Stagecoach's contract to run the East Coast Mainline rail franchise will end earlier than expected.
Transport Secretary Chris Grayling said Stagecoach would continue running the London to Edinburgh line only for 'a small number of months and no more'.
Since 2015 the franchise has met all its financial commitments to the taxpayer, returning nearly £1 billion to the public purse. But this has come at a substantial cost of nearly £200 million to Stagecoach.
Mr Grayling, speaking in the House of Commons, said: "The franchise will in due course run out of money and will not last until 2020. But it has now been confirmed the situation is much more urgent. It is now clear that this franchise will only be able to continue in its current form for a matter of a very small number of months and no more.
"Last week, following detailed analysis, my department issued the franchisee with notification that the franchise had breached a key financial covenant.
"This will not impact on the railway’s day-to-day operations. The business will continue to operate as usual with no impact on services or staff on the East Coast. But it does mean I will need to – in the very near future – end the contract and put in place a successor arrangement to operate this railway."
He said the franchising system as a whole had delivered great benefits to passenger: new private investment totalling £6.4 billion over the last 11 year; passenger journeys on the rail network have more than doubled; and the private sector is paying for new trains all round the country.
Mr Grayling added: "There has been much misinformation about this franchise so it is worth stressing again at the outset that – because payments to the government have been subsidised by Stagecoach – the taxpayer has still profited financially from this franchise. Passenger satisfaction is high and preparations are well under way to deliver state-of-the-art new trains on the route.
"The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price.
"Contrary to widespread speculation, no deal has been done and I have not yet made a decision on the successor operator to run the East Coast railway until the long-term plans for the integration of track and train can begin in 2020. There is no question of anyone receiving a bailout. Stagecoach will be held to all of its contractual obligations in full.
"As the Brown Review said five years ago, this is what you would expect in a competitive franchise system – private businesses risk substantial amounts of their own capital, and if they fail to live up to their stretching targets they lose out, not the taxpayer.
"To anyone who thinks that the nearly £200 million that Stagecoach will lose is insignificant, let me put it into some context. The combined profit of every single train operator in the country was only £271 million last year. The loss equates to over 20% of Stagecoach’s total market value. So it is a significant amount of money by any measure, and it should also act as a stark warning to any company tempted to over-bid in future. Moreover the franchising system has been adjusted to further deter over optimism when bidding.
"The priority now is to ensure the continued smooth running of the East Coast franchise for its passengers. I have therefore asked my officials to conduct a full appraisal of the options available to the government to ensure continuity of service until we implement the East Coast Partnership on the route from 2020."
At this stage, he said one of the options is to consider the possibility of Stagecoach continuing to operate services on the East Coast under a very strictly designed and short-term arrangement.
However, given the circumstances in which the government is having to step in to protect passengers on this line, he said he was only prepared to consider this option on the basis that the franchise would be operated on a short-term, not-for-profit basis.
"The only acceptable financial reward for Stagecoach would be received at the end of the contract and only in return for clearly specified passenger benefits being delivered," he said. "The company cannot be allowed to continue running this franchise and making a profit given what has happened. They got their sums wrong and they will pay the price for that – not the taxpayer.
"The alternative option is that the East Coast franchise would be directly operated by the Department for Transport through an Operator of Last Resort. My department will subject this option to the same rigorous assessment to establish whether it will deliver value for money for taxpayers and protect the interests of passengers. This option is currently on the table and will be selected if the assessment that I have set out determines that it offers a better deal for passengers and taxpayers than the alternative."
The East Coast Mainline franchise was taken into public ownership in 2009 after being run by National Express.
It was reprivatised when Stagecoach and Virgin signed a deal to run the East Coast line from 2015 to 2023, promising to pay the government £3.3bn to run the service.
Stagecoach owns 90% of the joint venture and Virgin owns the remaining 10%.
In November, the Department for Transport said Stagecoach and Virgin would withdraw from running the service three years early, in 2020, after running into difficulties.
Stagecoach said Stagecoach and Virgin had delivered for passengers, employees and the economy including generating payments to the taxpayer of more than £800million.