Transport Secretary Chris Grayling told the House of Commons this afternoon that no decision had yet been taken on the future of the Great Northern franchise, but that Great Northern services coming out of London King's Cross might be merged into LNER.
The company's subsidiary, East Coast Mainline (trading as Virgin Trains East Coast), is the current operator of the InterCity East Coast rail franchise under an agreement with the department for transport.
It is the third time since 2007 that the 393-mile (632 km) route has been returned to government hands, highlighting the difficulties for private companies of accurately bidding to run services on the privatized train network.
" When it is fully formed the new LNER operation will be a partnership between the public and private sectors".
"Today's decision should not detract from the hard work and dedication of our people at Virgin Trains East Coast, who have been central to the transformation we have been delivering for our customers over the past three years".
Stagecoach's chief executive Martin Griffiths estimated the company's total losses at £260m, in February.
The Department for Transport has today announced that London North Eastern Railway will be taking over train services from Virgin Trains East Coast.
"However, we respect the Government's decision".
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At the time, Virgin Group owner Sir Richard Branson said the partnership's bid for the franchise was "based on a number of key assumptions and a promise of a huge upgrade of the infrastructure by Network Rail", which faced delays.
Stagecoach pledged to "work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements".
Trains on the East Coast Mainline will gradually transfer to LNER branding from VTEC branding.
The RMT, the largest rail union, called for the switch back to the public sector to be made permanent.
The collapse of a franchise awarded only in 2014 marks the third time in a decade that private companies have bailed out of running the 400-mile-route, fueling an argument over the future of the railway nearly 25 years after the network was privatized.
"After three shambolic private sector failures on the east coast, the message should now sink in that these cowboys can not be trusted and should be locked out of the system on a permanent basis".
"Because they can not do it".