Grayling had said late past year that the East Coast franchise run since 2015 by Stagecoach, which owns 90 percent alongside Virgin, would need to end early after lower than forecast passenger numbers led to losses of about 200 million pounds for Stagecoach.
So who will now run the trains?
Transport groups underlined a point made by the government - that with 92 per cent passenger satisfaction scores, East Coast services are some of the best-rated by users.
Stagecoach said it and Virgin had been negotiating for a new contract with the Department for Transport but that it understood Mr Grayling was "no longer considering" them for the deal.
It said on Wednesday it hoped to continue to play a role in Britain's rail network in the future.
The loss-making service is being renamed London and North Eastern Railway (LNER) which is the name used by the company that operated the line before BR in the late 1940s.
To have one rail company fail to fulfil its contract may be regarded as a misfortune.
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WITH the Government set to restore the LNER name to Britain's railways, we thought we'd have a look back through the archives and came across these old railway posters. The firm will take a £75m hit to profits as a result of the decision. The chair of the Commons Transport Committee Lilian Greenwood said it was "a very sorry tale". "If Virgin-Stagecoach got their figures wrong, so did the government", said Greenwood.
Rail services on the East Coast Main Line are being brought back under government control, following the failure of the current franchise.
She said: "Three times in less than a decade, the government has been forced to intervene in the East Coast rail franchise". Lower passenger numbers and revenue than forecast have seen Stagecoach losing around £200m on the franchise to date.
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.
Explaining the contract's difficulties in February, Stagecoach said that some of its forecasts for growth on the line were based on enhancements expected to be carried out by state-backed rail infrastructure company Network Rail, but those actions had been either delayed or abandoned.
Services were run by the DfT for six years up to VTEC taking over in 2015.
Grayling said he had chosen to bring in the operator of last resort to expedite his plans to introduce a partnership model for the east coast railway from 2020, where a single team including Network Rail and a private train operator would take decisions on both track and trains on the route.