The scale of the problems affecting the UK's rail industry was underlined yesterday when Stagecoach said the job of Ian Dobbs, the chief executive of its rail business, had been "discontinued".

The transport group, whose shares have halved in value in the past 12 months, said executive chairman Brian Souter would take over from Dobbs overseeing the group's flagship South West Trains, while finance director Martin Griffiths would oversee the East Midlands franchise. Stagecoach this week submitted an ambitious bid to land the new South Central franchise which includes Gatwick Express, and is also a 49% partner in Virgin Trains which runs the west coast main line.

Stagecoach has cut 660 jobs at South West Trains, a franchise it renegotiated three years ago when the economy was booming. When South West tried to scale back ticket office opening hours last month, a transport minister intervened to keep some open.

"It's an unprecedented economic environment we are operating in," Stagecoach spokesman Steven Stewart said last night. "We have been reviewing our rail operations both in terms of the cost base and the way we manage our portfolio. As part of that review it was agreed that Ian's post would be discontinued."

The news came as rail union RMT announced it would ballot 3500 workers across three networks including South West for strike action, after failing to get assurances on job losses. It also coincided with a survey showing UK ticket prices were the highest in Europe.

Dobbs had a long rail career in the UK before moving to Australia, where he was headhunted by Souter in 2005 for the new divisional chief executive role. Stewart declined to comment on his severance terms. He went on: "Stagecoach has always had a different management approach to other companies of its size we tend to have short chains of command and there are very few links in the chain between the chief executive and the front line."

Souter has effectively run the group himself since 2002, after the short-lived appointments of Mike Kinski in 1998 and Keith Cochrane in 2000 to the post of group chief executive.

Stewart added: "Both Brian and Martin will have direct oversight of the various bits of the rail portfolio and will continue to work closely with the high calibre team on the ground."

Both train operating companies have their own managing directors, though Stewart agreed that Dobbs had "an involvement" in drafting the South Central franchise bid, while claiming Griffiths as finance director had a "very heavy involvement".

He said the group's UK bus operations, which retain a chief executive, comprised 20 different operating companies.

On whether the change signified a deteriorating position for the rail business, Stewart said: "Not at all, this is a change of management struc- ture. We have been very clear about the challenges that the transport sector as a whole faces in the current environment, we have been proactive in putting together a plan to deal with it and we are in the process of delivering on that plan."

A rail industry source commented that the current pressure on franchise budgets meant that "even at train company managing director level there isn't a great deal of room to manoeuvre".

All five major rail operators face a threat to profitability as the recession bites, with London commuter routes particularly at risk. But National Express's recently-negotiated East Coast Main Line and South West Trains are two franchises seen as particularly vulnerable to a downturn. Both operators agreed when negotiating the franchises to pay the government a premium on the back of anticipated revenue during the latter part of the franchise term. Collins Stewart estimates that Stagecoach faces a £40m bill in 2010. Virgin Trains, meanwhile, has promised the government to double its 2004 passengers on the west coast line by 2012.

Under franchise agreements, if revenues fall below 94% of the operators' projections, the government re-imburses 80% of the shortfall - and it collects 80% of the profit above 106%.

Aside from passenger resistance, the scope for regulated fare rises is limited to retail price inflation plus 1%, at a time of plunging inflation.

The Association of Train Operating Companies said this week: "Passenger number and revenues are still growing and we don't think it will be necessary for companies to renegotiate their franchises much of the passenger growth we have experienced in the last few years has been on off-peak services and we think that will continue."

However, passenger numbers are likely to fall from 5% growth last year to a 3% decline this year, according to transport analysts at Morgan Stanley, who predict that the recession "will mean rail operators are faced with potentially loss-making portfolios".

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