National Express pulls plans to operate German suburban trains

Germany’s biggest effort to privatise a big city’s suburban rail services collapsed on Tuesday when National Express, the preferred bidder, said it was pulling out of a contract to run Nuremberg’s S-Bahn amid legal challenges from the incumbent operator.

National Express, the UK group that runs bus and coach services across much of Europe and the Middle East as well as some rail operations, announced its decision to pull out in an otherwise positive trading statement.

The company said the “lengthy challenge” by Deutsche Bahn, the state-owned incumbent, meant the introduction of new trains for the service would be “substantially delayed”. It could also lead to National Express’s incurring “prohibitive” additional costs, it added.

National Express’s decision is a substantial setback for efforts to inject competition into local train operations in Germany, where authorities have long bridled at the high costs of subsidising sometimes poor quality operations by Deutsche Bahn.

The franchise award to National Express, announced in February last year, marked the first time that Deutsche Bahn had lost a contract to operate the S-Bahn suburban rail services that are the backbone of many large urban areas’ public transit networks.

Germany is one of several European countries seeking to improve its train services through the introduction of a competitive tendering system that shares some elements with the UK’s rail privatisation.

Several German state governments have held competitions to run services, mostly for small, rural operations.

The Nuremberg decision stood out because it would have produced total revenues of more than €1.4bn for National Express, far more than most other such franchises, over its 12-year term.

National Express was obliged under the contract to buy new trains for the service, which it was due to start operating in December 2018.

Tuesday’s announcement by National Express blamed Deutsche Bahn’s repeated challenges for holding up the ordering of the new trains, pushing up the costs that the UK company would have incurred if it pressed ahead with the contract.

The Bavarian Railway Authority, which awarded the contract to National Express, stood by its original decision and said it had been confirmed as “entirely legal” by a tribunal in southern Bavaria in July.

The authority added National Express’s announcement did not mean Deutsche Bahn would automatically win the right to continue operating the service. It intended to make a new contract award by the end of the year, it said.

Deutsche Bahn has frequently defended its powerful position in Germany’s passenger and freight rail markets aggressively in the face of efforts to bring in rival companies.

Meanwhile, National Express’s trading statement said operating profit rose 9 per cent year-on-year in the third quarter of this year.

Like-for-like group operating profit so far in 2016 had increased 12 per cent on last year and National Express was on target at least to deliver its targets for earnings, free cash flow and gearing for the full year, added the company.

National Express’s shares were up 4 per cent at noon in London, at 369.8p.

This article has been amended to correct the revenues that the Nuremberg contract would have produced for National Express.