Scrutineer: Bus firms hit bump in road

Published on Thursday 20 August 2009 20:55

FirstGroup 356.2p +1.2p Stagecoach 138.9p-6.4p

OH DAMN, a puncture. For years bus operations have been the Steady Eddies of British transport groups. Stable, mature businesses, buses have continued to throw off resilient profits as a dependable back-up to the more rollercoaster earnings of train operations often owned by the same parent companies.

Buses have not seen the sudden surges in earnings that rail has periodically enjoyed, but buses were also more reliable in horrendous times for the rail industry, such as the dreadful 1999-2002 period involving the fatal crashes at Paddington, Hatfield and Potters Bar.

The Office of Fair Trading has potentially challenged that perception of benign reliability with its decision yesterday to refer the UK bus sector to the Competition Commission (excluding London and Northern Ireland, where it is deemed competition on the buses is more robust).

A five-month inquiry had provided evidence of practices among the major bus players that "could prevent, restrict or distort competition" in the sector, the OFT said.

It said in many big towns and regions there was only one major national player, and this was making passengers pay an average 9 per cent more for fares in such places.

The OFT has also raised concerns over major bus groups discouraging new entrants through "predatory behaviour".

Buses have such a sleepy, unthreatening business image the regulatory revelation is almost the equivalent of the CID feeling the collar of your rumpled old uncle in his cardie by the fireside.

This is partly because bus operators have done such a good job of spin in the past decade.

They have stolen eco-friendly clothing whenever possible and talked endlessly about the ghastly-sounding "quality partnerships" with local authorities.

But underneath this reassuring bus template, critics argue that the deregulation of the sector in the mid-1980s has created a strange hybrid.

They say that it is a fundamentally anti-competitive industry with dominant players not encroaching on each other's territories, while still getting 1.2 billion from public subsidy for operating non-commercially viable routes and services, for example in some country areas.

Nine companies could be hit by any adverse Competition Commission decision. Four are large national bus operators: the Aberdeen-based FirstGroup; Perth-based Stagecoach; Arriva and Go-Ahead.

Then there are the so-called regional groups of National Express, TransDev, Kinch Group, Veolia Transport and East Yorkshire Motor Services.

It is the bigger groups that have the most to fear from this regulatory spotlight. They account for about two-thirds of local bus service provision (a higher percentage than I suspect the average person would have guessed).

But, having said that, what options are open to the regulators even if they look askance at the conventional wisdom that says the biggest competitors for bus companies are not each other but the motor car? Will we see the regulator insist on the likes of FirstGroup, Stagecoach and the rest giving up certain routes to try and encourage bus competition?

And will bus rivals step up to the plate to take on those routes and provide more choice for consumers?

Also, what will the environmental lobby say if the CC tries to promote more on-road competition as its solution to the problems in the industry?

That is the logical conclusion, however, if the OFT is genuinely worried that major bus groups are not venturing enough into each other's markets to avoid retaliation on their home turf.

As such, too many consumers are faced with using one major bus service or none at all as bus groups may opt for a tacit "live-and-let-live" operating policy. Unsurprisingly, the Confederation of Passenger Transport UK, the industry body, says that there is plenty of competition in the market and that it is in bus companies' interests to keep prices competitive in order to get people out of their cars.

But there's the rub. Should bus companies themselves be more robust competitors to each other rather than reaching for the off-the-peg response that they are motivated in their fares policies by taking on the car?

On predatory behaviour to nip in the bud competition from new bus entrants, the OFT revealed yesterday that it had received around one complaint in every four months since March 2000.

The investigation should reveal how loved or unloved our deregulated bus industry really is. However, the stock market is likely to be unfazed until the outcome of the CC's deliberations are known for the transport sector.

Cailey Barker of RBC Capital Markets

ONE TO WATCH

European Goldfields

182.5p -0.5p

Scotsman says BUY

GOLD has remained buoyant over the summer period. The traditional summer weakness in demand has been largely overrun by strong speculative buying. Most conventional gold equities have responded accordingly and so investors have had to look further afield to find strong value.

European Goldfields (EGU) is an Aim/TSX-listed emerging precious and base metals producer, with its core properties located in Greece and Romania. The company has an operating polymetallic mine, three development-stage gold projects and a large portfolio of projects in Turkey.

EGU expects to wrap up the permits for its projects by late this year or early next year. With permits in hand and financing finalised, EGU would then begin to develop three new mines over the next three years, making it a mid-tier gold producer.

The company has aligned itself with a strategic partner Aktor, Greece's largest construction company. Aktor holds a 20 per cent interest in EGU and is considered a valuable partner in the permitting process with the Greek authorities.

We believe a combination of steady production growth at its Stratoni mine, renewed permitting success at Skouries, Olympias and Certej projects, and positive exploration results in Greece are expected to serve as potential catalysts for the stock. We expect to see the discount to our valuation reduced as permitting and development progress.

The net asset value should grow over the next few years as mine production ramps up, new assets come on stream, and EGU's reserve base grows.

&#149 Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future. RBC Capital Markets currently acts as adviser and broker to European Goldfields.

Oil companies rise after reports of falling US supplies

SCOTS STOCKS

OIL producers surged on hopes that the price of crude will continue to rise, after reports showing stockpiles in the United States had fallen sharply.

Dana Petroleum, the North Sea oil explorer which hedges none of its production, climbed 56p or 3.9 per cent to 1,504p, its highest closing price in just under a year.

Cairn Energy, which is set to begin producing oil from its giant Indian fields imminently, leapt 69p to 2,500p. Oil services giant Wood Group jumped 5.5 per cent to 309.1p, on hopes that higher crude prices will boost investment in new oil projects.

Pharmaceutical company ProStrakan reported a 40 per cent rise in first-half sales, and maintained it is on course to report a maiden profit in 2010. Shares in the Galashiels group closed up 1.25p at 123.5p.

John Menzies, the Edinburgh-headquartered logistics group which rose by more than a fifth on Wednesday's bullish outlook statement, climbed a further 9p or 3.1 per cent to 300p.

Shares in Perth-based transport company Stagecoach dropped 4.4 per cent to 138.9p, after the Office of Fair Trading announced an investigation into the UK bus industry.

Forth Ports hit a fresh ten-month high as sentiment for the property sector continues to improve. Shares closed 4.7 per cent higher at 1,300p.

Skywest gets a lift from gas production plant plan

SMALL BUT BEAUTIFUL

SHARES in Skywest, the London-listed airline that flies across Western Australia, took off yesterday after the carrier predicted a rise in passenger numbers with the opening of a new gas production facility.

Chevron, Exxon-Mobil and Shell are expected to make a final investment decision next month on the $50 billion (30bn) Gorgon project, which would be the largest in Australia's history.

Jeff Chatfield, chairman of Skywest, which is listed on the Alternative Investment Market and has a market cap of about 15 million, said: "'The company is considering further expansion of the existing route network to towns such as Onslow.

"This will facilitate any future travel and support infrastructure requirements due to the Gorgon project."

News of Skywest's considerations came a week after the airline bought a Fokker 100 jet to take its fleet up to 16 aircraft.

Skywest paid $4.05m for the jet and expects to spend a further $950,000 refurbishing the interior and exterior.

As well as running scheduled services in Western Australia, Skywest also undertakes charter flights for mining companies. While Skywest is listed in London and operates in Australia, the parent company – Skywest Airlines – is based in Singapore.