Great North Eastern Railway - Financial Issues

Financial Issues

In May 2006 it was revealed that GNER's parent company Sea Containers was in financial difficulties, and was rumoured to be bordering on insolvency. Questions were raised as to whether GNER could continue operating should its parent company cease trading. The company rejected this assertion, stating that its lines of credit and financial activities were "ring-fenced" away from Sea Containers, and therefore a cessation of services for this reason was impossible. It did not however stop speculation from rival TOCs (principally First) and Virgin Rail Group that they would be keen to rebid for the ECML franchise if it were put back out to tender. In July 2006 rumours began circulating that Sea Containers would be prepared to sell GNER in an effort to stave off resorting to Chapter 11 proceedings to secure itself from its creditors.

In July 2006 the High Court rejected GNER's judicial review over the Office of Rail Regulation's decision to allow Grand Central to operate trains along part of the East Coast Main Line, – and in particular its right to call at York, one of the principal (and lucrative) stops on the ECML. GNER had made its application partly on the basis that 'open-access' train operators (like Hull Trains) are not required to meet the same fixed costs for accessing Network Rail's infrastructure as train operating companies running services under a contract or 'franchise' with the Department for Transport. GNER's case failed principally because the High Court determined that not only did European law permit the Rail Regulator to establish a charging regime for open-access operators which was different from the one which applies to franchised operators (such as GNER), in this case not imposing a fixed charge on open-access operators, but that if he had not done so, he would have been acting illegally because of the very different conditions under which open-access operators and franchised operators get access to the network. The High Court (Mr Justice Sullivan) refused GNER permission to appeal.

Two days before the public judgment in the above action, GNER announced that Christopher Garnett, the company's chief executive officer, was to step down, having occupied that position since Sea Containers won the first InterCity East Coast franchise. Amid growing industry speculation that Sea Containers was working towards a "financial restructuring", the company's President and Chief Executive Bob Mackenzie was named as Garnett's successor.

The problems were further fuelled by GNER's poor profitability, which had been linked to the company's overbidding for the franchise coupled to what proved to be crippling premium repayments to the government. The company blamed the effects of the 7/7 terrorist attacks, increased electricity prices, and increased competition from low-cost airlines for the decline in passenger numbers. It also faced a growing challenge from the revitalised West Coast services operated by Virgin Trains. The company attempted to address the problem by waiving booking fees on internet sales, cutting staff numbers, and raising fares and car-parking charges where the market could bear it. In a press interview in September 2006, GNER's ex-chief Christopher Garnett hinted at a bleak future for GNER and the franchising system, claiming that the trend among TOCs to overbid for the renewal of franchises would result in a financially unsustainable railway.

In October 2006 Sea Containers filed for Chapter 11 bankruptcy protection, therefore allowing it to continue trading while it sorted out its finances.