National Express faces a battle to keep its rail businesses as the Government weighs up whether to strip the company of its two remaining franchises. Lord Adonis, the Transport Secretary, condemned the company for walking away from its contract to operate the East Coast Main Line, saying it was unlikely to be allowed to bid for any more franchises.

He added that he might exercise his powers to strip the company of its two other franchises: East Anglia and c2c for London, Tilbury and Southend. “It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging.

“The reputational damage which is done to an operator which defaults on its commitments is huge. All of these businesses are looking for public contracts in future if they hope to stay in the rail market.”

National Express insisted that it was simply exercising clauses in its East Coast contract and said that it would strongly resist any attempt to remove its other two franchises, which remained profitable.

The dispute could go to the High Court because Lord Adonis appears keen to make an example of National Express and force it out of the rail industry. He wants to send a signal to other operators that may seek Government assistance, including Stagecoach South West Trains and Arriva CrossCountry, that they cannot expect to be bailed out by the taxpayer.

The second collapse in three years of a contract to operate trains on the East Coast Main Line is to trigger the most significant reforms to the rail franchising system since privatisation.

Lord Adonis admitted that there were flaws in contracts that allow parent companies of failing franchises to escape their financial commitments to the Department for Transport.

National Express had agreed to pay £1.4 billion for its 7½-year East Coast franchise but announced yesterday that it would walk away from the contract later this year. It is obliged to pay only £72 million to exit the contract, leaving a huge hole in the Department for Transport’s rail budget.

Its liability for the East Coast is strictly limited because, with the DfT’s approval, it created a “special purpose vehicle” to run the franchise.

Speaking to The Times, Lord Adonis said: “We will be learning from experience. I am certainly prepared to look at this relationship between parent groups and special purpose vehicles and whether or not the parent group should take on increased obligations in future.”

He also said that he would consider a Conservative proposal for getting private companies to make longer-term commitments to the railways by doubling the typical duration of a franchise to 15 years. “I am very open to the argument that we should have longer franchises so we give operators a bigger interest in their individual franchises.”

Anthony Smith, chief executive of the rail customer watchdog Passenger Focus, said that passengers had become “increasingly squeezed between the Government and the train operating company in an unrealistic deal”.

Sir Richard Branson, whose Virgin rail company runs the West Coast Main Line and which was beaten by National Express in the bidding for East Coast in 2007, said that the Government should “look again at the franchise system”.

Norman Baker, the Liberal Democrat transport spokesman, called on the Government to keep the East Coast service in the public sector permanently rather than just for a year. He said that it should act as a public sector comparator, providing a way of measuring whether privately run franchises were value for money.

Theresa Villiers, Shadow Transport Secretary, said that the Government had failed to learn from the collapse of GNER’s East Coast franchise in 2006.

“This Labour Government has used the franchising process to push the train operators to make wildly optimistic bids which has meant squeezing passengers for higher and higher fares.”

Gerry Doherty, leader of the TSSA rail union, said: “The farce of the East Coast bidding war proves that the rail franchise system is a lottery which only benefits the Treasury and private companies when it works. Passengers have to pay through the nose with the highest fares in Europe while staff have to pay with the loss of thousands of jobs. We should follow France, Germany and Spain where high-class public service railways are run for the benefit of the community.”

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