[Numbers 1-14 in the text refer to footnotes)

Our previous newsletter contained a history of the South West Trains franchise in the context of parent company Stagecoach’s business ethos. This document builds on that history, looking more closely at the current issues.

1. Stagecoach’s preference for ‘greed’ over ‘ethics’ today

1.1 Founder Brian Souter’s statement that “ethics are not irrelevant but some are incompatible with what we have to do, because capitalism is based on greed”1 was akin to scorning professional standards. ‘Professional’ has been defined as ‘conforming to the technical or ethical standards of a profession’2. If such words were uttered by transport professionals such as Chris Green, Christopher Garnett, Adrian Shooter or Moir Lockhead, they would be met with astonishment and disbelief.

1.2 With the collapse of the banking industry, it seems more relevant than ever to consider the threat to the transport industry posed by Stagecoach’s preference for ‘greed’ over ‘ethics’. Bankers, of course, are widely perceived as having pursued reckless strategies driven by greed, and of precipitating the need for a new age of austerity for the vast majority of Britons who are financially less fortunate than themselves.

1.3 The Royal Bank of Scotland (RBS) was well to the forefront of the crisis. Interestingly, therefore, Brian Souter has just appointed Sir George Mathewson (who joined Stagecoach from RBS in 2006) as the new Stagecoach chairman with effect from January 2011. So how may Sir George change the Stagecoach ethos?

1.4 The following comments3 seem relevant: “Iain Martin is disappointed that Sir George Mathewson, the former chief executive and chairman of Royal Bank of Scotland, does not like saying sorry. I’m not surprised though. It was Sir George, as Royal Bank’s ‘executive deputy chairman’, who said in March 2001 that a A£2.5million bonus he shared with colleagues would not “give you bragging power in a Soho wine bar”. That year Sir George’s bonus was paid A£814,000 while his chief executive Sir Fred Goodwin’s payout was worth A£759,000. Leopards don’t change their spots. And Sir George hasn’t either.”

1.5 The read-across is obvious. The Stagecoach founders are famous for their enormous personal fortunes, built to a large extent on public subsidy and stripping public assets. Not saying sorry is another enduring Stagecoach characteristic, famously illustrated when the company first took over South West Trains and wrecked the service by disposing of too many drivers. Stagecoach director Brian Cox mocked critics as “fully paid-up member of the Hindsight Club”, whilst Souter accused furious passengers of writing letters of complaint in their bosses’ time.4

1.6 So Sir George looks likely to fit the Stagecoach mould rather snugly. He already dismisses notions of potential contention with Souter, and it is expected that he will be well remunerated5 (even before account is taken of the company’s huge bonus culture): “Asked if he expected future clashes with the chief executive, given that both he and Souter, the millionaire founder of the bus and rail giant, are regarded as strong-willed individuals, Mathewson said: “That’s the last thing I would anticipate. We get on very well.” “Mathewson’s new salary was not disclosed. According to the company’s latest annual report, however, Speirs [the current chairman] earned £150,000 as non-executive chairman last year, and Mathewson’s salary is likely to be in the same ballpark.”

1.7 The indications at the top, therefore, are that Stagecoach’s trajectory of ethically-limited greed is likely to continue its destructive course.

2. Stagecoach ignores its franchise obligations, wrests an extra £100m from taxpayers, and seeks greater freedom to do what it likes

2.1 SWT had become a cash-cow for Stagecoach, and the company seriously overbid for a third franchise term: over £½ billion more than the second highest bid. Transport Minister Tom Harris called this "a good deal for passengers and a good deal for the taxpayer”6. Informed commentators were sceptical about Stagecoach’s ability to deliver.

2.2 Although it is fashionable for train operators to complain about DfT micro- management of franchises, Stagecoach simply ignored its franchise obligations from the outset. For example:

Passengers were promised that “Capacity will be increased on both mainline and suburban services by around 20% ---- there will be more seats for many passengers on busy routes, with longer trains and extra services operating.” 7 Thousands of seats were then stripped from the suburban trains which serve SWT busiest routes, Portsmouth-Waterloo commuters were crammed into suburban trains with dense seating, and even some Waterloo-Weymouth services were scheduled for suburban train operation.

DfT’s press release further proclaimed: “It is expected that many regulated season tickets into London will be discounted for passengers travelling outside the height of peak times.” Great expectation: nil delivery. Instead, Stagecoach introduced a 20% surcharge on many morning off-peak trains into London. And it proclaimed: “The franchise will provide £40m investment in enhancements at stations.” This was followed by busy travel centres being shut across the franchise, whilst other operators have commendably enhanced such facilities.

The Service Level Commitment specified that there should be an hourly train service from Waterloo to Poole, running fast from Clapham Junction to Basingstoke.8 Stagecoach added stops at the well-served stations of Farnborough and Fleet, in an area where it has a virtual public transport monopoly. These stations are on a high-speed stretch of line, and the stops severely slowed the specified service, creating scheduling conflicts. National Rail live running data show that the trains have about 15 minutes of recoverable slack time between Waterloo and Southampton Central, where there is a 13-minute layover followed by a 25-minute layover at Brockenhurst.

More generally, Stagecoach has concentrated its faster London services at a few stations such as Winchester, Southampton Airport and Brockenhurst, whilst substantial towns such as Eastleigh, Fareham, Totton and Christchurch are poorly served. This simply encourages passengers to drive longer distances to catch a train, undermining the green agenda and netting huge car parking revenues for Stagecoach. So the promised additional parking spaces at Southampton Airport Parkway station are arguably more a matter of profiteering than of necessity. At least cowboy clamping at SWT station car parks should be confined to history under the new legislation the Government is bringing forward to ban clamping on private land.

2.3 Far from investing in SWT, Souter admits that Stagecoach’s cuts amount to £110m9.

2.4 With an extraordinary display of amnesia or ethical deficit, having ignored the most passenger-oriented obligations in the SWT franchise, he has started to complain of DfT micro-management and wanting greater freedom to boost shareholder rewards (a significant proportion of which go to people at the top of Stagecoach):

“Souter believes improvements must be made to the existing rail franchising model, however, to give operators greater freedom to invest in improving services for passengers, reduce the burden on taxpayers, cut unnecessary micro-management by government and better protect services in challenging economic times.

The emphasis should be on high levels of customer satisfaction, said Souter, with each train operator free to determine the best way of achieving that objective.

“All of this can be achieved while ensuring a sensible risk transfer to the private sector, which allows for shareholder returns commensurate with performance and capital put at risk”, he said.”10

2.5 As for ‘reducing the burden on taxpayers’, we now know that people have been no luckier as taxpayers than as SWT passengers. With so many SWT franchise obligations discarded, and footfall at Waterloo depressed much more than at other London termini serving the South, SWT’s revenue plummeted. This triggers compensation under the franchising regime, but the earliest start-date intended by DfT was not good enough for Stagecoach, whose successful challenge is set to cost taxpayers up to £100m of unbudgeted expenditure.

2.6 To put this £100m into context, the likely cost of the cancelled order for 14 much-needed new trains to relieve overcrowding on the Portsmouth-Cardiff route (where 3-coach regional trains serve more cities than most inter-city trains do) would have been in the order of £56m (based on a typical cost of £1m per coach).

2.7 The following report11, shows how little risk franchise operators bear in return for their huge profits, and how Stagecoach expects ‘integrity’ in others whilst paying lip-service to ‘ethics’ itself:

“The Department for Transport was left humiliated and saddled with a £100 million bill today after an arbitrator ruled against its interpretation of its £1.2 billion, 10-year contract with Stagecoach to run the South West Trains franchise into Waterloo.

The long-running dispute centred over when SWT should start receiving revenue support — where the Government makes up any lower than-expected earnings from passengers — to prop up the business.

The DfT believed the terms of its contract with Stagecoach meant it would not have to pay any support until February 2011, but the transport firm’s lawyers successfully argued that the subsidies should kick in from April this year.

The recession-fuelled dive in passenger revenues at SWT, which mainly caters for London commuters, made the impact of the today’s judgement even more valuable.

Analysts said the rail industry arbitrator’s ruling will see the taxpayer paying SWT an extra £100 million in subsidies for the period between April and February next year. After then, the Government will continue to pay revenue support as planned.

However, it wasn’t all good news for Stagecoach, as the arbitrator also ruled that the firm’s earnings from station car parks should be taken into account when the Government tots up its subsidy payouts in the future.

That will hurt ongoing earnings, with Stagecoach predicting that its pre-tax profit will be £8 million lower in the year to the end of April 2011 as a result. But the transport group said its revenue boost from receiving taxpayer cash for most of this year “should enable” its UK Rail division to remain profitable in the 12 months to April 2011.

Stagecoach will post full-year figures for the 2009-10 financial year next week, after like-for-like revenues at its British rail business — which includes a 49% stake in Virgin trains as well as SWT — rose 4% in the 48 weeks to April 4.

A spokesman for the train and bus operator said: “We are pleased at the outcome of the arbitration process, which has ruled in our favour. “We believed this was a matter of integrity over a contract signed in good faith and we had strong legal advice in support of our position.”

A DfT spokesman said: “The Department is considering the details of the judgement and its implications.”

Stagecoach investors were relieved with today’s news, particularly as the credit ratings agency Fitch put out a negative outlook on the group’s long term debt last November, saying a failure to resolve the subsidy dispute would weaken its financial profile. Shares rose almost 3% to 191.6p.

3. With £100m wrested from taxpayers, Stagecoach is exposed as cash-rich

3.1 Stagecoach was supposed to be suffering financial constraints at the time it was challenging DfT for more taxpayers’ money:

“The recession saw transport giant Stagecoach post an 18% plunge in pre-tax profit to £161.3 million in the year to April, when it spent almost £5 million on consultant fees to defend itself against a Competition Commission enquiry and putting together a failed takeover bid.

The firm behind the South West Trains franchise and Megabus coaches spent £2.3 million on its aborted move for National Express.

Finance director Martin Griffiths said the firm had no new intentions for a shopping trip. “Right now, we’re very happy with our portfolio and balance sheet,” he said. “There are no imminent deals out there.”

Stagecoach has also set aside £2.6 million to pay for work involved in the Competition Commission’s study of the local bus market. But it’s bullish about the year ahead and upped the full-year dividend by 8.3% to 6.5p, meaning founder and chief executive Brian Souter will get a £7 million cheque for his dividend spoils.”12

3.2 A few weeks later, it emerged that there was an idle £340m in the Stagecoach pot:

“The return of the London commuter helped Stagecoach rail revenues rise 7% in the past three months. The buses and trains operator added that demand for its South West Trains line into Waterloo and the East Midlands franchise into St Pancras is still improving.

Stagecoach said its Euston-based West Coast mainline route, which it operates as a joint venture with Virgin Rail, was doing particularly well, with revenue up 18.7% in the 12 weeks to 25 July. The boost was partly thanks to the effect of ad campaigns, and partly due to reduced rail disruption due to engineering work, and weak comparables last year.

“Trading conditions have improved across the group, with improving revenue trends in both the UK and North America,” Stagecoach said. In the US, where it runs a fleet of 2,800 coaches, revenue came in 6.9% higher than the same three months last year.

Stagecoach said its buses division was also on the up, with revenue up 2% over the 12 weeks. The firm said it would do well whatever happened to UK plc. “Whilst the effect of the change in the Government and the sustainability and pace of economic recovery remain uncertain, we believe that on balance the outlook for the group is positive,” it said. The shares rose 3.7%, or 6.2p, to 173.5p.

Analysts at KBC Peel Hunt said Stagecoach’s “uniformly strong” figures made it one of the first players to show a significant bounce-back from recession. They said it also had huge acquisition potential, with £340 million of unused facilities on its balance sheet.”13

4. Stagecoach’s latest manoeuvres

* We understand that, fresh from wresting up to £100m more from taxpayers for SWT (despite spending cutbacks of £110m at the expense of passengers), Mr Souter is now in contention with Hampshire County Council about pensioners’ concessionary bus travel. He apparently wants payments for pensioners who travel on buses which the Council already subsidises. In case this leads to the concessionary scheme being reined in, he threatens to cut back services:

“Stagecoach founder Brian Souter has urged the coalition Government not to cut concessionary travel schemes and warned that many of its beneficiaries are Conservative voters…. Souter added that scaling back or abolishing free travel for pensioners and the disabled would lead to bus companies axing services.”14

* During July PassengerFocus announced the results of research showing that people found ticket machines difficult to use, could not get essential information about ticket availability, and were often overcharged. The longest ticket queues were at Guildford, Basingstoke and Winchester. On 21 July, the BBC’s transport correspondent Paul Clifton reported that he had been barred by SWT from speaking to passengers at Basingstoke station, and had had his request for an interview with SWT refused.

* Extraordinarily, SWT’s revenue protection measures, already condemned as ‘disproportionate’ by Eastleigh MP Chris Huhne, have become even more spiteful. A couple travelling from Waterloo to Southampton on a Sunday with two £6 Megatrain tickets were fined £114 when they decided to alight at Eastleigh, a few miles short of their booked destination. Such pointless (other than greed-feeding) action defies belief. The railways are supposed to be a public service. If Government still provided this public service direct, would it behave in this way? And, if not, isn’t it time to weed companies like Stagecoach out of the rail industry?

1 Source: ‘Stagecoach’ by Christian Wolmar. 2 Source: Penguin English Dictionary. 3 Source: Christopher Hope, Daily Telegraph website 23.2.2009. 4 Source: ‘Stagecoach’ by Christian Wolmar. 5 Source: Herald 20.8.2010. 6 Source: DfT press release 22.9.2006. 7 Source: DfT press release 22.9.2006. 8 Source: Response to FOI request by South Hampshire Rail Users’ Group. 9 Source: Herald 24.6.2010. 10 Source: RAIL issue 648. 11 Source: Evening Standard 17.6.2010. 12 Source: Evening Standard 23.6.2010. 13 Source: Evening Standard 18.8.2010. 14 Source: Herald 24.6.2010. 6