Yesterday National Express told the Department for Transport (DfT) that its Inter-City East Coast franchise would run out of money this year. Lord Adonis, the Transport Secretary, promptly took the line into public hands and threatened to take away another two National Express franchises.

“It is simply unacceptable,” Lord Adonis said, “to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging.”

The trouble is that National Express, and the other operators who have taken on franchises in the past couple of years, haven’t had the good times. At First Great Western, for example, revenue was under budget in the second year of its replacement franchise and last year, the third year, it needed £50 million of government support.

So should we sympathise with National Express? Only in that its bid for the East Coast Main Line was based on the same assumptions used by the DfT and rival train operators in the very different economic climate of three years ago.

Franchise bidding has been a calculated gamble on the economy. To win, a bidder has to assume that fare revenue will grow every year and promise to pass this extra money on to government in the form of an annual premium.

In its winning bid for the line, National Express assumed that growth of 9-10 per cent every year would allow it to pay the Government £470 million in 2014. Was this rash? Not according to the DfT. Remarkably, National Express was not the highest bidder. An even more generous bid was not accepted because the department considered it to be “high risk”. The successful National Express offer was considered “medium risk”.

As Richard Bowker, then National Express chief executive, explained at the time: “We have had a very simple bidding philosophy. We will not bid at levels we think are unsustainable or undeliverable — there’s no point in being a hero for a day and a villain for ever more afterwards.”

But with passenger numbers booming, the DfT and Mr Bowker had forgotten that the railways are dependent on the state of the economy. Two decades earlier, in the Thatcher/Lawson boom, the number of rail passengers grew dramatically. During the 1980s British Rail’s numbers grew by a quarter to reach the highest level for 35 years. But nearly all that growth was lost in the resulting recession.

Privatisation coincided with the start of economic recovery. Year after year passenger numbers set new records, eventually topping the peak of 1946. Against this background, franchise bids became increasingly ambitious, assuming perpetual revenue growth. Bidders who did not buy into this philosophy did not win franchises, and the DfT encouraged this.

We now know what happens when boom turns to bust. National Express was contracted to pay an additional £55 million in premium to the Government this year, based on expected revenue growth of 10 per cent. But in the first quarter of this year, growth was only 0.3 per cent. The good times are over.

Provision for such economic uncertainty is built into franchise agreements through an arrangement called cap and collar. This shares short-term windfall profits with the taxpayer (the cap) while giving the train operator some reassurance about long-term economic effects (the collar). From the fifth year of the franchise onwards, if revenue is below forecast, taxpayers absorb 80 per cent of the loss.

Unfortunately for National Express, the collar is not available on the East Coast franchise until December 2011. But other operators are already receiving this support, including the National Express East Anglia franchise, First Great Western and Virgin West Coast.

So the National Express bid was not uniquely optimistic. Nor, given the prescriptive nature of franchise specifications, did it make unrealistic promises. The problem was that the franchising process was locked into an expectation of perpetual growth. It was a perfect system until the economy failed to play by the rules.

National Express East Coast is the canary down the mine, revealing the financial crisis facing the railway industry. Revenue is falling as City job losses take effect and business travellers move from first to standard class. Fare income is static at best, but the DfT’s five-year plan assumes that revenue will rise at 5 per cent a year from £6.7 billion today to £8 billion in 2013-14. This additional income is intended to transfer more of the cost of the railway from the taxpayer to the rail user. Now support through the collar could add a £500 million hole to the taxpayers’ contribution — with even more to come next year.

Inevitably, nationalisation is being suggested as a solution. But regardless of who runs the East Coast, the revenue will stay flat and the costs are virtually fixed. It took three decades after nationalisation in 1948 for British Rail to work out how to run a state railway with the Government at arm’s length. Today the Government specifies everything in fine detail, from the design of trains to timetables. It is hard to see how power could be returned to the working railway or how a nationalised railway would be organised. Longer franchises — say 15 to 20 years instead of 7 to 10 — are on the Government’s agenda and Chiltern, the only long franchise, is a success. But had National Express been awarded a 20-year franchise in 2007, would the immediate situation be any better? I doubt it.

The urgent need is to get through the present crisis with the minimum damage to the working railways. That means cutting costs, whether through fewer trains, shorter trains or deferred investment. And for the long term? As someone who has reported on the railways for more than 30 years, I see no easy solution.

Roger Ford is industry editor of Modern Railways

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