The Government could take direct control of the East Coast Mainline as the Transport Secretary came under attack for his management of rail franchises.
Chris Grayling informed MPs on Monday that Stagecoach, which runs the East Coast franchise with Virgin, had "got their sums wrong" and will suffer "significant losses" of nearly £200m.
The Cabinet minister had previously announced the £3.3bn franchise – running between London and Edinburgh – was set to collapse, but informed the House of Commons the situation is now "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," said Mr Grayling.
Following a breach of contract by Stagecoach, the Transport Secretary announced he will have to "end the contract and put in place a successor arrangement".
Mr Grayling admitted his department is now considering running the East Coast line through an "operator of last resort", which would see the franchise return to public ownership less than three years after it was re-privatised.
"This option is very much on the table and will be selected if the assessment I have set out determines that it offers…a better deal for passengers than the alternative," he said.
The other option the Transport Secretary outlined to MPs is for Stagecoach to continue to operate services "under a very strictly designed short-term arrangement".
"Given the circumstances in which this Government is having to step in to protect passengers on this line I am only prepared to consider this option on the basis that the franchise would be operated on a short-term, not-for-profit basis," Mr Grayling added.
However, the Transport Secretary defended the continued franchising of Britain's railways to private companies and stressed "the taxpayer has still profited financially" from the East Coast deal, with nearly £1bn returning to the public purse.
"Passenger satisfaction is high and preparations are well under way to deliver state-of-the-art new trains on the route," he said.
"The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price."
Mr Grayling also insisted "there is no question of anyone receiving a bailout" and Stagecoach would be "held to all of its contractual obligations in full".
Yet the Transport Secretary said, legally, Stagecoach could not be barred from bidding for current or future rail franchises.
Indeed, Mr Grayling also used his statement to announce an extended contract for Virgin Trains to run services on the West Coast Mainline.
In addition, it was revealed Stagecoach had been shortlisted to continue running the East Midlands franchise beyond 2019.
Responding to Mr Grayling's statement, Labour's shadow transport secretary Andy McDonald attacked "yet another monumental misjudgement to add to a growing list of miscalculations".
He told MPs: "It is increasingly clear that he does not care about taxpayers, rail passengers or the rail industry itself, but will do everything in his power to protect and support Virgin, Stagecoach and their ilk, and the failed franchise system.
"The bailout culture at the Department for Transport is alive and well – it has never been better.
"Virgin-Stagecoach failed to deliver on its contract on the East Coast route.
"No problem – the Government will step in and bail it out, kissing goodbye to the £2bn that Virgin had previously agreed to pay.
"But, guess what? Let us just give both companies a new contract to run the West Coast line as well."
LATEST GRAYLING BAILOUTS: Despite their failure on East Coast, he has given Virgin a sweetheart deal on West Coast Main Line, without competition, & allowed Stagecoach to bid for future franchises and possibly also keep the East Coast contract as well! Yet more taxpayer bail-outs
— Andrew Adonis (@Andrew_Adonis) February 5, 2018
Away from the House of Commons, Labour peer Lord Adonis – who recently quit as chair of the Government's National Infrastructure Commission over Brexit – accused Mr Grayling of handing a "sweetheart deal" to Virgin for the West Coast franchise.
He posted on Twitter: "Cut through the waffle & yet again he is bailing out the billionaires [Virgin owner] Sir Richard Branson and [Stagecoach founder] Sir Brian Souter at the expense of the taxpayer."
Mick Cash, leader of the Rail, Maritime and Transport (RMT) union, called for Mr Grayling's resignation.
More from Chris Grayling
"East Coast should be renationalised with immediate effect and the scale of the scandal unveiled today should mark the point at which the whole rotten business of rail privatisation in Britain was called to a halt," he said.
"RMT is demanding immediate assurances that the thousands of rail workers caught in the crossfire of this chaos will have their jobs and working conditions fully protected and underwritten."