FirstGroup focus on costs after rail travel blows

FirstGroup, the Aberdeen-based transport operator, is stepping up cost-cutting efforts in its UK bus business in a bid to offset the impact of losing a raft of rail contracts.

First failed to win a new contract on ScotRail services. Picture: Michael Gillen

In a trading update the firm said it was “advancing cost efficiency plans” for the bus operation including “a number of changes to our depot portfolio” as it targets higher profit margins.

It has recently announced plans to close depots in Bracknell and Hereford, merge depots in the Potteries and to sell one in south Devon.

The firm said in the update for its first quarter that like-for-like bus takings had grown by 1.4 per cent. Commercial passenger revenue continued to grow by more than 2 per cent, but this had been offset by a fall in turnover related to passengers entitled to reduced fares.

The group is paid by local authorities – under pressure from squeezed government funding – to subsidise these reductions.

First said its UK rail division had delivered like-for-like passenger revenue growth of 6.3 per cent on a “robust” uptick in passenger numbers.

But it reiterated a warning that earnings from this division would be “substantially lower in the first half and for the current year”.

It has been dealt a blow after failing to win new contracts to keep running services on First ScotRail and First Capital Connect, while also missing out on bids for several new deals.

The group is hoping that earnings from its UK and US bus businesses – the latter including Greyhound and First Student – will help make up for the shortfall.

Passenger numbers on Greyhound services have continued to be affected by lower fuel prices which have seen some customers switch to using cars. Like-for-like revenue decreased by 5.7 per cent in the first quarter and year-on-year growth is expected to remain challenging throughout the first half of the current year.

Chief executive Tim O’Toole said: “We anticipate strong progress for the current year in our non-rail businesses, mainly from the First Student and UK Bus turnarounds, to largely offset the reduced size of our UK Rail franchise portfolio compared with the prior year.”

Analysts at Shore Capital said the statement was in line with their own forecasts.

The broker currently has a “buy” rating on the shares citing factors such as progress on repaying debt.

“With S&P recently upgrading its credit rating outlook and the business on track to achieve its targets, it is in our opinion only a matter of time before the market turns its attention to the repayment of debt and potential transformational impact this could have on cashflow,” said the research note.