More failures and this fragile industry could derail

The long-expected collapse of the National Express East Coast franchise shows the fragility of the privatised railway system in the face of an economic downturn - and raises serious doubt about whether the system can ever function truly in the private sector.

The boss of National Express, Richard Bowker, made a big mistake three years ago when, in his desperation to win the franchise, he greatly outbid his rivals and promised to pay £1.4 billion in premium payments to the Government over the seven years of the franchise.

His error was in believing Gordon Brown's declaration that the era of boom and bust had ended and the economy would grow indefinitely. Then he compounded the mistake by trying to play hard ball with transport ministers, arguing that the recession was so unexpected he should be allowed to renegotiate the franchise. No chance.

Lord Adonis, the canny Transport Secretary, and a cautious fan of the private sector, was having none of it. He knew that if he gave in, the other companies would follow suit and the whole system would effectively become unworkable.

In the short term, the franchise system has been saved and the industry as a whole notionally stays in private hands. But several other companies are in trouble, as ticket sales have flat-lined or, in the case of first-class, plummeted. The collapse of the National Express franchise leaves a big hole in the Government's rail finances. Any further collapse would jeopardise its investment plans for schemes such as Crossrail and Thameslink.

For the moment, at least, passengers will be unaffected by the collapse of the East Coast franchise. Indeed things may improve, as in its dying days National Express seemed to be going out of its way to make life awful for its customers, by charging for seat reservations, pushing up fares and scrapping catering.

Lord Adonis wants to re-examine what franchisees are required to offer. He would like to see better catering at stations, more cycle parking and improved car parking. He is delaying re-letting the franchise until September 2010 to look at ways of improving services - although he acknowledges that the premium payments from the new franchisee will be lower than what National Express would have paid.

For National Express this may be the end of its involvement in the industry. The company will not be allowed to bid for further franchises and there are doubts whether it will be able to keep its other two, C2C and East Anglia.

Adonis is banking on the industry improving over the next few months, if the economy recovers in line with the Chancellor's expectations. If it does not, and there are further franchise failures, the whole house of cards could collapse, with the industry having to be re-nationalised by default - just like Network Rail when Railtrack failed.