FirstGroup Wins Multibillion Pound London Overground Deal as Labour Renationalises Railways

FirstGroup is set to assume control of the London Overground rail operation starting next spring, after being named the preferred operator by Transport for London. This change sees FirstGroup replacing the incumbent, Arriva, and comes at a pivotal moment as the ongoing government initiative to renationalise much of the United Kingdom’s rail network continues to reshape the industry.

While the national railway contracts transition into state hands under Labour’s agenda, the London Overground, along with the Elizabeth Line and Docklands Light Railway, will remain under private public concessions. This approach preserves these networks as outliers, maintaining a hybrid operational structure amidst nationalisation elsewhere.

The contract awarded to FirstGroup is structured as a concession, with the company set to receive an earnings rate of low single digit percentages on revenue, mirroring the management contracts that previously existed in the sector. Industry sources suggest a margin of two to three per cent, implying annual earnings from the contract could reach approximately £9 million, or £90 million over the expected ten year term. FirstGroup will initially enter into an eight year agreement, with the option to extend for a further two years.

The announcement of the contract boosted FirstGroup’s share value by five per cent, rising to 184.5p and providing a market capitalisation exceeding £1 billion. This development comes as FirstGroup faces the loss of significant annual earnings, approximately £80 million, following nationalisation of other networks including South Western Railway and, in future, Great Western Railway and Avanti West Coast.

London Overground operates as an extensive, subsidised network of railway lines serving the capital, offering vital commuter links supplementary to the London Underground. Despite substantial pre-pandemic revenue close to £300 million per annum, operating costs have consistently surpassed income, necessitating £100 million in annual subsidy from taxpayers. The post-pandemic environment has seen revenue recover to £260 million, yet costs have reached record levels, prompting government support of £216 million last year alone.

The network spans 100 miles and encompasses 113 stations, facilitating the journeys of around four million passengers per week. Services provide a strategic ring through areas including Clapham, Shepherd’s Bush, Kentish Town and Whitechapel, with routes extending into the suburbs to destinations such as Croydon, Richmond, Watford, Cheshunt, Chingford, Stratford and Barking.

FirstGroup’s chief executive, Graham Sutherland, emphasised that this contract underscores the company’s strategic ambitions to grow and diversify. As nationalisation reduces its rail earnings, FirstGroup continues to invest in bus operations and profitable open access train services, such as routes connecting London with Hull and Edinburgh, despite some government concern regarding the impact on state owned rail operators.