Sir Richard Branson has blasted the Department of Transport for its "insanity" in awarding the West Coast Main Line that his Virgin Rail company has been operating since 1997 to a rival bidder.
The government announced on Wednesday that the fight to take over a new 13-year West Coast franchise had been won by giant transport company FirstGroup.
FirstGroup, which already has a number of rail franchises including Great Western and ScotRail, will start operating the London to Scotland West Coast line in December.
Announcing the new franchise winner, rail minister Theresa Villiers said the new franchise would deliver "big improvements for passengers, with more seats and plans for more services".
But the RMT transport union warned of "massive cuts to jobs and passenger services and huge increases in fares".
Virgin has operated the West Coast line for 15 years, introducing tilting high-speed Pendolino trains to the route and increasing passenger levels from around 13m a year in 1997 to around 31m a year now.
Virgin Rail is 49% owned by another giant transport company, Stagecoach, which expressed its disappointment that its bid with Virgin to continue running the franchise had been unsuccessful.
It said it understood that Virgin was the Department for Transport's (DfT) second-choice bidder and that that the reason it failed to win the new franchise was "because another bidder contracted to pay significantly higher premiums to the DfT".
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Branson said in a statement he was "extremely disappointed" to have lost the franchise, adding that had the company bid more it "would have involved dramatic cuts to customer quality and considerable fare rises which we were unwilling to entertain".
He added: "We also did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise, as happened to GNER and National Express who overbid on the East Coast mainline. Sadly, the government has chosen to take that risk with First Group and we only hope they will continue to drive dramatic improvements on this line for years to come without letting everybody down."
Branson also said it was unlikely Virgin Trains would bid for the franchise again, saying the process is too costly and uncertain.
"We have made realistic offers for the East Coast twice before which were rejected by the Department for Transport for completely unrealistic ones and therefore will have to think hard before embarking on another bid," he said.
FirstGroup chief executive Tim O'Toole said the company was delighted to win the franchise.
He went on "We will be making significant improvements including reduced journey times and introducing new direct services."
The deal will see the introduction, from December 2016, of 11 new six-car electric trains which will enable more seats to be provided across the franchise, including greater capacity on the Birmingham to Scotland route.
New services are planned from Blackpool, Telford, Shrewsbury and Bolton to London. FirstGroup has also committed to cut the cost of West Coast standard anytime fares by an average of 15% within the first two years.
The franchise stretches from London to Glasgow, connecting many of the UK's major cities including Manchester, Liverpool, Birmingham, Wolverhampton, Edinburgh, Lancaster and Chester.
The DfT said the franchise deal was worth £5.5bn over the lifetime of the contract. The new franchise will begin on 9 December and will run for 13 years and four months.
Villiers said: "This new franchise will deliver big improvements for passengers, with more seats and plans for more services. Targets to meet on passenger satisfaction will be introduced for the first time in an InterCity rail franchise and passengers will also benefit from smart ticketing and from investment in stations.
"The West Coast is the first of the new longer franchises to be let by the Coalition which has helped us secure real benefits for passengers by encouraging First West Coast Limited (as the company will be named) to invest in the future of the service."
According to Sky News, FirstGroup shares were down more than 6% following the West Coast Mainline decision.