The East Coast rail service has suffered
falling passenger numbers

The troubled rail franchise, which is expected to have lost £20m in the first half of the year, is suffering from slumping passenger numbers.

Ministers have refused the company's requests for its contract with the government to be renegotiated.

The Department for Transport said that all East Coast services would continue and that tickets would be honoured.

Existing operational staff will transfer to the new state company which will be set up to operate the route.

The government added it intended to put the franchise out for tender from late next year.

'No bail-out'

National Express won the franchise from GNER in 2007.

It agreed to pay the government £1.4bn to run the East Coast main line, which runs between Edinburgh and London, until 2015.

At the time, many rail analysts said it had paid too much for the franchise.

Now National Express has said it will walk away from the loss-making route after failing to alter the terms of its agreement - a step which prompted the government to intervene.

Transport Secretary Lord Adonis said: "The government is not prepared to renegotiate rail franchises, because I'm simply not prepared to bail out companies that are unable to meet their commitments.

"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."

In a statement, the government added that it believed it had also had grounds to end National Express's two other rail franchises - East Anglia and c2c.

But the company said it felt the government had "no grounds" to do this and would challenge any such attempt in court.

It added that it did not expect the any losses from the East Coast franchise could be recouped from National Express.

Debt pile

Richard Bowker, the chief executive of National Express, has confirmed he is to leave the firm, to become chief executive of Union Railway in the United Arab Emirates.

In a trading statement, National Express said that the "challenging economic environment" meant it was seeing fewer passengers on the East Coast Mainline and "significant" levels of people downgrading from first-class and full fares.

The firm is trying to reduce a debt pile of about £1.2bn. Earlier this week, rival transport company FirstGroup said a takeover approach made for National Express had been rejected.

Cuts have been made in dividend payouts to shareholders, while 750 jobs have also been lost.

Last month, the company started charging passengers for reserving a seat on its East Coast and East Anglia franchises.

'Not right'

Liberal Democrat transport spokesman Norman Baker said that National Express should not be allowed to run any other train services.

"It doesn't seem to me right that the taxpayer should pick up the loss from one and leave the profits from the other two with National Express," he told the BBC.

He added that by leaving the East Coast line in public hands would provide a comparator which would be "useful in driving up standards across the whole industry."

The transport union, the RMT, welcomed the development and also called for the franchise to remain in government hands permanently.

"It should be a long-term solution to the chaos that privatisation has brought to the UK's most lucrative rail franchise," said RMT General Secretary Bob Crow.