FirstGroup Beats Market Expectations Despite Losing Major Railway Contract
Shares of FirstGroup, a bus and train operator based in Aberdeen, Scotland, rose by more than 17% on 9 December after the company reported results exceeding market estimates, despite its loss of a major railway contract. The company posted adjusted attributable profit from continuing operations of more than £82.1m ($87.4m), which excluded central costs, taxes, and cash interest, for the 52 weeks to 25 March, more than double the £36.2m recorded for the previous year. Although the loss of the UK Department for Transport’s TransPennine Express (TPE) contract last month due to problems with train cancellations impacted the company, it insisted its outlook for the year was in line with expectations. For the 52 weeks to 25 March, FirstGroup’s revenue from continuing operations increased by 3.6% to £4.76bn.
Key Results for Each Division
FirstGroup has the major share of Avanti West Coast and South Western Railway franchises, as well as the Great Western Railway franchise after wholly owning its operator. The company has two fully commercial “open access” operations Lumo, which offers services from London to Edinburgh, and Hull Trains, which runs from London to Hull. During the year, FirstRail reported adjusted net operating profits up 42% to £125m, on revenues up 2.4% to £3.89bn. Meanwhile, the adjusted operating profit of FirstBus rose 29% to £58.4m, with revenues rising 14% to £903m. The division is benefitting from the UK government cap on local bus fares of £2 in England and a policy of offering free bus travel to everyone under 23 in Scotland.
Loss of TPE Contract and Staff-Related Issues
Brian Souter, the executive chairman of FirstGroup, said the company had made “very significant progress to make sure the company is more stable going forward,” singling out the company’s “decisive action on funding the pensions to the tune of £800m” and “sharp focus on cash and debt” as key achievements. The company did acknowledge the challenges presented by the loss of the TEP contract but said its other railway franchises, including Avanti West Coast, were recovering from their own periods of difficulty. Sutherland admitted that the cancellation of TPE services did have an impact, despite the company’s other UK rail operations being “in line with expectations,” but he remained optimistic about the future. The company’s interim dividend increased to 4.19p per share, up from 0.25p per share for the prior year due to the company’s strong cash position.
Additional Piece: The Impact of Rail Service Contracts on Companies
Rail franchises and service contracts award private companies the rights to operate railway services with compensation in the form of management fees and incentives which are directly linked to the revenue generated. Despite being less risky than full contract ownership, these performance-based contracts are more appealing to private operators for their potential for maximizing revenue above and beyond the fee structure set out in the contract. The private company is responsible for service delivery, rolling stock, and stations in a contract which lasts between seven to ten years. Loss of a contract could lead to serious consequences ranging from job losses to the halting of service and the intricacies of the contractual agreement can further complicate the issue.
The recent loss of FirstGroup’s TransPennine Express contract has sent a shockwave through the British rail industry as this was one of the largest contracts in the sector. TPE began its service in 2016, replacing First TransPennine Express (FTPE) in the process, but after only five years, the contract was lost because of staff issues. Both the contract holder and the government remained heavily focused on service delivery, with penalty clauses in the contract for service failures. FirstGroup lost this because of issues with train cancellations on TPE, and a decline in staff availability for rest days.
In other rail franchises, service-related issues have also caused problems. In 2018, when Stagecoach lost the East Coast franchise, it cited over-optimistic revenue assessments, which meant the company was pumping more money into the franchise than it was receiving. The government, therefore, had to take control of the service under the Department of Transport. A similar issue occurred with Virgin Trains with problems at the core of the InterCity West Coast franchise. In both cases, service levels over the period had become increasingly difficult to manage due to declining staff availability for rest days, leading to service disruptions. Issues with train cancellations also led to penalties under the contract.
Summary:
FirstGroup, a bus and train operator based in Aberdeen, attainted results exceeding market estimates despite its loss of a major railway contract. The company posted adjusted attributable profit from continuing operations of more than £82.1m ($87.4m), which excluded central costs, taxes, and cash interest, for the 52 weeks to 25 March, more than double the £36.2m recorded for the previous year. For the 52 weeks to 25 March, FirstGroup’s revenue from continuing operations increased by 3.6%, reaching £4.76bn. During the year, FirstRail reported adjusted net operating profits up 42% to £125m, on revenues up 2.4% to £3.89bn. Meanwhile, FirstBus’ adjusted operating profit rose 29% to £58.4m, with revenues increasing 14% to £903m. The division is benefitting from UK government policy of offering free bus travel to everyone under 23 in Scotland and a cap of £2 on local bus fares in England. Despite the loss of the TransPennine Express Contract, the company reflected enthusiasm for the year yet to come.
However, the loss of TransPennine Express (TPE) has already sent shockwaves through the British rail industry. Loss of a rail service contract could lead to serious consequences ranging from job losses to the halting of service. The intricacies of the contractual agreement further complicate the issue since service-related issues can result in penalties under the contract. Issues with train cancellations on TPE meant FirstGroup sorted to lose the contract, which was one of the largest in the rail industry. As well as train cancellations, an increase in staff unwillingness to work on rest days has been reported as well. Service levels over the period have become increasingly difficult to manage due to declining staff availability for rest days, leading to service disruptions.
Despite such difficulties, Britain’s rail infrastructure investments have been increasing in recent years, steadily leading to better rail service delivery for the customer. This has also led to increased investor interest in rail organizations. In the years ahead, rail infrastructure projects will aim to promote faster and more efficient passenger rail transport while preserving safety and quality. Investment in rail infrastructure has doubled since 2000, which has been critical in driving growth in freight and passenger rail traffic in the UK. Even with the transition from COVID’s cross-country lockdowns, demand for rail service has increased, reinforcing the sector’s significance to future economic growth.
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Shares of bus and train operator FirstGroup rose more than 17% on Thursday after the Aberdeen-based company’s results topped market expectations despite the company’s loss of a major railway contract.
FirstGroup’s adjusted attributable profit from continuing operations, a figure excluding central costs, cash interest and taxes, for the 52 weeks to 25 March more than doubled to £82.1 million, from £36.2 million the previous year.
The principal business disrupted was the company’s U.S. bus business, including the Greyhound intercity bus business, the sale of which was announced in October 2021. Revenue from continuing operations increased by 3.6%, to £4.76 billion.
It lost the UK Department for Transport’s contract to run the TransPennine Express (TPE) operation in the north of England last month after experiencing problems with train cancellations. However, the company said its outlook for the year is in line with expectations despite the challenging economic and industrial relations backdrop.
FirstGroup still has the major stake in the Avanti West Coast and South Western Railway franchises, as well as wholly owning the operator of the Great Western Railway franchise. The company has two fully commercial ‘open access’ operations, Lumo, which offers services from London to Edinburgh, and Hull Trains, which runs from London to Hull.
Graham Sutherland, chief executive, said he was “obviously disappointed to have lost [TPE]“. He added: “In terms of business impact, we are the largest private sector rail operator in the UK. It will have an impact, but overall we will deliver a rail business in line with expectations.”
Sutherland said TPE, like Avanti West Coast, had suffered from a decline in staff willingness to work on rest days, something both operators had relied on to keep trains running, particularly on Sundays.
He noted that Open Access operations had a “really, really strong year” driven primarily by demand for leisure. The open access operations have reached pay deals with their staff, meaning they have been able to operate as normal during much of the union action that has hit other UK rail operations over the past year.
On its UK franchised operations, like other rail operators, FirstGroup is no longer exposed to the risk of fluctuation in fare revenue, which is borne by the DfT. Instead, a management fee is paid based on performance.
Avanti’s services, which also experienced a period of severe disruption, have recovered well, Sutherland said.
FirstRail reported adjusted net operating profits up 42% to £125m, on revenues up 2.4% to £3.89bn.
The adjusted operating profit of the company’s FirstBus bus division rose 29% to £58.4m, with revenues rising 14% to £903m. Sutherland said the division benefited from a cap on local bus fares of £2 in England and a Scottish Government policy of offering free bus travel to everyone under 23.
On a statutory basis, the company reported £129 million in pre-tax profit for the 52 weeks to 25 March, compared with £654 million a year earlier, with revenue down 15% to £4.76 billion. pounds.
By midday, shares of the company were up 20.2p to 138.9p.
https://www.ft.com/content/48e3127b-bb11-4488-8a85-b2e2707b2279
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