DB Schenker. These subsidiaries are companies in their own right, although most of them are 100% owned by DBAG. >>> Arriva Trains Wales Owned by: Arriva (Now owned by DB Schenker) Franchise period: December 2003 to October 2018 Subsidy per passenger km for 13/14 (in pence): 13.1*** 2013/14 annual profit: 17,000,000**** 2013/14 divident paid: 16,000,000**** 2013 drivers employed*: highest paid director s emoluments (includes pension contribution)*: 231,000. >>> Arriva CrossCountry Owned by: Arriva (Now owned by DB Schenker) Franchise period: November 2007 to November 2019 Total subsidy per passenger mile for 13/14 (in pence): 15.6** 2013/14 annual profit : 10,000,000**** 2013/14 dividend paid: 0**** 2013 operational staff employed*: highest paid director s emoluments*: 239,000 >>> 9

11 ASLEF THE TRAIN DRIVERS UNION >>> Chiltern Railways Owned by: DB Regio UK Limited (a subsidiary of Arriva UK Trains) Franchise Period: March 2002 to December 2021 Total Subsidy per passenger mile for 13/14 (in pence): 7.9** 2013/14 Profit: -1,000,000**** 2013/14 dividend paid: 0**** 2013 drivers employed*: Highest Paid Director s Emoluments*: 272,000 >>> London Overground Owned by: Arriva UK Trains and MTR Franchise Period: November 2007 to November 2016 Total Subsidy per passenger km for 13/14 (in pence): 15.0*** 2013/14 Profit: 1,000,000**** 2013/14 dividend paid: 5,000,000**** 2014 operation staff employed*: Highest Paid Director s Emoluments*: No details given Deutsche Bahn 2013 Annual Report Positive developments in the labour market supported demand in British passenger transport. Passenger rail transport showed slightly increasing volume due above all to growth in local transport. The British rail passenger transport market received a new impetus in March 2013 through the new franchise schedule of the Transport Ministry. With the announcement of a prospective extension of the CrossCountry franchise, and a basic agreement on the extension 10 >>>

12 RAIL FRANCHISE HANDBOOK 2015 of the contract for London Overground Services, DB Arriva was also able to benefit from this development. In addition, DB Arriva pre-qualified for the tender of the three franchises Crossrail, Caledonian Sleeper and ScotRail. Business developments in the UK Trains line of business were positively influenced especially by increased farebox revenues, business expansion in Grand Central Railway as well as higher revenue support payments for the CrossCountry franchise. Performance development varied in the year under review. While volume produced remained stable, volume sold improved slightly (+1.5%). On the revenue side, positive effects occurred as a result of higher revenue support payments for the CrossCountry franchise ( + 41 million) and from increased farebox revenues. Group management report Development of business units 157 However, negative exchange rate effects had an adverse impact (about 60 million). Both total and external revenues increased by about 4 %. UK Trains Change Selected key figures absolute Change m m m % Passengers (million) Volume solid (million pkm) 6,207 6, Volume produced (million train-path km) Total revenues 1,343 1, External revenues 1,319 1, EBITDA adjusted EBIT adjusted Gross capital expenditures Employees as of Dec 31 (FTE) 5,379 5, >>> 11

13 ASLEF THE TRAIN DRIVERS UNION On the cost side, there was an increase in cost of materials (+ 5.4%) mainly resulting from higher train-path utilization fees. Exchange rate effects partially helped compensate for the increase in expenses. Adjusted profit figures worsened overall. Adjusted EBITDA fell by 3 million to 62 million, while adjusted EBIT fell by 6 million to 38 million. Gross capital expenditures fell significantly by 21.7 % year-on-year due to smaller capital expenditures in Chiltern Railways and negative exchange rate effects. The number of employees increased slightly by 1.0% in comparison to December 31, 2012 due to new hires. 12 >>>

14 RAIL FRANCHISE HANDBOOK 2015 >>>FIRST GROUP FirstGroup is an international transport group operating in the United Kingdom, Ireland, Denmark, Canada and the United States. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index. >>> First Capital Connect Owned by: First Group Franchise period: April 2006 to Sept 2014 (Now Govia September 2014 to September 2021) Total subsidy per passenger mile for 13/14 (in pence): -3.9** 2013/14 profit: 10,000,000**** 2013/14 dividend paid: 5,000,000**** 2014 operation staff employed: 808* 2013/14 highest paid director s emoluments *: 261,000* >>> First Great Western Owned by: First Group Franchise period: April 2006 to July 2016 Total subsidy per passenger mile for 13/14 (in pence): 6.4** 2013/14 annual profit: 12,000,000* 2013/14 dividend paid: traincrew staff employed: 2, /14 highest paid director s emoluments *: 328,000 >>> 13

15 ASLEF THE TRAIN DRIVERS UNION >>> TransPennine Express Owned by: First Group (55%) Kelios (45%) Franchise period: February 2004 to Feb 2016 Total subsidy per passenger mile for 13/14 (in pence): 16.8** 2013/14 annual profit: 16,000, /14 dividend paid: 30,000, operations staff employed: /14 highest paid director s emoluments *: 313,000 >>> First Scotrail Owned by: First Group Franchise period: October 2004 to October 2011 extended to November 2014 (Now Abellio April 2015 to March 2025) Subsidy per passenger km for 13/14 (in pence): 17.5*** 2013/14 annual profit: 13,000,000**** 2013/14 dividend paid: 21,000,000**** 2014 drivers employed*: 1, /14 highest paid director s emoluments*: 408,000 First Group Annual Report 2014 UK rail Revenue: 2,870.1m (2013: 2,795.1m) Operating profit: 55.2m (2013: 19.3m) Operating margin: 1.9% (2013: 0.7%) Number of employees: 14,000 (2013:13,500) 14 >>>

16 RAIL FRANCHISE HANDBOOK 2015 Financial performance Our UK Rail division saw like-for-like passenger growth of 5.9% during the year (2013: 7.4%) as the strong demand that has been seen across the industry since privatisation continued into 2013/14. Revenue during the year was 2,870.1m (2013: 2,795.1m), with the increase principally due to the strong passenger volume growth across all of our train operating companies. Adjusted operating profit was 55.2m (2013: 19.3m), representing a margin of 1.9% (2013: 0.7%), in part reflecting First Great Western moving from a loss-making position to normal commercial terms under the direct award agreed in October 2013 and the successful delivery of a number of important fleet and infrastructure projects in conjunction with industry partners. Focused and disciplined bidding This year the DfT and Transport Scotland have made significant progress in the third generation of their rail refranchising programmes, which will see 8bn per annum of long term contractbacked passenger revenue available through 19 major franchise opportunities in the coming years. We are shortlisted for a number of competitions in the current round of franchising. We submitted compelling bids for the first four of these which demonstrate value for money for passengers, the taxpayer and our shareholders, and expect to submit a competitive bid for the InterCity East Coast competition in the summer. We are also investigating contract opportunities from other franchising authorities, and during the year we were pleased to be shortlisted for the tender to operate the Luas light rail system in Dublin by the Railway Procurement Agency of the Republic of Ireland. The contract award decision is expected in the autumn of Following the review of the refranchising programme completed in 2012/13, the DfT announced a new timetable in March 2013 which was subsequently updated in April As part of this new timetable, we agreed shorter direct awards with the DfT to run our First Capital Connect franchise for an additional six months until September 2014 and our First Great Western franchise for an additional two years until September 2015, securing continuity of rail services for passengers and retaining our experience in managing the impact of the multi-billion pound investment programmes already underway on these networks. We are progressing negotiations with the DfT to continue operating our First TransPennine Express franchise until February 2016, and working with the Department to explore whether a longer direct award with First Great Western may offer better value for money and better services for passengers during the significant programme of works to improve services on the Greater Western network. >>> 15

17 ASLEF THE TRAIN DRIVERS UNION Continuous improvement in operating and financial performance Our UK Rail teams have a depth of expertise and a record of delivery. Our operating companies have outperformed the industry in delivering punctuality and customer satisfaction improvements since 2006, despite infrastructure challenges. We continue to work closely with Network Rail where we can in order to both help them reduce infrastructure issues, which in some of our operating areas accounts for two-thirds of delays, and also to ensure upgrades are delivered in an efficient manner which causes the least possible disruption to our passengers. By far the most visible impact of infrastructure failures were the various incidents associated with the severe winter weather in December 2013 and February 2014, which led to significant and high profile damage to the Great Western Mainline at Dawlish, Bridgwater and Maidenhead. We worked closely with Network Rail as they undertook repairs to the line at Dawlish, during which time trains were unable to travel between Exeter and Plymouth. We introduced a revised timetable and our rail replacement bus teams were able to provide comprehensive support including a direct coach link between Exeter and key Cornish towns and cities. The line reopened on 4 April Amongst the infrastructure upgrades we are currently involved in is the 7.5bn Great Western Mainline upgrade in preparation for the introduction of the InterCity Express Programme, Crossrail and a new fleet of local electric trains. This upgrade includes the 850m Reading station remodelling project, which is due to finish a year ahead of schedule thanks in part to excellent working relationships with our industry partners. Following our success at securing additional services in Wiltshire in partnership with the DfT and local authorities, we began a consultation on improving the timetable between London and the South West for introduction later in the year. First Capital Connect was involved in the unveiling of brand new Class 700 trains which will be introduced from 2016 and the beginning of significant work to improve the busy London Bridge station, as part of the 6bn Thameslink Programme which will double capacity on the key cross- London route. We are also a key partner within the industry to deliver rolling stock and capacity upgrades with four successful fleet introductions in recent years. We are currently involved in programmes to deliver a further 1,500 new vehicles. The previously announced investment in 40 new carriages for First TransPennine Express saw the first new longer electric trains run on the Manchester- Scotland route in December, as part of the Government s Northern Hub electrification project. 16 >>>

18 RAIL FRANCHISE HANDBOOK 2015 By May 2014 all of the new vehicles will be in service, permitting an improved timetable and in turn freeing up carriages to increase capacity on the popular Manchester-Leeds route. Future priorities We have been running rail services in the UK since 1997 and currently operate around a quarter of the rail market, with the delivery of rail services aligned with our customers needs at the heart of our offer. We are the only UK rail owning group whose services include long distance, regional, commuter and sleeper operations. Our management team has strong commercial, rolling stock and major infrastructure project upgrade expertise and we have a highly experienced bidding team. Our objective is to replenish our franchise portfolio to deliver profit on a par with the last round of franchising, with an acceptable level of risk. Outlook Rail passenger volumes across the industry continue to see strong growth, with passenger numbers more than doubling since We have seen consistent strong performance and have a highly successful record of delivery, outperforming the industry in achieving punctuality and customer satisfaction improvements. We remain committed to our goal of providing more and better rail services across the UK and have a clear focus on meeting the needs of passengers, taxpayers and delivering an economic return for shareholders. >>> 17

19 ASLEF THE TRAIN DRIVERS UNION >>>GOVIA Go-Ahead Group The Go-Ahead Group is an international transport group headquartered in Newcastle upon Tyne, operating bus and passenger rail services in the United Kingdom and school buses in the United States. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index. Keolis Keolis is the largest private sector French transport group. It runs passenger railways, tramways, bus networks, funiculars, trolley buses, and airport services. The company, based in Paris, is majority owned by SNCF, the French state rail operator. 18 >>>

20 RAIL FRANCHISE HANDBOOK 2015 >>> London Midland Owned by: Go-Ahead Group plc (65%) and Keolis UK Ltd (35%) Franchise period: November 2007 to June 2017 Total subsidy per passenger mile for 13/14 (in pence): 13.6** 2013/14 annual profit: -8,000,000**** 2013/14 dividend paid: 0**** 2014 operations staff employed*: 1, highest paid director s emoluments*: 297,000 >>> Southern Owned by: Go-Ahead Group plc (65%) and Keolis UK Ltd (35%) Franchise period: May 2009 to July 2015 Total subsidy per passenger mile for 13/14 (in pence): 0.6** 2013/14 annual profit: 25,000,000**** 2013/14 dividend paid: 23,000,000**** 2014 operations staff employed*: 3, highest paid director s emoluments *: 485,000 >>> Southeastern Owned by: Go-Ahead Group plc (65%) and Keolis UK Ltd (35%) Franchise period: January 2006 to June 2018 Total subsidy per passenger mile for 13/14 (in pence): 12.4** 2013/14 annual profit: -1,000,000**** 2013/14 dividend paid: 5,000,000**** 2014 operations staff employed*: 2, highest paid director s emoluments *: 350,000 >>> 19

21 ASLEF THE TRAIN DRIVERS UNION The Go-ahead Annual Report and Accounts 2014 Total rail operations 2014* * Total revenue ( m) 1, ,810.3 Operating profit ( m) Margin 1.0% 0.6% Passenger revenue growth Southern 6.1% 5.8% 5.4% Southeastern 5.6% 4.3% 6.7% London Midland 7.4% 6.8% 11.5% Volume growth Southern 4.1% 3.9% 0.8% Southeastern 5.3% 3.8% 3.1% London Midland 4.9% 4.5% 2.1% *On a like-for-like basis, adjusting for the estimated impact of the Olympic Games. Unless otherwise stated, references made to operating profit throughout Go-Ahead s report exclude amoritisation and exceptional items Rail Go-Ahead s rail operation is the busiest in the UK, responsible for around 30% of all train passenger journeys. Rail performance review The rail division has delivered a good result in the year, significantly exceeding our initial expectations, despite a challenging premium payment profile. Overall passenger revenue growth was 5.4% (2013: 7.6%). When adjusted for the impact of the Olympic Games this was 6.1%, slightly lower than last year (2013: 6.9%), due in part to lower fare increases in January 2014 than the prior year. Passenger journey data across all companies was impacted by a change in Travelcard allocations, inflating growth rates as well as an increase in shorter, lower yield journeys. Total passenger journey growth was 4.0% (2013: 2.8%) or 4.8% when adjusting for 20 >>>

22 RAIL FRANCHISE HANDBOOK 2015 the impact of the Olympic Games (2013: 2.0%). The Group s net increase in contributions to the DfT was 51.6m (2013: 85.9m increase) with an overall contribution of 64.0m (2013: 12.4m). Southern s core premium payments to the DfT increased by 29.8m in the year whilst subsidy receipts in Southeastern and London Midland decreased by 44.5m and 2.5m respectively, a total increase in net core premium of 76.8m. Revenue support increased by 15.8m for Southeastern. Southern, which became eligible to receive revenue support during the year, was paid 9.4m in the period. Revenue Total revenue increased by 5.1%, or 91.6m, to 1,901.9m (2013: 1,810.3m) consisting of: Net change % m m m change Passenger revenue 1, , Southern Southeastern London Midland Other revenue Southern Southeastern London Midland Total subsidy (47.0) (64.1) Southeastern (29.6) 14.9 (44.5) (298.7) London Midland (2.5) (4.3) Total revenue support Southeastern revenue support Southern revenue support n/a Total revenue 1, , Premium payments Southern s core premium payments are included in operating costs Southern core premium >>> 21

23 ASLEF THE TRAIN DRIVERS UNION Operating profit Operating profit in the rail division was up 8.2m at 19.7m (2013: 11.5m), with operating margins increasing to 1.0% (2013: 0.6%) but remaining at historically low levels. Rail bid costs of 8.1m (2013: 3.2m) were higher than in the prior year due to increased bidding activity, including 5.9m for our successful bid for the Thameslink, Southern and Great Northern (TSGN) franchise, which we will operate as GTR (Govia Thameslink Railway). The remaining costs were in respect of our unsuccessful Crossrail bid and the bidding activity associated with our bid for Docklands Light Railway, which was not submitted, due to our partners, Colas UK, withdrawing from the process ahead of the bid submission date. m 2013 operating profit 24.3 IAS 19 (revised) adjustment (12.8) 2013 operating profit (restated) 11.5 Change in: Additional passenger revenue 83.4 Additional like-for-like costs and other income (23.6) Premium payments (29.8) Subsidy receipts (47.0) Revenue support receipts operating profit 19.7 Individual franchise performance Southern Passenger revenue growth was 5.8% (2013: 5.6%) year on year driven by growth in passenger numbers of 3.9% (2013: 1.1%). When adjusting for the impact of the Olympic Games, passenger revenue increased by 6.1% (2013: 5.4%) and journeys were up 4.1% (2013: 0.8%). Southern is now in receipt of revenue support at the maximum 80% level. Southeastern Overall passenger revenue increased by 4.3% (2013: 8.0%), with passenger numbers up 3.8% (2013: 4.7%). Excluding the impact of the Olympic Games, passenger revenue grew by 5.6% 22 >>>

24 RAIL FRANCHISE HANDBOOK 2015 (2013: 6.7%), with an increase of 5.3% (2013: 3.1%) in the number of journeys taken. Southeastern was impacted by a revenue recognition adjustment in the fourth quarter, but otherwise traded in line with our expectations. In March 2014, Southeastern began a seven month extension period, continuing on the original contract assumptions. The franchise continues to receive revenue support at the 80% level. London Midland Passenger revenue grew by 6.8% (2013: 12.1%) in the year and passenger numbers increased by 4.5% (2013: 2.4%). Passenger revenue and journeys rose 7.4% (2013: 11.5%) and 4.9% (2013: 2.1%) respectively, when adjusting for the impact of the Olympic Games. As previously reported, the rate of passenger revenue growth in the London Midland franchise began to slow during the year as a result of increased competition on the West Coast main line. During the year, London Midland carried out a reorganisation of management and administrative staff to reduce costs. Southern and Gatwick Express Revenue 774.7m Passenger journeys 176m Average no. of employees 3,993 London Midland Revenue 375.9m Passenger journeys 64m Average no. of employees 2,389 South Eastern Revenue 751.3m Passenger journeys 179m Average no. of employees 3,861 This resulted in an exceptional charge of 3.0m in the year. The franchise has been awarded a seven month extension which will run to March 2016, continuing on its original contract terms. London Midland is no longer making revenue share payments to the DfT. Capital expenditure and depreciation Capital expenditure for the rail division was 8.2m (2013: 7.2m), slightly higher than the prior year. Depreciation for the division was 15.5m (2013: 12.4m). >>> 23

25 ASLEF THE TRAIN DRIVERS UNION Capital expenditure for 2014/15 is expected to increase to around 25m reflecting the start of the GTR franchise and assuming the start of Southeastern s planned extension to June 2018 in October Rail outlook We are entering a transitional year in rail. On 14 September 2014, we will begin operating the Great Northern and Thameslink routes of the GTR franchise. We anticipate a margin of around 3% from the beginning of the franchise. We continue discussions with the DfT regarding the planned extension of the Southeastern franchise to June 2018 and we hope to agree terms shortly. The seven month extension period, which is expected to run to 12 October 2014, will continue to be loss making. London Midland is not expected to contribute to Group profit in 2014/15. We look forward to working with the DfT in the coming months to agree contract terms for the planned extension to this franchise to June The full benefits of GTR and the planned extension of Southeastern will not be realised until 2015/16. Southern will continue on its original contract terms until July 2015 when it will be incorporated into the GTR franchise and London Midland will also remain on existing terms in 2014/15. We expect the same level of bid costs as in 2013/14. Therefore, we expect rail profits to be broadly similar to 2013/ >>>

26 RAIL FRANCHISE HANDBOOK 2015 >>>NATIONAL EXPRESS National Express Group plc is a multinational public transport company headquartered in Birmingham that operates bus, coach, rail and tram services in the United Kingdom, United States, Canada, Spain, Portugal and Morocco and long-distance coach services across Europe. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index. >>> C2C Owned by: National Express Period: September 2014 to November 2029 Total subsidy per passenger mile for 13/14 (in pence): 5.6** 2013/14 annual profit: 8,000,000**** 2013/14 dividend paid: 8,000,000**** 2014 operations staff employed*: highest paid director s emoluments*: 245,321 National Express Annual Report 2014 Rail The UK rail market is a regulated market and is broadly dispersed between UK private train operators and overseas state market participants. In the past ten years, growth has been driven by passenger volumes with the levels of economic activity and employment also drivers. A new framework for future UK franchises is likely to see franchise durations settle between seven and 15 years with the introduction of a quality element alongside pricing. Meanwhile the German rail market is liberalising and offering growth opportunities. >>> 25

27 ASLEF THE TRAIN DRIVERS UNION Overview of 2014 National Express Rail division has had a successful year. We successfully retained the long-term contract for the operation of the Essex Thameside franchise (through to 2029). Over the coming year we will continue to leverage our UK rail expertise to bid for further selective franchise opportunities in both the UK and Germany. Total revenue in 2014 increased by 6% to million (2013: 143.0m) supported by passenger growth of 2%. Normalised operating profit was 9.7 million (2013: 9.8m), reflecting an increase in franchise premiums coupled with a rise in train maintenance costs under the terms of the interim franchise extension, resulting in a planned decrease in the operating margin to 6.4% (2013: 6.9%). Cash and returns Rail offers a capital-light model with lower margins but high returns on capital. In 2014 c2c converted 141% of normalised operating profit into operating cash. Creating new opportunities c2c is the best performing rail franchise in the UK and this strength in operational performance is helping to drive growth in new rail markets. Our strategy in rail is to secure smaller, lower risk German rail franchises where the risk is acceptable and meets our capital-light investment criteria. We will also continue to monitor the UK market and consider competitions as they arise and will bid for new franchises where they meet our strict financial criteria. In addition, we will regularly monitor the regulatory environment across Europe and may look to enter other markets as they liberalise. In 2014 c2c successfully retained the Essex Thameside franchise which is expected to generate 4 billion of future revenue over the next 15 years. We are encouraged by the passenger response so far to the new franchise s focus on customer service. Investment in Wi-Fi and new advance purchase off-peak tickets are already proving popular. With new flexible ticketing and pioneering automatic delay-repay compensation being introduced in due course, we are confident this enhanced customer service offer will continue to be popular. 26 >>>

28 RAIL FRANCHISE HANDBOOK 2015 >>>SERCO Serco Group plc is a British services company based in Hook, North Hampshire in the United Kingdom. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index. Among its operations are public and private transport and traffic control, aviation, military and nuclear weapons contracts, detention centres and prisons and schools. Serco is frequently described as probably the biggest company you've never heard of. As well as the listed TOCs, Serco operates London's Docklands Light Railway, Woolwich Ferry and the Barclays Cycle Hire scheme (all for Transport for London), the NorthLink Ferries Northern Isles lifeline ferry service in Scotland, and Great Southern Railways in Australia. Serco also operates the Dubai Metro. Serco 2014 Annual Report Northern Rail is a 50% joint venture with Abellio to operate the rail franchise that runs until February In 2014 Serco s share of revenue was 288.7m (2013: 325.2m) and profit after tax was 6.5m (2013: 12.4m). The prior year contract re-pricing on AWE and that agreed as part of the Northern Rail interim franchise drove the profit reductions. Dividends of 8.9m (2013: 14.2m) were received from Northern. >>> 27

29 ASLEF THE TRAIN DRIVERS UNION AWE Northern Management Rail Holdings Limited (100% Limited (100% Summarised financial information of results) m of results) m Revenue Operating profit Net investment revenue/(finance costs) Income tax expense (4.6) (5.1) Profit from continuing operations Other comprehensive income/(expense) Total comprehensive income Non-current assets Current assets Current liabilities (230.1) (83.5) Non-current liabilities (583.3) (6.0) Net assets/(liabilities) 16.8 (6.1) Proportion of Group ownership 33% 50% Carrying amount of investment 5.5 (3.0) FOR INFO ON NORTHERN SEE ABELLIO ON PAGE >>>

30 RAIL FRANCHISE HANDBOOK 2015 >>>ABELLIO Abellio operates public transport services in Europe, with both bus and rail networks. It was founded as NedRailways in 2001, before being renamed Abellio in October Abellio is the international arm of the Dutch government rail operator Nederlandse Spoorwegen. >>> Northern Owned by: Serco-Abellio Franchise period: December 2004 to October 2015 Total subsidy per passenger mile for 13/14 (in pence): 51.5** 2014 annual profit: 29,000,000**** 2013/14 dividend paid: 27,000, operations staff employed*: 3, highest paid director s emoluments*: 213,000 >>> Merseyrail Owned by: Serco-Abellio Franchise period: July 2003 to July 2028 Total subsidy per passenger km 13/14 (in pence) 19.0*** 2014 annual profit: 14,000,000**** 2013/14 dividend paid: 16,000,000**** 2013 operations staff employed: highest paid director s emoluments*: 267,000 >>> Greater Anglia Owned by: Abellio (Was National Express until February 2012) Franchise period: February 2012 to October 2016 Total subsidy per passenger mile for 13/14 (in pence): 1.5** 2014 annual profit: - 3,000,000**** 2013/14 dividend paid: 0**** 2013 operations staff employed: 2, highest paid director s emoluments*: 214,000 >>> 29

31 ASLEF THE TRAIN DRIVERS UNION Nederlandse Spoorwegen 2013 Annual Report Public transport franchises in the United Kingdom The railway market in the United Kingdom is completely deregulated and subdivided into franchises. Abellio tenders actively for franchises in order to obtain and retain a market share, running the Merseyrail, Northern Rail and Abellio Greater Anglia franchises in Last year, Abellio participated in two tendering processes in the United Kingdom: Essex Thameside and TSGN (Thameslink, Southern and Great Northern). The winner of both these franchises will be announced in the spring of Abellio also was prequalified for the rail franchise ScotRail in October. This is an honour and an opportunity for Abellio to potentially acquire a franchise that is important for the Scottish economy. The requirements for this franchise will be announced in January Abellio also worked on the Single Tender Award (STA) last year for Northern Rail and Abellio Greater Anglia. For Northern Rail, the STA resulted in a head of terms agreement in January This will let Abellio run these franchises for a further 22 months, until February 2016, with an option for a further extension of two months. Abellio is expected to sign the interim franchise agreement for Abellio Greater Anglia in May or June The STA contains an extension to the franchise by 27 months from July 2014, with an option for a six-month extension after October The revenue from passenger transport in other countries provided by Abellio was 1,596 million in This is 75 million more than in 2012, primarily because the Abellio Greater Anglia franchise was in operation throughout 2013; this franchise started in February Merseyrail franchise This franchise is operated in a 50/50 joint venture with Serco Group plc, a listed British company. It concerns passenger transport on the rail network around Liverpool. The annual train-kilometres covered comes to approximately six million. There is a duty to implement the agreed service level (timetable, quality of the service) at a fixed fee from the regional authorities. An evaluation is performed once every five years to ascertain whether the operations continue to be efficient. The first evaluation took place in The franchise runs for 25 years (until 20 July 2028). There is an option to extend for 5 years. Failure to comply with the contract means that the franchise 30 >>>

32 RAIL FRANCHISE HANDBOOK 2015 may be terminated, in which case the financial exposure for the company would be 5 million. The annual fee from the authorities (grant) is laid down in the contract and is indexed annually. Northern Rail franchise This franchise is operated in a 50/50 joint venture with Serco Group plc, a listed British company. It concerns the regional and urban passenger transport in the north of England. This franchise covers about 45 million train-kilometres a year. There is a mandatory requirement to perform the agreed service provision (timetable, quality of the timetable) at a fee from the authorities (grant) agreed in advance and which is indexed annually. The franchise runs until 1 April In January 2014 a head of terms agreement has been reached which extends the franchise for 22 months to 6 February 2016, with an option to extend by another 2 months. If the contractual conditions are not met, the franchise may be terminated. In that case, the financial exposure for the company would be 16 million. Greater Anglia franchise Abellio won the Greater Anglia franchise in This franchise is operated by the full subsidiary Abellio Greater Anglia Ltd. It concerns passenger transport by train on the rail network in the Anglia region in the east of England. The number of train-kilometres for this franchise is around 34 million per annum. The franchise started on 5 February 2012, was awarded for the period to 19 July It is expected to sign an interim franchise agreement in May/June 2014 containing an extension for 27 months to 10 October 2016, with an option to extend by another 6 months. There is an obligation to provide the set services (timetable, quality of the services) for a predetermined fee paid to the government, which is index-linked on an annual basis. In the event of non-compliance with the contract, the franchise may be terminated. In that case the financial exposure is 10 million. There are also 50 franchise obligations that must be met during the term of the franchise, with penalty clauses if the obligations are not met. >>> 31

33 ASLEF THE TRAIN DRIVERS UNION >>>STAGECOACH Stagecoach Group plc is an international transport group operating buses, trains, trams, express coaches and ferries. The group was founded in 1980 by the current chairman, Sir Brian Souter, his sister, Ann Gloag, and her former husband Robin. The group is based in Perth, Scotland, and has operations in the United Kingdom and North America. >>> East Midlands Trains Owned by: Stagecoach Franchise period: November 2007 to October 2017 Total subsidy per passenger mile for 13/14 (in pence): 13.1** 2014 annual profit: 14,000,000**** 2013/14 dividend paid: 0**** 2014 operations staff employed*: 1, highest paid director s emoluments*: 272,000 >>> South West Trains Owned by: Stagecoach Franchise period: February 2007 to April 2019 Total subsidy per passenger mile for 13/14 (in pence): -1.7** 2014 annual profit: 16,000,000**** 2013/14 dividend paid: 16,000,000**** 2014 operations staff employed*: 2, highest paid director s emoluments*: 401, >>>

34 RAIL FRANCHISE HANDBOOK 2015 >>> Virgin Trains Owned by: 51% Virgin Group, 49% Stagecoach Franchise period: March 1997 to April 2017 Total subsidy per passenger mile for 13/14 (in pence): 4.7** 2014 annual profit: 7,000,000**** 2013/14 dividend paid: 10,000,000**** 2014 operations staff employed*: 2, highest paid director s emoluments*: 324,000 Group Annual Report and Financial Statements 2014 The financial performance of the UK Rail division for the year ended 30 April 2014 is summarised below: Stagecoach Year to 30 April Change m (restated) m Revenue and like-for-like revenue 1, , % Operating profit (16.7)% Operating margin 2.7% 3.4% (70.0)bp Revenue growth The Group s two wholly-owned rail franchises, South West Trains and East Midlands Trains, continue to receive revenue support which partly offsets the extent to which actual revenue falls short of the revenue that was forecast as part of the successful bids for the franchises. As a result of the revenue support arrangements, the profit of our UK Rail Division is less sensitive to changes in revenue than it would otherwise be. >>> 33

35 ASLEF THE TRAIN DRIVERS UNION Profitability The decrease in operating margin was built up as follows: Operating margin 2012/13 (restated) 3.4% Change in: Amounts paid to/from DfT (1.0)% Other operating income 0.7% Other (0.4)% Operating margin 2013/14 2.7% The Division reported good revenue growth for the year ended 30 April 2014 even after allowing for the adverse effect on revenue of severe winter weather, particularly at South West Trains. The financial performance of our rail businesses is in line with our expectations and there is continuing good passenger revenue growth at our South West and East Midlands rail franchises. Expected increases in the franchise payments to the DfT resulted in a reduced operating margin for the year. Our efficient financial stewardship of the railway and our ability to generate continued growth is benefitting taxpayers. Recent data published by the Office of the Rail Regulator shows that our South West Trains franchise made the largest net return to the taxpayer of any UK train operator in 2012/13, providing a significant premium which the government can choose to invest in public services and improvements for passengers. Outlook As we approach the end of the existing period of our two wholly-owned franchises, the financial performance of the businesses becomes more challenging compared to that forecast in the original bids for the franchises. The existing franchise periods end in 2015 for East Midlands Trains and in 2017 for South West Trains. South West Trains and East Midlands Trains face further substantial increases in the amounts they are due to pay to the DfT as franchise premia amounts in the year ahead. While we remain focussed on growing revenue and controlling costs to offset 34 >>>

36 RAIL FRANCHISE HANDBOOK 2015 these increased premia payments, to the extent possible, the greater opportunities to add value in UK Rail lie in the planned direct awards of new South West Trains and East Midlands Trains franchises and in the opportunities to secure other new franchises. Virgin Rail Group Financial performance The financial performance of the Group s Virgin Rail Group joint venture (excluding intangible asset expenses and exceptional items) for the year ended 30 April 2014 is summarised below: Year to 30 April Change 49% share m (restated) m Revenue and like-for-like revenue % Operating profit (75.2)% Net finance income % (40.0)bp Taxation (0.9) (2.7) (66.7)bp Profit after tax (75.9)bp Operating margin 0.6% 2.4% (180)bp Until December 2012, Virgin Rail Group ( VRG ) operated the West Coast rail franchise under a commercial agreement where it was at risk for variations in revenue and cost, and earned a commensurate return. To ensure the continued operation of the franchise following the DfT s failure to properly conclude its re-letting of the franchise during 2012, a temporary commercial arrangement was entered into in December Since then until June 2014, VRG has earned a pre-tax profit equivalent to 1% of revenue from the West Coast rail franchise with the DfT taking virtually all of the risk that revenue and/or costs differ from those expected. >>> 35

37 ASLEF THE TRAIN DRIVERS UNION VRG has now reached an agreement with the DfT to return its West Coast rail franchise to more normal commercial terms. Under the new agreement, the West Coast rail franchise is now planned to run until at least March VRG will look to build on its industry-leading customer satisfaction by delivering a range of further enhancements to the customer experience, including, high bandwidth wi-fi, a partnership with the Nectar loyalty scheme, additional standard class seating capacity, more ticket vending machines, an upgraded website and planned new train services from London to Blackpool and Shrewsbury. The new franchise has a GDP sharing agreement that is intended to ensure that the DfT bears most of the risk of variances in the West Coast Trains revenue resulting from UK GDP differing from that expected at the time of the June 2014 franchise agreement. A profit share arrangement also applies whereby a share of the profit above certain predetermined thresholds is payable to the DfT. Outlook The new West Coast Trains franchise that Virgin Rail Group has now agreed enables it to deliver a range of benefits to customers. The franchise also has the potential to deliver higher levels of profitability than were earned in the year ended 30 April 2014 under the management contract then in force. 36 >>>

38 RAIL FRANCHISE HANDBOOK 2015 >>>VIRGIN Virgin Group Ltd. is a British multinational branded venture capital conglomerate company founded by business tycoon Richard Branson. Its core business areas are travel, entertainment and lifestyle and it consists of more than 400 companies worldwide. Virgin Group's date of incorporation is listed as 1989 by Companies House, who class it as a holding company; however Virgin's business and trading activities date to the 1970s. The net worth of Virgin Group as of September 2008 was 5.01 billion. Virgin Group has an annual revenue of around of 15bn. FOR INFO ON VIRGIN TRAINS PLEASE LOOK AT STAGECOACH ON PAGE 33 >>> 37

39 ASLEF THE TRAIN DRIVERS UNION >>>DIRECTLY OPERATED RAILWAYS Directly Operated Railways is a holding company set up by the Department for Transport in the United Kingdom in July 2009 to run rail franchises should it become necessary to bring them into public ownership. Subsidiary East Coast Main Line Company trading as East Coast, took over the running of services on the InterCity East Coast franchise from 13 November 2009 following the government assuming control of the franchise from National Express East Coast after it defaulted on its contract. >>> East Coast Owned by: Directly Operated Railways Ltd (State owned) Franchise period: 14 November 2009 to February 2015 (now Stagecoach / Virgin March 2015 to March 2022) Total subsidy per passenger mile for 13/14 (in pence): -0.6** 2014 annual profit: -1,000,000**** 2013/14 dividend paid: 0**** 2014 operations staff employed*: 2, highest paid director s emoluments*: 365,818 DOR Annual Report 2013 DOR s financial performance has been good throughout the year, with million provided to the DfT in premium and dividend payments, in addition to making a profit before tax of 8.4 million. Given the improving economy and prevailing market conditions, I am confident that the plans we have in place will enable East Coast to continue to achieve sustainable growth during the year ahead. During the year, East Coast continued to make further good progress with the turnaround of the business. Whilst yield growth slowed in the late summer and autumn of 2013, volume remained strong overall with almost 20 million passenger journeys made in 2013/14. The First Class 38 >>>

40 RAIL FRANCHISE HANDBOOK 2015 product had a particularly successful year, seeing revenue growth of 12% and journey growth of 17%. The overall trend of year-on-year improvement continued, with the lower rate of revenue growth offset by good cost control and performance receipts. Turnover for the year ending 31 March 2014 amounted to 720.0m (2013: 693.8m) which in the main reflects ticket revenue earned from passenger services at East Coast and associated income earned from catering, car parks and commission from the sale of tickets on other train operators services. The operating expenditure reported in the year was 715.3m (2013: 690.0m), comprising access charges payable to Network Rail for stations and depots, rolling stock lease costs, staff costs and other operating costs, generating an operating profit before DfT Service Payments and taxation of 225.3m (2013: 208.7m) and an operating profit after DfT Service Payments before taxation of 8.4m (2013: 5.9m). Despite difficult general economic market conditions prevailing during the year East Coast was able to secure year on year growth in passenger revenue of 4.5% which compares to the average for all Long Distance Operators of 4.9%. It is considered that the slightly weaker revenue performance than the peer group can be attributed to variations in regional market dynamics, and the impact of open access competition on the route. >>> 39