A failure to attract more customers to the railway risks a permanently smaller network, an industry body has warned.

Rail Partners, which represents independent passenger and freight train operators, published a report urging the Government to take urgent action to “avoid a spiral of decline”.

It wants operators to be given more influence on key issues such as timetabling, marketing and fares.

The body commissioned analysis by consultancy Oxera which suggested the Treasury will missing out on up to £1.6 billion over two years due to restrictive contracts limiting the ability of train companies to drive the recovery in passenger numbers.

Rail Parners believes the contractual system brought in due to the collapse in demand caused by the coronavirus pandemic must be quickly evolved.

Revenues are around a fifth lower than pre-virus levels, and taxpayers are contributing around £2 billion more annually than before the pandemic, according to the association.

The report estimated that ongoing industrial disputes have cost the sector £320 million in lost revenue, and the wider economy almost £700 million.

Rail Partners chief executive Andy Bagnall said: “If we don’t challenge the status quo and overhaul the contractual model on the railways to enable operators to better attract customers, our research shows the Treasury will miss out on nearly £1.6 billion revenue over the next two years.

“The gap in rail finances cannot be closed by cost savings alone – in fact, a sole focus on reducing costs risks a spiral of decline, with cuts to services putting passengers off using rail, leading to further cost pressures and further cuts.

“To secure the financial sustainability of the sector, encourage private sector innovation and investment, and ultimately protect service levels and jobs, operators must be given greater freedoms to attract customers back and help the network return to growth.

“This can be done now, without legislation and we look forward to working with the Department for Transport to develop and implement such reforms.”

In October, then-transport secretary Anne-Marie Trevelyan told MPs that the creation of a new public sector body to oversee Britain’s railways – named Great British Railways – would be delayed.

It was due to be established as part of a Transport Bill in the currently parliamentary session, but the bill has been dropped.

Ms Trevelyan said the Government was considering what improvements it can introduce without legislation.