UK strips National Express of key rail line

By John Bowker

LONDON (Reuters) - The British government on Wednesday stripped rail operator National Express (NEX.L) of its key East Coast service and warned the takeover target it faced losing further franchises.

Transport Minister Lord Adonis said he would set up a public body to run the loss-making London-Edinburgh route famed for its Flying Scotsman express trains and questioned the future of National Express as a rail operator.

The move - accompanied by the announcement of the resignation of Chief Executive Richard Bowker - came as National Express said funds set aside to cover losses on the line would run out later this year, with no plans to top them up.

In a deal negotiated by Bowker, National Express agreed in 2007 to pay a hefty 1.4 billion pounds for an eight-year franchise but was quickly hit by recession and stalled passenger growth.

Shares in National Express, which runs train and bus services in Britain, North America and Spain and which rejected a takeover bid from rival FirstGroup (FGP.L) on Monday, were 8.2 percent lower at 284 pence by 11:41 a.m. EDT.

The handover will mark the second time in three years a company operating the East Coast service has had to give up the franchise, after the demise of GNER in 2007.

"I think given the track record that National Express has demonstrated today, they'll have some difficulty in getting into this business again," Adonis said.

He added that he would look at whether the company could also lose its East Anglia London commuter network, although the group insisted it could not.

According to a BBC report, National Express had offered to pay more than 100 million pounds to terminate the East Coast franchise on a consensual basis.

Talking to BBC radio, Adonis declined comment, calling the figures "purely speculative."

Howard Wheeldon, senior strategist at BGC Partners, said the move showed that British railways should all be nationalized.

"We appear to be left with little alternative but to view that rail privatization has failed and that the sooner it is over the better," he said.

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Douglas McNeill, transport analyst at Astaire stockbrokers, said the removal of the franchise made a bid for National Express less likely -- but it could sell separate parts.

"National Express is certainly in play. It lacks a CEO and has said it is considering all options including disposals," he said.