Bus and rail group Stagecoach's 49% owned Virgin Rail joint venture has secured an extension to the West Coast rail franchise until March 2017, moving terms back onto a commercial basis, with Virgin paying more to assume revenue and cost risk.
Virgin will pay more to the government up front, in return for the commercial terms. It has agreed to £433m in premium payments over the period of the contract, or £155.3m a year compared to £98.1m a year on the previous deal.
Stagecoach said the joint venture, with Richard Branson's Virgin Group, was expected to earn a profit margin "similar to the levels expected on other medium-term UK rail franchises and franchise extensions".
Historically Virgin Rail has earned a pre-tax profit equivalent to 1% of revenue from the franchise, with the DfT taking the risk that revenue and/or costs differ from those expected.
Stagecoach said the new contract "moves the franchise back onto a commercial basis, with Virgin Rail assuming revenue and cost risk".
Virgin mounted a legal challenge after the Department for Transport moved the franchise to rival FirstGroup in 2012, and was given the contract back until this year. There will be more competition for the long-term franchise that will be awarded in 2017.
For this medium-term deal, there will be a profit sharing arrangement whereby a proportion of profit in excess of certain thresholds will be payable to the government.
A gross domestic product (GDP) sharing arrangement will also apply whereby amounts are receivable by the franchise from the DfT where UK GDP is below certain pre-defined levels and likewise, amounts are payable by the franchise to the DfT where UK GDP is above certain pre-defined levels. A similar GDP sharing arrangement has been proposed for the new East Coast rail franchise currently out for tender.
New services have also been pencilled in for Virgin, with a direct service between Shrewsbury, Blackpool and London, backed by Network Rail and to be submitted to the Office of Rail Regulation shortly with expectations of a start by the end of the year.
Martin Griffiths, Stagecoach Group Chief Executive and Virgin Rail Co-Chairman, said: "This new contract is a great deal for our customers, communities and taxpayers.
"Millions of passengers will benefit from thousands of extra seats, plans for new services and free super fast connectivity.
"At the same time, the taxpayer will receive a significant increase in income, helping support the Government's record investment in Britain's rail network.
The new franchise will begin on June 22nd 2014 and run until March 31st 2017, with the government having the option to extend the contract by an additional year to March 31st 2018.
The market liked the look of the deal, with the shares
up 1.50% to 373p by 09:30 on Thursday.