This is a monstrous waste of taxpayers money. Why should we be subsidising a few dozen passengers per night when perfectly good alternatives exist? The money would be far better spent on improving services which people actually use. As for sleepers to Paris/Frankfurt etc., sleeper services are dying out all over Europe in the face of high speed rail and low cost airlines. Sleepers are a complete irrelevance in todays world.
Depends what you mean by perfectly good. Sleepers use what would otherwise be dead time - I can, and have, spent the evening in Edinburgh, go to sleep, and wake up the next morning in London. All the other alternatives usually compromise on something (sleep, waking up time, leaving earlier). The highland sleepers provide a fantastic direct service.
By the time HS2 is actually in service, maybe the lowlands will be under threat. But that doesn't sound like a good argument for non-investment now, but just an acceptance that the stock might need to serve another purpose post-HS2 (less intensive working to prolong life, new routes, take a different route via. places with less of a journey time improvement via. HS2). There could also be pressures the other way, making air travel more expensive, and so rail cheaper.
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This service has been killed off by the alternatives. It is only kept going with huge subsidies for political reasons.
Citation Needed? I'm not arguing it's not subsidised, but you're claiming that the somehow the economics have got worse - that is demand has decreased, and/or subsidy increased?
Whilst the burden of proof lies with you for such a claim, I offer this as a demonstration of demand existing:
http://uk.megabus.com/megabus-sleeper.aspx