The London-to-Exeter franchise, which is run by the SWR joint venture between FirstGroup and Hong Kong’s MTR, is “not sustainable in the long term”, Shapps said in a ministerial statement on Wednesday.
Options for the franchise include nationalisation or moving to a new short-term contract.
SWR lost £137mln in its last trading year and was in danger of going bust before the end of the current year, according to filings at Companies House.
Shapps said the franchise will “continue to operate as usual with no material impact on SWR services or staff”.
He added: “Across the country, a number of franchises are failing to provide the reliable services that passengers require and there are legitimate questions on whether the current franchising model is viable.”
The Transpennine franchise, another of FirstGroup’s, is also in trouble, while earlier this month, Shapps said Northern Rail could lose its franchise due to its “appalling” performance over the last year.
Last year, FirstGroup and Trenitalia were jointly awarded the West Coast mainline railway franchise, between London and Manchester, before authorities stepped in over potential competition concerns.
Aberdeen-headquartered FirstGroup also is looking at potentially selling off its North American businesses as management see “limited synergies” between its divisions.