Sir Richard Branson: 'We are not the kind of people who give up'

 

Richard Branson on Virgin's West Coast deal

I interviewed Sir Richard Branson today. I was in a basement room in the BBC's headquarters in London, crammed in with a camera crew.

He was speaking via Skype from his Caribbean island home of Necker - complete with cup of tea and open necked shirt.

Various jokes were made of the "I know where I'd rather be" variety.

It would be understandable if one could hear a whiff of "I told you so" in Sir Richard's voice.

In 2012 the Government announced that Virgin had lost the right to run the lucrative line between London and Glasgow. Instead, competitor First Group would pay far more for that privilege.

Except that the Department for Transport had got its sums wrong.

Its fancy franchise modelling system (a new one as it turned out that was largely un-tested) was wildly optimistic about possible increases in passenger numbers and therefore the amount FirstGroup would pay over the lifetime of the 15-year contract - £5.5bn as opposed to Virgin's offer of £4.9bn.

The DfT then failed to provide a suitable claw-back mechanism should the forecasts be missed by FirstGroup. They were asked to provide a capital buffer of £265m, woefully inadequate, according to Virgin, given the risks involved.

You can read about the initial controversy here.

Virgin launched a legal action, the award of the franchise was abandoned, the DfT admitted to "unacceptable flaws" and today it agreed that Sir Richard's company could extend its operation of the franchise until 2017.

Advantages

Following that, a longer term franchise will be put in place - one that Sir Richard told me Virgin would compete for. "In two years' time when this temporary contract comes to an end we will be in there bidding," he said.

"We are not the kind of people who like to give up."

Asked what advantage passengers will see from the new contract, Sir Richard said: "They will see some extra services, they will see a lot of extra seats.

"From the taxpayer point of view, they will get a lot of extra money." The contract is valued at £430m.

As long as Virgin runs the service efficiently and handles the commercial risk that passenger numbers do not increase as expected, it will gain a better profit margin from the deal than was possible previously. Under the original management contract for the line, margins were set at 1%.

David Brewer, of RBC Capital Markets, explained as much in a note published this morning: "The new contract with more commercial risk sees a higher margin beyond the 1% fee margin the current contract had been on. If it is in line with recent other direct awards, we think that margin is likely to be 3%."

First class

Intriguingly, the government has also demanded that Virgin reduces the number of first class carriages it has on its trains (well, this is the era of austerity). Anyone who has travelled on the line will be well used to standard class passengers stuck with standing room only whilst in first class there is acres of space disturbed only by polite staff offering free bacon butties.

Was Virgin, I asked Sir Richard, just trying to be too upmarket when it initially over-loaded its trains with premier service seats? "You could say that," Sir Richard responded.

"The only way to get extra people onto the train [now] is to convert [some carriages] to all economy." A few first class passengers might get displaced but the move "is of benefit to the majority of people".

Of course, one other way to improve capacity on the line that carries north of 30 million passengers a year and rising, would be to divert money earmarked for the new and controversial High Speed 2 rail link from London to the north of England.

That money, many serious commentators argue, would be better spent on improving the present West Coast Mainline, East Coast Mainline (which Virgin is also bidding for) and links between cities across the north of England and Scotland.

The HS2 question

"If HS2 didn't take place and the government decided to spend that money upgrading the West Coast mainline our trains [would be] capable of doing 140mph instead of 125mph," Sir Richard said.

So I asked him, whether it wouldn't simply be better to spend HS2's billions of pounds on improving the two existing north south routes and the rail connections between northern cities?

"I suspect they have to do all three," Sir Richard said, maybe with one eye on the fact that the transport secretary, Patrick McLoughlin, is a passionate supporter of HS2 as well as head of the department that agrees who should run the UK's train services.

"What is important is that whilst HS2 is built [the government] does not forget the money that needs to be spent on the East Coast Mainline and the West Coast Mainline.

"If they decide not to do HS2 we've got plenty of suggestions as to how they could spend the money."

Not, presumably, on better transport links to Necker.

 
Kamal Ahmed Article written by Kamal Ahmed Kamal Ahmed Business editor

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