Posted on: 09/06/2009 

The first rail contract to be awarded since the recession started will be announced this week, in a closely-watched deal that will set the benchmark for future agreements.

Four bidders are on the short list to run the busy South Central commuter routes, which carry 140m passengers a year and include London to Brighton services and the Gatwick Express.

Govia, a joint venture between the UK's Go-Ahead and Keolis, France's largest private sector transport company, is the current incumbent. It is tipped to retain the franchise in a battle against Stagecoach, National Express, and NedRailways, the Dutch state operator.

However, with a slowdown in ticket sales revenues threatening profits at all five of the UK's big bus and train operators, the South Central contract is expected to be markedly different to the last round of agreements struck in 2007.

Bidders compete for franchises according to how much they think they will be able to pay the government after taking their profits on certain routes. Less profitable ones are fought according to the declining amounts of subsidies they will require. But with the rail franchise system under pressure as train operators struggle to meet demanding payment schedules, which assumed a continued strong rise in passenger numbers, they will be pushing for more lenient terms.

Operators now perceive a much greater degree of risk in the system, and that new reality will be reflected in key terms like the level of subsidy and the availability of revenue support, said Douglas McNeill, analyst at BlueOar Securities.

Go-Aheads share price rose 6 per cent last week, outstripping sector rivals, in anticipation of the deal.

The lack of concern over the three franchises it holds - together accounting for about a third of all passenger journeys in the UK - are in the companys favour, as is its relatively strong balance sheet.

Rival bidder National Express is holding urgent talks with the Department for Transport as it struggles with its £1.4bn contract to run the East Coast mainline, while Stagecoach is embroiled in a legal battle with the government over the amount of revenue support it receives for its South-West trains franchise.

The South Central contract runs for five years from September until July 2015. The winner will be required to improve reliability and introduce later running trains on the service, as well as coping with the £5.5bn upgrade to the cross-London Thameslink line.