Transport operator Stagecoach (SGC) has been banned from bidding on three rail franchises by the Department for Transport (DfT) after failing to meet pension rules, causing the shares to fall 3.8% to 128.2p.

The DfT could not give an exact figure for long-term pension liabilities, meaning Stagecoach may end up paying significantly more than expected – which it may not be able to afford.

Stagecoach may be playing it safe after racking up significant losses following the early termination of its underperforming East Coast rail franchise last June.

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DfT’s decision means Stagecoach can no longer bid for the East Midlands franchise or the Southeastern franchise, the latter of which it was pursuing with partner Alstom.

It also cannot pursue a joint bid for the West Coast Partnership with Virgin Group and French national state-owned railway firm SNCF.

PENSIONS GAP OF UP TO £6BN

‘Without ongoing government support for the long-term funding of railway pensions, The Pensions Regulator has indicated an additional £5bn to £6bn would be needed to plug the gap in train company pensions,’ says Stagecoach chief executive Martin Griffiths.

Griffiths, who is ‘extremely concerned’ with the DfT’s decision says the rail industry proposed an additional £500m to £600m for the pensions scheme.

The chief executive is seeking an urgent meeting with the DfT to discuss ‘significant concerns’ as he believes forcing rail companies to take extra pension risks could lead to the failure of more franchises.

STAGECOACH TO EXIT UK RAIL

Without the opportunity to bid for the above franchises, Stagecoach will be left with no rail franchises when the East Midlands operations is taken over by Abellio East Midlands on 18 August.

The Southeastern franchise will continue to be managed by Govia until April next year at the latest, while the West Coast Partnership is due to be awarded in June.

Despite setbacks in its rail division, shares in Stagecoach have dipped only 5.9% over the last year as the company has focused on improving the performance of its UK operations instead of overseas.

Earlier this month, the transport operator forecast a better than expected adjusted earnings per share after its rail division delivered a stronger than anticipated performance.

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Issue Date: 10 Apr 2019