The government is also to change the way franchises are allocated in future with a switch to directly-awarded contracts once this new period of support ends ln what it called the biggest shake-up of the rail industry for 25 years.
The government effectively took over the running of the railways in March when rail franchise agreements were suspended due to the nationwide lockdown.
The Department of Transport (DoT) said it wants an estimate from the train operators of how much it will cost to terminate existing franchise agreement by mid-December and will terminate franchises if it cannot agree on a sum.
New Emergency Recovery Measures Agreements (ERMAs) will replace the existing support arrangement for the transition period to the new contracts.
FirstGroup said these new Emergency Recovery Measures Agreements (ERMAs) came into force yesterday for South Western Railway (SWR), TransPennine Express (TPE) and the West Coast Partnership (WCP).
Go-Ahead’s GTR franchise is also covered by a new ERMA, which it said in a statement generates a margin of up to 1.5% and is a management contract with no exposure to changes in passenger demand or ancillary revenue, such as car parking and retail commission.
The new fees are lower than under the previous measures and are more heavily weighted to performance delivery, the government department said.
Supporting franchise holders’ revenue and costs since March has cost the DfT at least £3.5bn.
The arrangement for the WCP line runs until March 2022 and the SWR and TPE lines to the end of March 2021.
An EMRA for Great Western Railway (GWR) is already in place until at least June 26, 2021.
FirstGroup Chief Executive Matthew Gregory said: “The Government has extended its funding of the rail industry whilst demand for services remains heavily affected by coronavirus, and we are pleased that the vital nature of rail services to communities and local economies is being recognised.
“Together with the earlier GWR extension, these agreements 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.
“We have long advocated for a more sustainable long-term approach to the railway, with passengers at its centre, and we look forward to working constructively with the DfT to make this a reality.”
Broker Loiberum added that the decision to replace EMAs with less generous ERMA terms that ensure the continued operation of train services by incumbent operators at low levels of financial risk.
The duration of the ERMAs varies, but the intent appears to be to pave the way for a transition to non-revenue risk concessions to be negotiated with incumbent operators, said the broker.
For FirstGroup, Liberum said it sees the most likely outcome as an agreement, with FirstGroup deferring the outflow of rail restricted cash at the expense of some or all contingent capital at SWR and TPE, which would limit the damage to the balance sheet and covenant test ratios.
At Go-Ahead, which will run GTR will run to its scheduled September 2021 expiry date with the possibility of a further extension, the broker does not see a material financial impact.
FirstGroup shares tumbled 14% to 36.8p and Go-Ahead 7% to 606p, with worries over a second UK national lockdown also knocking sentiment.
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