Trouble could be brewing at train operator FirstGroup (FGP) amid reports it is set to renegotiate its South Western Railway contract due to timetable changes barely a year after taking over the franchise.

According to media reports, South Western is at loggerheads with Network Rail on the operational and financial fallout.

FirstGroup says it is simply using a mechanism in its contract which allows for such discussions.

Liberum’s Gerald Khoo notes FirstGroup’s rail division is enduring mixed fortunes with Great Western in good shape, high losses in its TransPennine Express contract, while South Western is ‘profitable but potentially at risk.’

Khoo says rail franchises have substantial downside risk as high fixed costs could expose profitability in the event of falling sales, even if the parent company has effective ‘stop-loss arrangements’ as part of the franchise agreement to limit the damage. (LMJ)

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