Serco, which has run the night train service since 2015, was told on Wednesday by the Scottish Government that its £800m, 15-year franchise would end next June – seven years early.
Jenny Gilruth, Scotland’s transport minister, said new terms proposed by Serco for the remainder of the franchise had been “rejected on the grounds of not representing value for money to the public” despite it having broadly delivered a good service.
But Serco said the Sleeper had been “loss making” and the proposed changes were designed to improve the finances of the cross-border service.
The 2014 decision to separate the Caledonian Sleeper from ScotRail and hand it to Serco led to a £150m upgrade of the 75 sleeper carriages.
The luxury refurbishment saw the creation of a “hotel on wheels”, with tartan-clad en-suite carriages - some with double beds - and a new dining area and whisky bar.
The sleeper connects Euston with Aberdeen, Fort William, Glasgow, Edinburgh and Inverness and is used by about 70,000 passengers a month.
Tory critics said there was a “suspicion” that Serco was being axed on “ideological” grounds. In April, the Scottish Government brought ScotRail services back into public ownership after stripping private operator Abellio of the franchise.
The SNP-led Scottish Government decided to bring the Sleeper contract to an early end after Serco used a mid-franchise opportunity, known as a “rebasing option”, to apply for an unspecified change to the terms of the deal.
Ms Gilruth, in a written statement to the Scottish Parliament, said: “I can confirm that today Serco Caledonian Sleepers Limited has been advised that its proposal to rebase the franchise agreement with Scottish Ministers for the provision of Caledonian Sleeper rail services has been rejected on the grounds of not representing value for money to the public.
“Additionally, I can confirm that a notice was served today which confirms that the Scottish Ministers will terminate the franchise agreement with Serco Caledonian Sleepers Limited on 25 June 2023.
“Work is underway to determine arrangements for the continued provision of Caledonian Sleeper rail services beyond 25 June 2023 and this will be updated to Parliament once determined.
“It is worth noting that Serco Caledonian Sleepers Limited has, broadly, delivered well and significantly improved Caledonian Sleeper services over the last seven years.”
The RMT union had previously demanded that the Sleeper be brought back in-house.
Fiona Hyslop, a former SNP minister, said there was now ”an opportunity for the Scottish Government to consider bringing the iconic service into public hands”.
She said: “The Scottish Government has already successfully brought ScotRail under public ownership and doing the same with the Caledonian Sleeper presents an opportunity to continue to improve the service provided to those travelling overnight between Edinburgh and London.”
Graham Simpson, transport spokesperson for the Scottish Conservatives, told The Scotsman: “The minister needs to say in greater detail why this contract is being terminated given that Serco has performed well.
"There must be a suspicion that this is driven by political ideology rather than what is best for customers.”
Serco’s strategy had been to create a “hybrid concept between hotel rooms and travel” to attract passengers.
John Whitehurst, managing director of Serco’s transport business, said on Wednesday: “When Serco took over the Caledonian Sleeper service in April 2015, we inherited an unreliable and outdated fleet of carriages dating back to the 1970s.
“The service that Serco provides today is widely recognised as being outstanding, providing hotel standard service and accommodation that is renowned and admired around the world and loved by the people who travel on it.
“The contract that was signed in 2014 included a ‘rebase clause’ that meant that, after seven years of the 15-year franchise, Serco could present to the Scottish Government alternative financial arrangements for the remaining years of the franchise.
“The Government and Serco were not able to reach agreement on these revised terms, and accordingly the franchise will now end in June 2023, at which point, unless other arrangements can be agreed, Serco will hand back the management of the Sleeper to the Scottish Government.
“We note that the Government’s decision not to accept our proposals has not been made due to any performance issues; from Serco’s point of view the service has been loss-making over the life of the contract and the proposals that we made to Transport Scotland were to put it on a more sustainable financial footing.
“We will continue to work with Transport Scotland around options for the future management of the service.”
Passenger numbers increased by a quarter in the two years prior to the pandemic, after the new carriages were introduced. Lonely Planet, the travel guide, named the line as one of the world’s best train journeys.
Transport Scotland said that Scottish minister would ensure “suitable arrangements” were in place after next June to keep the Sleeper trains running.
A source said: “The Caledonian Sleeper is an important part of Scotland’s transport mix, particularly for Highland and rural communities.”