New entrants compete with UK franchise operator dominance

Each month, freelance asset finance
specialist Anthony O’Connor breaks exclusive news
and provides analysis about business in the European rail finance
sector. In his second report for Leasing Life on this
theme, he covers, besides other issues, the impact open-access
operators are having on the leasing industry. 

---

Open-access operators in the UK look set to launch fresh
passenger rail services this year and next that will compete with
the corporate clout of the country’s franchise operators. With
their fresh approach to UK rail, they are helping to develop new
opportunities for emerging rail lessors.

Wrexham Shropshire & Marylebone Railway (WSMR), a joint
venture between Renaissance Trains and DB Regio UK, became just the
third open-access operator in the UK when it launched services
between Wrexham, in Wales, and London Marylebone in late April.

The rail company is leasing Class 67s from budding lessor
English Welsh & Scottish Railway (EWS), which includes
maintenance, and Mk 3 carriages that will be interim-leased from DR
Regio, part of the Deutsche Bahn group.

Deutsche Bahn

The EWS rolling stock had been previously earmarked for a Royal
Post contract that the rail company was unsuccessful in winning.
EWS is part of Deutsche Bahn’s international rail freight
subsidiary, Railon.

WSMR will lease the rail assets for a little longer than its
seven-year track access contract.

“The easiest way to obtain longer-term track access for
open-access operators is to introduce new rolling stock on to the
network, which is what Hull Trains did when it launched services
between Hull and London King’s Cross,” said Mary Bonar, head of
Stephenson Harwood’s rail practice in London, and one of the
promoters of the new WSMR rail service.

In March 2008, Hull Trains revealed it is applying for track
access rights to run services between Harrogate and London King’s
Cross via York, and from Cleethorpes to London via Lincoln and
Spalding. Details on rolling stock leasing have yet to be
finalised. Hull Trains is 80 per cent owned by First Group and 20
per cent owned by Renaissance Trains.

National Express

According to an EWS official in London, the company hires rather
than leases five Class 67 engines to National Express for use
around the UK as so-called Thunderbird rescue services
when its other equipment has technical problems.

Aside from industrial contracts and spot-hire contracts, EWS
also wet leases locos to FirstScot Rail for its Caledonian Sleeper
service.

Renaissance Trains has earmarked a number of potential
open-access routes in the UK, said Bonar, including a passenger
rail service between Glasgow and Liverpool which is “a market with
hardly any rail service”.

Working with an undisclosed partner, Renaissance’s data analysis
of the city pair is focusing on car and passenger coach travel
ahead of a planned route launch in spring 2009, she added. Data
supply is generally very lean for city pairs not featuring
London.

Other potential focus for open-access operators in the UK is the
under-used Channel Tunnel Rail Link and also the decommissioned
Eurostar passenger terminal at London Waterloo.

Grand Central Trains, also an open-access operator that runs
services between Sunderland and London King’s Cross, is awaiting a
Network Rail decision in July about whether it can launch services
between Bradford Interchange and London King’s Cross, according to
York-based finance director David Lowrie.

Angel Trains

While its first trainsets, Class 222 Pioneers, are leased from
its wholly owned leasing subsidiary Sovereign Trains (ex-
Porterbook-owned), Lowrie said that, with very little choice in the
UK passenger rolling stock, the company has no choice but to
negotiate lease contracts with Angel Trains for Class 180 Adelante
trainsets, which are in very limited supply. Hull Trains operates
two Class 180 Adelante trainsets, while First Great Western
operates the lion’s share of the asset type.

“The real question is how many other parties are looking to get
those trains,” said Lowrie. “If you don’t have to operate services
at 125mph, there is a lot more choice in the market.”

“I think the UK rail market will evolve. Since privatisation, it
has been a franchise market, but there is now room for it to become
less constrained,” Lowrie said.

He added there are growing opportunities for banks to become
involved in rail leasing in the UK: “For any banks wishing to set
up a UK rail-leasing operation, we would be very happy to talk to
them. The reality is, they have to provide something the other
rolling stock leasing companies cannot.”