National Express to give up East Coast

LONDON (Reuters) - The government on Wednesday stripped rail operator National Express 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 on Monday, were 8.2 percent lower at 284 pence by 4:41 p.m..

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 nationalised.

"We appear to be left with little alternative but to view that rail privatisation 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.

Bowker is taking a new job heading up planned railways in the United Arab Emirates.

National Express has also been struggling with a billion pound debt pile, but distanced its group finances from those of the East Coast mainline.

"The group itself has reduced its debt and does not have 'financial problems'," it said in a statement. Analysts expect it to launch a rights issue later this year, something the company has not ruled out.

National Express said the performance of the East Coast route would hit first-half profit, and the franchise would make a loss of 20 million pounds.

(Additional reporting by Keith Weir; Editing by David Cowell)