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The head of the UK’s largest rail operator FirstGroup has warned that the prospect of a Labour government poses a “risk” to the company because of its commitment to renationalise the railways.
The opposition party has pledged to “bring our railways into public ownership”, which if enacted would fully reverse the controversial privatisation of the industry in the mid-1990s.
“It is a risk that exists,” Graham Sutherland, chief executive of FirstGroup told the Financial Times.
FirstGroup runs three of the UK’s largest train operators: Avanti West Coast, Great Western Railway and South Western Railway.
Private companies are currently paid a fixed fee to run train services under tightly controlled contracts introduced by the government following a collapse in passenger numbers during the pandemic.
Labour’s stated policy is to take these contracts into full government control as they lapse, but has added the caveat that doing so would need to be “consistent with our fiscal rules”.
In a statement, Labour said it would “bring contracts into public ownership as they expire, and that is entirely consistent with our fiscal rules”.
The industry is still hoping to persuade the party to continue with a version of the current private-public partnership model.
Sutherland said “there is strong evidence the private sector makes a major contribution to the rail system”, pointing to a growth in passenger numbers and reduction in public subsidy across First Group’s rail operations this year.
“At the end of the day it is a risk that exists. We are leaning into it, we are in communications with both parties, and we are demonstrating the value we add,” he said. “We are a company that invests in the UK, creates jobs, and we will carry on doing that.”
FirstGroup has also “diversified” its business away from its rail contracts with the government, including growing its two fully commercial “open-access” rail businesses (which pay a fee to access the rail network and have no government involvement) and bus operations, said Sutherland.
“By default that makes us more resilient, whichever government is in,” he said.
Alexander Paterson, analyst at Peel Hunt, expected FirstGroup’s government rail contracts to be about a fifth of its adjusted operating profit in its current financial year, which he forecast at £196mn in total.
“A slight fear of nationalisation and the unknown with Labour may have held the stock back slightly and that might become more pronounced as we get into an election,” he said.
“But privatisation transformed the outlook for rail revenues and passenger volumes, so going back to state ownership and control may be risky,” he added.
FirstGroup shares have approached 10-year highs in recent weeks as passenger numbers on both rail and bus have recovered from lockdowns.
Over the past two and a half years the company has also seen off a bruising battle with one of its biggest shareholders, refocused its operations on the UK through the sale of North American assets, and rejected a £1.2bn take private offer.
Sutherland said FirstGroup was considering growing its rail business by bidding for contracts to operate the Elizabeth Line or London Overground for Transport for London when they come up in the next six to 12 months.
“These are large, complex bids so there are only so many people can do them,” he said.
He added that the company was also exploring how to grow its open-access operations, and could also begin operating in continental Europe if the right opportunities came up.
