One dark and misty night, Percy is getting ready to deliver the mail to Ulfstead Castle. James tells Percy he might see the Phantom Express, the ghost engine. James is only teasing; he knows there is no such thing as ghosts, but Percy is nervous as he puffs away.
At the castle, Percy's driver unloads the mail as Percy hears a ghostly chuffing noise. It is only Stephen and Percy is relieved it is not the Phantom Express. Stephen tells Percy there is no such thing as ghost engines.
Just then, James arrives with coal for the castle. Percy tells James he does not believe his ghost stories, but then the three engines hear a spooky hooting in the distance. James knows it is just an owl, but James pretends it is the ghostly whistle of the Phantom Express. Now, Stephen is frightened, too.
Stephen goes off to do his jobs, but sneaky James follows him. James blows his whistle loudly, scaring Stephen who puffs backwards towards the castle. Stephen cannot see the drawbridge is up until it is too late. Poor Stephen rolls off the track and into the dry moat below.
Meanwhile, Percy has finished delivering the mail. James is hiding behind some trees, calling in a spooky way. Percy is spooked and races away, straight past a red signal. Percy derails and lands in the dry moat next to Stephen.
James wants to tell Percy and Stephen that it had all been a joke, but he cannot find them anywhere. James starts to grow scared, even starting to believe his own nonsense stories. James decides to look for his friends in the castle, but as the drawbridge comes down, it hides Percy and Stephen from view. Realising there is someone on the bridge, Percy decides they should whistle for help. Unable to see them, James thinks their whistles are the Phantom Express and is so frightened that he runs away to find the Fat Controller.
When he finds the controller, James tells him that the Phantom Express has got Percy and Stephen. The Fat Controller knows there is no such thing as ghosts, but decides to go with James to find his missing engines.
When James and the Fat Controller arrive at the castle, a whistling can be heard all around. The Fat Controller orders for the drawbridge to be raised and peers down into the moat. He is surprised to see Stephen and Percy who explain that the Phantom Express had chased them. James is forced to admit it had been him playing a trick.
Soon, Rocky has lifted Percy and Stephen back onto the tracks. The Fat Controller punishes James by telling him to take Percy's mail every night for a month. Percy tells James to look out for the Phantom Express as he and Stephen puff away. Then, an owl hoots and James chases after his friends, scared.