Listed transport companies have seen their share prices plunge on Monday morning after the Government scrapped rail franchising and extended support for the rail industry.
Stagecoach (SGC), which runs the Sheffield Supertram and used to operate East Midlands Trains, was the biggest faller with its shares down over 17% to 36.6p.
It comes after rail firms secured an extension of emergency funding arrangements with the Government for the next six to 18 months, with previous support measures replaced by a new but similar Emergency Recovery Measures Agreements (ERMAs).
The deal means the Department for Transport (DfT) will continue cover the losses of the train operating companies and will pay them a fixed management fee, with the potential for an additional performance fee based on measures including punctuality, passenger satisfaction and financial performance.
EARNINGS POTENTIAL LOWER UNDER NEW DEAL
However, the fixed fee and overall fee potential for each rail firm is lower under the new measures and more heavily weighted to performance delivery, meaning they will earn less than before the coronavirus pandemic.
It is also difficult for the rail firms to ‘hand back the keys’ to the Government and let it take on the routes, as this carries financial penalties and would dent balance sheets further, as well as carry reputational risks.
But the train companies have sounded an upbeat note on the deal. FirstGroup chief executive Matthew Gregory said the agreements, and axing the franchise model, ‘reinforce our balance sheet position and provide a potential path for our rail business to move onto a new contractual footing over time, with a more appropriate balance of risk and reward for all parties.’
Analysts at Liberum also see the agreements as positive, arguing that they will ‘further de-risk earnings’ for Go-Ahead and FirstGroup.
They added, ‘The focus will now be on discussions for longer-term directly-awarded contracts after the ERMA and any termination sums that would be payable at the end of the ERMA term, which we see as potentially relevant to FirstGroup, rather than Go-Ahead.’