Virgin Trains has reversed the industry trend of paying billion pound windfalls to the government by securing a £1.4bn subsidy for its west coast franchise.
The government has agreed to subsidise Virgin after the charges it pays for using the London-to-Glasgow line more than doubled.
Over the course of the five-year franchise to March 2012, Virgin will receive £1.36bn in state funding that will be passed on to Network Rail, the quasi-public body that inherited the running of the British rail network.
Under the majority of large train franchises, train operators pay the government premium payments for using the rail network, typically over the course of a 10-year contract.
The four largest train franchises paid the state around £500m last year.
The rising premium payments have caused alarm among industry executives.
GNER is attempting to renegotiate the terms of its deal after admitting that it cannot meet the £1.3bn payments pledge in its contract.
Stagecoach and First have also raised alarm by signing £1bn contracts over the past year, although they claim to be happy with the terms.
A Virgin Trains spokesman said no company could run trains on the London-to-Glasgow route without a subsidy, because Network Rail has spent £8.6bn of taxpayers' money on upgrading the west coast mainline and needs to recoup its investment.
"The cost of turning this line into one fit for the 21st century has been huge. We clearly have to repay the cost of it to the government, but it would not be viable for a sole commercial operator to cover the cost with income of around £500m per year," he said.
Virgin said it would not cover the increased access charges with significant fare hikes.
The spokesman added that the train operator expected to generate the extra revenue through a rise in passengers: from 20 million currently to 34 million by 2012.
"This only works if we can get passenger numbers up by 70%. If we price people off the trains we will not hit those revenue targets. We will need to have sensible pricing," he said.
Virgin is also in talks with the Department for Transport over adding two extra cars to its 53 high-speed tilting Pendolino trains, which would provide a further 10m seats, although the DfT is understood to be sceptical about the need for the extra capacity.
Virgin is planning to increase the number of journeys by 50% from 2008 onwards, through longer trains and more frequent services.
The company had been operating the route on a yearly contract after its original franchise deal - which envisaged a massive increase in services - collapsed following delays in the west coast upgrade and the financial turmoil caused by the 2000 Hatfield crash.
Rail minister Tom Harris said: "Now the [west coast upgrade] project is on track it makes sense to reinstate the franchise agreement.
"Many passengers are already benefiting from the increase in services, improved reliability and faster journeys.
"But this provides the opportunity to put even more services in the December 2008 timetable within the contract, and strike a better value deal for the taxpayer."
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